UNITED
      STATES
              SECURITIES
      AND EXCHANGE COMMISSION
              Washington,
      D.C. 20549
              FORM
      10-K[X]           annual
      report pursuant to section 13 or 15(d) of the securities exchange act of
      1934
              For
      the fiscal year ended: December 31,
      2008[   ]           transition
      report pursuant to section 13 or 15(d) of the securities exchange act of
      1934
              For
      the transition period from
      _______________________________________________________Commission
      file number 1-31993STERLING
      CONSTRUCTION COMPANY, INC.
              (Exact
      name of registrant as specified in its charter)Delaware
              State
      or other jurisdiction of
              incorporation
      or organization
            25-1655321
              (I.R.S.
      Employer
              Identification
      No.)20810
      Fernbush Lane
              Houston,
      Texas
              (Address
      of principal executive offices)
            77073
              (Zip
      Code)Registrant's
      telephone number, including area code (281)
      821-9091Securities
      registered pursuant to Section 12(b) of the Act:
              Title
      of each class
              Common
      Stock, $0.01 par value per share
              (Title
      of Class)
              Preferred
      Share Purchase Rights
              (Title
      of Class)
            Name
      of each exchange on which registered
              The
      NASDAQ Stock Market LLCSecurities
      registered pursuant to section 12(g) of the Act:
              NoneIndicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act. [  ]
      Yes   [√] NoIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the Act. [  ]
      Yes   [√] NoIndicate
      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  [   ] NoIndicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K []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.
              Large
      accelerated filer [  ] Accelerated filer [√]
              Non-accelerated
      filer   [  ] (Do not check if a smaller
      reporting company)Smaller reporting company []Indicate
      by check mark if the registrant is a shell company (as defined in Rule
      12b-2 of the Act). [   ] Yes  [√] NoAggregate
      market value of the voting and non-voting common equity held by
      non-affiliates at June 30, 2008: $228,573,765.At
      March 2, 2009, the registrant had 13,189,838 shares of common stock
      outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE


None









Sterling Construction Company, Inc.




Annual
Report on Form 10-K




Table
of Contents


Part
      I
              
              4Cautionary
      Comment Regarding Forward-Looking Statements
              4Item
      1.
              Business
              5Access
      to the Company's Filings
              5Overview
      of the Company's Business
              5Our
      Business Strategy
              6Our
      Markets
              7Competition
              9Contract
      Backlog
              10Contracts
              10Employees
              12Item
      1A.
              Risk
      Factors
              12Item
      1B.
              Unresolved
      Staff Comments
              20Item
      2.
              Properties
              20Item
      3.
              Legal
      Proceedings
              20Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              20Part
      II
              
              21Item
      5.
              Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              21Dividend
      Policy
              21Equity
      Compensation Plan Information
              21Performance
      Graph
              21Item
      6.
              Selected
      Financial Data
              23Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
              24Overview
              
              24Critical
      Accounting Policies
              24Results
      of Operations
              26Historical
      Cash Flows
              30Uses
      of Capital
              33Off-Balance
      Sheet Arrangements
              34Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              34Item
      8.
              Financial
      Statements and Supplementary Data
              35Item
      9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              35Item
      9A.
              Controls
      and Procedures
              35Evaluation
      of Disclosure Controls and Procedures
              35Management’s
      Report on Internal Control over Financial Reporting
              35Changes
      in Internal Control over Financial Reporting
              35Inherent
      Limitations on Effectiveness of Controls
              35Item
      9B.
              Other
      Information
              35




2




Part
      III
              
              36Item
      10.
              Directors
      and Executive Officers of the Registrant
              36Directors
              36Executive
      Officers
              37Section
      16(a) Beneficial Ownership Reporting Compliance
              37Code
      of Ethics
              38The
      Audit Committee
              38Item
      11.
              Executive
      Compensation
              38Introduction
              38Compensation
      Discussion and Analysis
              39Employment
      Agreements of Named Executive Officers
              43Potential
      Payments Upon Termination or Change-in-Control
              44Summary
      Compensation Table for 2008
              45Grants
      of Plan-Based Awards for 2008
              46Option
      Exercises and Stock Vested for 2008
              48Outstanding
      Equity Awards at December 31, 2008
              48Director
      Compensation for 2008
              49Compensation
      Committee Interlocks and Insider Participation
              51Compensation
      Committee Report
              51Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              51Equity
      Compensation Plan Information
              51Security
      Ownership of Certain Beneficial Owners and Management
              51Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              51Transactions with Related
      Persons
              53Policies
      and Procedures for the Review, Approval or Ratification of Transactions
      with Related Persons
              53Related
      Persons
              53Director
      Independence
              54Item
      14.
              Principal
      Accountant Fees and Services
              54Audit
      and Non-Audit Service Approval Policy
              55Procedures
              55Part
      IV
              
              55Item
      15.
              Exhibits,
      Financial Statement Schedules
              55Financial
      Statements
              55Financial
      Statement Schedules
              55Signatures
              
              57


3
 Table of Contents





PART
I




Cautionary
Comment Regarding Forward-Looking Statements




This
Report includes statements that are, or may be considered to be,
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934.  These forward-looking statements are included throughout this
Report, including in the sections entitled "Business," "Risk Factors," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and relate to matters such as our industry, business strategy, goals
and expectations concerning our market position, future operations, margins,
profitability, capital expenditures, liquidity and capital resources and other
financial and operating information.  We have used the words
"anticipate," "assume," "believe," "budget," "continue," "could," "estimate,"
"expect," "forecast," "future, " "intend," "may," "plan," "potential,"
"predict," "project," "should, " "will," "would" and similar terms and phrases
to identify forward-looking statements in this Report.




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




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




•
            delays
      or difficulties related to the commencement or completion of contracts,
      including additional costs, reductions in revenues or the payment of
      completion penalties or liquidated
damages;




•
            actions
      of suppliers, subcontractors, customers, competitors, banks, surety
      providers and others which are beyond our control including suppliers' and
      subcontractor's failure to perform;




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




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




•
            our
      dependence on a few significant
customers;




•
            adverse
      weather conditions - although we prepare our budgets and bid contracts
      based on historical rain and snowfall patterns, the incident of rain,
      snow, hurricanes, etc., may differ significantly from these
      expectations;




•
            the
      presence of competitors with greater financial resources than we have and
      the impact of competitive services and
pricing;




•
            changes
      in general economic conditions and resulting reductions or delays, or
      uncertainties regarding governmental funding for infrastructure
      services;




•
            adverse
      economic conditions in our markets in Texas and
  Nevada;




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




•
            citations
      issued by any government authority, including the Occupational Safety and
      Health Administration;




4
 Table of Contents




•
            the
      current instability of financial institutions could cause losses on our
      cash and cash equivalents and short-term investments;
  and




•
            the
      other factors discussed in more detail in Item 1A. —Risk
      Factors.




In
reading this Report, you should consider these factors carefully in evaluating
any forward-looking statements and you are cautioned not to place undue reliance
on any forward-looking statements.  Although we believe that our
plans, intentions and expectations reflected in, or suggested by, the
forward-looking statements that we make in this Report are reasonable, we can
provide no assurance that they will be achieved.




The
forward-looking statements included in this Report are made only as of the date
of this Report, and we do not undertake to update any information contained in
this Report or to publicly release the results of any revisions to any
forward-looking statements to reflect events or circumstances that occur, or
that we become aware of after the date of this Report, except as may be required
by applicable securities laws.




Item
1.                      Business.




Access to the Company's
Filings.




The Company's
Website.The Company
maintains a website at www.sterlingconstructionco.com
on which our latest Annual Report on Form 10-K, recent Quarterly Reports on Form
10-Q, recent Current Reports on Form 8-K, any amendments to those filings, and
other filings may be accessed free of charge through a link to the Securities
and Exchange Commission's website where those reports are filed.  Our
website also has recent press releases, the Company's Code of Business Conduct
& Ethics and the charters of the Audit Committee, Compensation Committee,
and Corporate Governance & Nominating Committee of the Board of
Directors.  Information is also provided on the Company’s
“whistle-blower” procedures.  Our website content is made available
for information purposes only.  It should not be relied upon for
investment purposes, and none of the information on the website is incorporated
into this Report by this reference to it.




The Securities and Exchange
Commission (SEC).  The public may read and copy any materials
filed by the Company with the SEC at the SEC's Public Reference Room at 100
F Street, NE, Room 1580, Washington, DC 20549.  The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330 (1-800-732-0330).  The SEC also maintains an
Internet site at www.sec.gov on which
you can obtain reports, proxy and information statements and other information
regarding the Company and other issuers that file electronically with the
SEC.




Overview of the
Company's Business.Sterling
Construction Company, Inc. was founded in 1991 as a Delaware
corporation.  Our principal executive offices are located at 20810
Fernbush Lane, Houston, Texas 77073, and our telephone number at this address is
(281) 821-9091.  Our construction business was founded in 1955 by a
predecessor company in Michigan and is now operated by our subsidiaries, Texas
Sterling Construction Co., a Delaware corporation, or "TSC", Road and Highway
Builders, LLC, a Nevada limited liability company, or "RHB", Road and Highway
Builders Inc. a Nevada corporation, or "RHB Inc." and Road and Highway Builders
of California, Inc., a California corporation or "RHB Cal".  The terms
"Company", "Sterling", and "we" refer to Sterling Construction Company, Inc. and
its subsidiaries except when it is clear that those terms mean only the parent
company.




Sterling
is a leading heavy civil construction company that specializes in the building,
reconstruction and repair of transportation and water
infrastructure.  Transportation infrastructure projects include
highways, roads, bridges and light rail.  Water infrastructure
projects include water, wastewater and storm drainage systems. Sterling provides
general contracting services primarily to public sector clients utilizing its
own employees and equipment, including excavating, concrete and asphalt paving,
installation of large-diameter water and wastewater distribution systems;
construction of bridges and similar large structures; construction of light rail
infrastructure; concrete and asphalt batch plant operation; concrete crushing
and mining aggregates. Sterling performs the majority of the work required by
its contracts with its own crews, and generally engages subcontractors only for
ancillary services.




5
 Table of Contents




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




Sterling
has a history of profitable growth, which we have achieved by expanding both our
service profile and our market areas. This involves adding services, such as
concrete operations, in order to capture a greater percentage of available work
in current and potential markets.  It also involves strategically
expanding operations, either by establishing a branch office in a new market,
often after having successfully bid on and completed a project in that market,
or by acquiring a company that gives us an immediate entry into a
market.  Sterling extended both its service profile and its geographic
market reach with the 2007 acquisition of RHB, a Nevada construction
company.




Sterling
operates in Texas and Nevada, two states that management believes benefit from
both positive long-term demographic trends as well as an historical commitment
to funding transportation and water infrastructure projects.  From
2000 to 2006, the population of Texas grew 12.7% and the population of Nevada
24.9%.  Expenditures for transportation capital expenditures by the
Texas Department of Transportation ("TXDOT") in 2009 are projected to be $2.9
billion.  In the November 2007 election, Texas voters approved the
issuance of $5 billion of bonds for highway improvements which TXDOT proposes to
include in its 2010 and 2011 budgets.  In Nevada, total estimated
highway capital expenditures in 2009 are projected to be $421
million.  These amounts do not include any additional funds that may
be received for highway infrastructure construction from the federal
government's recently enacted economic-stimulus
legislation.  Management anticipates that continued population growth
and increased spending for infrastructure in these markets will positively
affect business opportunities over the coming years.




On
October 31, 2007, we acquired our Nevada operations with our purchase of an
interest in RHB, which is headquartered in Reno, Nevada.  RHB is a
heavy civil construction business focused on the construction of roads and
highways throughout the state of Nevada and, through RHB Inc., operates an
aggregates quarry.  We paid $53 million to acquire a 91.67% equity
interest in RHB and a 100% equity interest in RHB Inc.  The remaining
8.33% interest of RHB is owned by Richard Buenting, the chief executive officer
of RHB who continues to run RHB as part of our senior management team, and his
ownership interest can be put to or called by us in 2011.




Our Business
Strategy.  Key features of our business strategy
include:




Continue to Add Construction
Capabilities.  By adding capabilities that augment our core
construction competencies, we are able to improve gross margin opportunities,
more effectively compete for contracts, and compete for contracts that might not
otherwise be available to us.




Increase our Market
Leadership in our Core Markets.  We have a strong presence in a
number of attractive growing markets in Texas and Nevada in which we intend to
continue to expand our presence.




Apply Core Competencies
Across our Markets. We intend to capitalize on opportunities to export
our Texas experience constructing bridges and water and sewer systems into
Nevada markets. Similarly, we believe our experience in aggregates and asphalt
paving materials in Nevada may open new opportunities for us in our Texas
markets.




Expand into Attractive New
Markets and Selectively Pursue Strategic Acquisitions.  We will
continue to seek to identify attractive new markets and opportunities in select
western, southwestern and southeastern U.S. markets. We will also continue to
assess opportunities to extend our service capabilities and expand our markets
through acquisitions.




Position our Business for
Future Infrastructure Spending. As evidenced by the federal government's
recently enacted economic stimulus legislation, we believe there is a growing
awareness of the need to build, reconstruct and repair our country’s
infrastructure, including water, wastewater and storm drainage systems, as well
as transportation infrastructure such as bridges, highways and mass transit
systems.  We will continue to build our expertise to capture this
infrastructure spending.




Continue to Develop our
Employees. We believe that our employees are key to the successful
implementation of our business strategy, and we will continue allocating
significant resources in order to attract and retain talented managers and
supervisory and field personnel.




6
 Table of Contents




Our
Markets


We
operate in the heavy civil construction segment for infrastructure projects in
Texas and Nevada, specializing in transportation and water infrastructure. RHB
Cal has bid on construction projects in California, but has not been awarded any
such projects.




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




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




Our
highway and bridge work is generally funded through federal and state
authorizations. The federal government enacted the SAFETEA-LU bill in 2005,
which authorized $286 billion for transportation spending through
2009.  Of this total, the Texas Department of Transportation (“TXDOT”)
and the Nevada Department of Transportation (“NDOT”) were originally allocated
approximately $14.5 billion and $1.3 billion, respectively, over the five years
of the authorization. Actual SAFETEA-LU appropriations have been somewhat
reduced from the original allocations. The USDOT proposed budget under
SAFETEA-LU for the Federal-Aid Highways Program requests $39.4 billion of
federal financial assistance to the States for 2009 versus actual appropriations
of $41.2 billion for 2008 and $38.0 billion for 2007.




In
January, 2009, the 2030 Committee, appointed by TXDOT at the request of the
Governor of the State of Texas, submitted its draft report of the transportation
needs of Texas.  The report indicated that the population of Texas is
projected to grow at close to twice the U.S. rate with the population of Texas
growing from 23.5 million in 2006 to between 30.5 million and 40.5 million in
2030.  The report stated that "With this population increase expected
by 2030, transportation modes, costs and congestion are considered a possible
roadblock to Texas' projected growth and prosperity."




The
report further indicated that Texas needs to spend approximately $313.0 billion
(in 2008 dollars) over the 22 year period from 2009 through 2030 to prevent
worsening congestion and maintain economic competitiveness on its urban highways
and roads, improve congestion/safety and partial connectivity on its rural
highways and bridge replacement.




While
TXDOT officials have indicated potential short-term funding shortfalls and
reductions in spending on transportation, the TXDOT budget for 2009 for
transportation construction projects is $2.9 billion versus estimated
expenditures of $2.1 billion in 2008 and actual expenditures of $2.7 billion in
2007. Without any new funding resources beyond what are currently available,
TXDOT estimates that the annual transportation construction project amounts
would be $2.7 billion and $2.4 billion for 2010 and 2011,
respectively.




To
supplement these projected amounts for 2010 and 2011, TXDOT has proposed that
all funds deposited in the State Highway Fund be made available to support
transportation construction and maintenance projects—this would increase highway
improvement expenditures by approximately $700 million in each of those years to
$3.4 billion in 2010 and $3.1 billion in 2011.  Further, TXDOT has
proposed that the general obligation bonds approved by the voters of Texas in
2007 be appropriated for transportation expenditures in 2010 and 2011, which
would add $2.0 billion and $2.3 billion in 2010 and 2011, respectively, to the
above amounts. Assuming all these additional amounts are authorized, total TXDOT
transportation expenditures would be approximately $5.4 billion in each of the
years 2010 and 2011.




In Texas,
substantial funds for transportation infrastructure spending are also being
provided by toll road and regional mobility authorities for the construction of
toll and pass-through toll highways and roads.




NDOT
transportation construction expenditures totaled $449.2 million in 2006 and
$455.5 million in 2007. NDOT’s budget for 2008 and 2009 includes $355.0 million
and $420.9 million for transportation capital expenditures,
respectively.  Projections by NDOT for 2010 and 2011 transportation
capital expenditures are $400 million each year. NDOT has stated that Nevada’s
highway system needs are expected to be $11 billion by 2015; however, it has
also stated that Nevada is currently facing a $3.8 billion shortfall (in 2006
dollars) for the 10 largest projects planned for completion in
2015.




7
 Table of Contents




On
February 17, 2009 the American Recovery and Reinvestment Act ("economic-stimulus
legislation") was enacted by the federal government that authorizes $26.7
billion for highway and bridge construction.  A significant portion of
these funds will be used for ready-to-go, quick spending highway projects for
which contracts can be awarded quickly.  States are required, subject
to certain exceptions, to obligate 50 percent of the apportionment within 120
days of the apportionment or lose 50 percent of the funds not obligated in that
period of time.  States would be further required to obligate the
second 50 percent of their apportionment within one year of the
apportionment.  The highway funds will be apportioned to States
according to the SAFETEA-LU formula which would be approximately $2.3 billion
for Texas and $0.2 billion for Nevada.  In addition, the legislation
includes $16.4 billion for mass–transit and high speed railways and $7.4 billion
for water infrastructure.




Accordingly,
aggregate contract lettings, including stimulus funds, would be $4.1 billion in
2009 and $6.6 billion in 2010 in Texas and $521 million in 2009 and $500 million
in 2010 in Nevada, based on the currently proposed TXDOT and NDOT budgets and
strategic plans.




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




The City
of Houston estimated expenditures for 2008 on storm drainage, street and
traffic, waste water and water capital improvements were $721 million. While the
budget for these improvements for 2009 has not yet been approved, the most
recently adopted five-year capital improvement plan includes $612 million in
2009, $557 million in 2010 and $504 million in 2011 for such improvements and
projects; however, prior to the recent enactment of the federal government's
economic-stimulus legislation, the Mayor of the City of Houston indicated he
would defer $200 million of the 2009 improvements to future years.




The City
of San Antonio has adopted a six-year capital improvement plan for 2009 through
2014, which includes $415 million for streets ($124 million in 2009) and $228
million for drainage ($103 million in 2009). The expenditures will be partially
funded by the $550 million bond program that the voters of the City of San
Antonio approved in May 2007. Included in those bonds was $307 million for
streets, bridges and sidewalks improvements and $152 million for drainage
improvements to be built over the period 2007 through 2012.




We also
do work for other cities, counties, business area redevelopment authorities and
regional authorities in Texas which have substantial water and transportation
infrastructure spending budgets.




In
addition, while we currently have no municipal contracts in the City of Las
Vegas, that City’s capital improvement plan proposes expenditures for public
works of $807 million for the years 2009 through 2013, including $311 million in
2009. The City Council of Las Vegas recently directed the city staff to delay
capital improvement projects that will require additional staffing for one to
two years which may cause significant deferrals of construction
projects.  However, management believes there will be opportunities
for the Company to bid on and obtain municipal work in Las Vegas as well as Reno
and Carson City.




While our
business does not include residential and commercial infrastructure work, the
severe fall-off in new projects in those markets in Nevada and to a lesser
extent in Texas, has caused a softer bidding climate in our infrastructure
markets and has caused some residential and commercial infrastructure
contractors to bid on public sector transportation and water infrastructure
projects, thus increasing competition and creating downward pressure on bid
prices in our markets.  These and other factors could adversely affect
our ability to maintain or increase our backlog through successful bids for new
projects and could adversely affect the profitability of new projects that we do
obtain through successful bids.




Recent
reductions in miles driven in the U.S. and more fuel efficient vehicles are
reducing the amount of federal and state gasoline taxes and tolls collected.
Additionally, the current credit crisis may limit the amount of state and local
bonds that can be sold at reasonable terms. Further, the nationwide decline in
home sales, the increase in foreclosures and a prolonged recession may result in
decreases in user fees and property and sales taxes.  These and other
factors could adversely affect transportation and water infrastructure capital
expenditures in our markets.




Due to
increased competition and our concern about a possible decline in the future
level of bid opportunities, the Company has submitted some of its more recent
bids at margins that are lower than bids submitted earlier in 2008 and 2007. The
resulting lower margin jobs may affect gross margins recognized in the financial
statements for several quarters subsequent to December 31,
2008.  Assuming TXDOT moves forward in 2009 with its planned level of
spending, we expect to have bidding opportunities that could allow our gross
profit margins to return to more historic levels.




8
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While the
bidding climate varies by locality, we continue to bid projects that fit our
expertise and current criteria for potential revenues and gross margins after
giving consideration to resource utilization, degree of difficulty in the
projects, amount of subcontracts and materials and project competition. Our
markets are softer and more competitive in the current economic
climate.  Management believes that the Company has the resources and
experience to continue to compete successfully for projects as they become
available.




Our
Customers.  For decades, we have concentrated our operations in
Texas. We are headquartered in Houston, and we serve the top markets in Texas,
including Houston, San Antonio, Dallas/Fort Worth and Austin. In 2007, we
expanded our operations into Nevada.




Although
we occasionally undertake contracts for private customers, the vast majority of
our contracts are for public sector customers. In Texas, these customers include
TXDOT, county and municipal public works departments, the Metropolitan Transit
Authority of Harris County, Texas (or Metro), the Harris County Toll Road
Authority, North Texas Transit Authority (or NTTA), regional transit and water
authorities, port authorities, school districts and municipal utility districts.
In Nevada, our primary public sector customer has been NDOT.  In 2008,
state highway work accounted for 68% of our consolidated revenues, compared with
68% in 2007 and 67% in 2006.




Our
largest revenue customer is TXDOT. In 2008, contracts with TXDOT represented
39.2% of our revenues.  In 2008, contracts with NDOT represented 21.3%
of our revenues.  The North Texas Tollroad Authority represented 6.4%
of our revenues.  In both Texas and Nevada, we provide services to
these customers exclusively pursuant to contracts awarded through competitive
bidding processes.




In Texas,
our municipal customers in 2008 included the City of Houston (8.5% of our 2008
revenues), City of San Antonio (4.2% of our revenues) and Harris County, Texas
(4.4% of our 2008 revenues). In the past, we have also completed the
construction of certain infrastructure for new light rail systems in Houston,
Dallas and Galveston. We anticipate that revenues obtained from the Cities of
Houston and San Antonio will continue to increase due to these metropolitan
areas' steady gain in population through migration of new residents, the
annexation of surrounding communities and the continuing programs to expand
storm water and flood control systems and deliver water to suburban communities.
We provide services to our municipal customers exclusively pursuant to contracts
awarded through competitive bidding processes.




Competition.  Our
competitors are companies that we bid against for construction contracts. We
estimate that Sterling has in excess of 160 competitors in the Texas and Nevada
markets that we primarily serve, and they include large national and regional
construction companies as well as many smaller
contractors.  Historically, the construction business has not
typically required large amounts of capital, which can result in relative ease
of market entry for companies possessing acceptable qualifications.




Factors
influencing our competitiveness include price, our reputation for quality, our
equipment fleet, our financial strength, our surety bonding capacity and
prequalification, our knowledge of local markets and conditions, and our project
management and estimating abilities. Although some of our competitors are larger
than we are and may possess greater resources or provide more
vertically-integrated services, we believe that we are well-positioned to
compete effectively and favorably in the markets in which we operate on the
basis of the foregoing factors.




We are
unable to determine the size of many competitors because they are privately
owned, but we believe that we are one of the larger participants in our Texas
markets and one of the largest contractors in Houston engaged in municipal civil
construction work. In Nevada, we believe that we are a leading asphalt paving
contractor in suburban and rural highway projects. We believe that being one of
the largest firms in the Houston municipal civil construction market provides us
with several advantages, including greater flexibility to manage our backlog in
order to schedule and deploy our workforce and equipment resources more
efficiently; more cost-effective purchasing of materials, insurance and bonds;
the ability to provide a broader range of services than otherwise would be
provided through subcontractors; and the availability of substantially more
capital and resources to dedicate to each of our contracts. Because we own and
maintain most of the equipment required for our contracts and have the
experienced workforce to handle many types of municipal civil construction, we
are able to bid competitively on many categories of contracts, especially
complex, multi-task projects.




In the
state highway markets, most of our competitors are large regional contractors,
and individual contracts tend to be larger and require more specialized skills
than those in the municipal markets. Some of these competitors have the
advantage of being more vertically-integrated, or they specialize in certain
types of projects such as construction over water. However those competitors,
particularly in Texas, often have the disadvantage of having to use a temporary,
local workforce to complete each of their state highway contracts. In contrast,
we have a permanent workforce who performs our state highway contracts in Texas;
however, we do rely on a temporary, unionized workforce for performance of a
portion of our state highway contracts in Nevada.




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Contract
Backlog




Contract
backlog is our estimate of the revenues that we expect to realize in future
periods on our construction contracts.  We add the revenue value of
new contracts to our contract backlog, when we are the low bidder on a public
sector contract and have determined that there are no apparent impediments to
award of the contract.  As construction on our contracts progresses,
we increase or decrease contract backlog to take into account changes in
estimated quantities under fixed unit price contracts, as well as to reflect
changed conditions, change orders and other variations from initially
anticipated contract revenues and costs, including completion penalties and
bonuses.  We subtract from contract backlog the amounts we recognize
as revenues on contracts.




Our
backlog of construction projects was $448 million at December 31, 2008, versus
backlog of $450 million at December 31, 2007.  During 2008, we were
awarded $413 million in new contracts and change orders and recognized revenues
earned of $415 million.  The reduction in backlog was due to increased
competition for contracts and economic conditions in certain of our
markets.  To date, the Company has had no material project
cancellations or scope reductions in any of its backlog as a result of reduced
funding authorization.




Of the
contract backlog at December 31, 2008, approximately $379 million is scheduled
for completion in 2009.  At December 31, 2008, we had no contracts in
backlog which had not been officially awarded to us.




Substantially
all of the contracts in our contract backlog may be canceled at the election of
the customer; however, we have not been materially adversely affected by
contract cancellations or modifications in the past.  See the section
below entitled "Contracts - Contract Management Process."




Contracts.




Types of
Contracts.  We provide our services by using traditional
general contracting arrangements, which are predominantly fixed unit price
contracts awarded based on the lowest bid. A small amount of our revenue is
produced under change orders or emergency contracts arranged on a cost plus
basis.




Fixed
unit price contracts are generally used in competitively-bid public civil
construction contracts and, to a lesser degree, building construction contracts.
Contractors under fixed unit price contracts are generally committed to provide
all of the resources required to complete a contract for a fixed price per unit.
Fixed unit price contracts generally transfer more risk to the contractor but
offer the opportunity, under favorable circumstances, for greater profits. These
contracts are generally subject to negotiated change orders, frequently due to
differences in site conditions from those anticipated when the bid is placed.
Some contracts provide for penalties if the contract is not completed on time,
or incentives if it is completed ahead of schedule.




Contract Management
Process.  We identify potential contracts from a variety of
sources, including through subscriber services that notify us of contracts out
for bid, through advertisements by federal, state and local governmental
entities, through our business development efforts and through meetings with
other participants in the construction industry. After determining which
contracts are available, we decide which contracts to pursue based on such
factors as the relevant skills required, the contract size and duration, the
availability of our personnel and equipment, the size and makeup of our current
backlog, our competitive advantages and disadvantages, prior experience, the
contracting agency or customer, the source of contract funding, geographic
location, likely competition, construction risks, gross margin opportunities,
penalties or incentives and the type of contract.




As a
condition to pursuing certain contracts, we are sometimes required to complete a
prequalification process with the applicable agency or customer. Some customers,
such as TXDOT and NDOT, require yearly prequalification, and other customers
have experience requirements specific to the contract. The prequalification
process generally limits bidders to those companies with the operational
experience and financial capability to effectively complete the particular
contract in accordance with the plans, specifications and construction
schedule.




There are
several factors that can create variability in contract performance and
financial results compared to our bid assumptions on a contract. The most
significant of these include the completeness and accuracy of our original bid
analysis, recognition of costs associated with added scope changes, extended
overhead due to customer and weather delays, subcontractor performance issues,
changes in productivity expectations, site conditions that differ from those
assumed in the original bid, and changes in the availability and proximity of
materials. In addition, each of our original bids is based on the contract
customer’s estimates of the quantities needed to complete a contract. If the
quantities ultimately needed are different, our backlog and financial
performance on the contract will change. All of these factors can lead to
inefficiencies in contract performance, which can increase costs and lower
profits. Conversely, if any of these or other factors is more positive than the
assumptions in our bid, contract profitability can improve.




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The
estimating process for our contracts in Texas typically involves three phases.
Initially, we consider the level of anticipated competition and our available
resources for the prospective project. If we then decide to continue considering
a project, we undertake the second phase of the contract process and spend up to
six weeks performing a detailed review of the plans and specifications,
summarize the various types of work involved and related estimated quantities,
determine the contract duration and schedule and highlight the unique and
riskier aspects of the contract. Concurrent with this process, we estimate the
cost and availability of labor, material, equipment, subcontractors and the
project team required to complete the contract on time and in accordance with
the plans and specifications. Substantially all of our estimates are made on a
per-unit basis for each line item, with the typical contract containing 50 to
400 line items. The final phase consists of a detailed review of the estimate by
management, including, among other things, assumptions regarding cost, approach,
means and methods, productivity, risk and the estimated profit margin. This
profit amount will vary according to management’s perception of the degree of
difficulty of the contract, the current competitive climate and the size and
makeup of our backlog. Our project managers are intimately involved throughout
the estimating and construction process so that contract issues, and risks, can
be understood and addressed on a timely basis.




The
estimating process in Nevada is primarily the responsibility of the management
of those operations.  Management reviews all of the plans and
specifications for a proposed project, estimates the costs to complete the
project and the risks involved, adds an appropriate profit level, and, based on
all of that information, determines whether to submit a bid on the project.
Prior to submittal of any proposals, estimates are reviewed by Sterling
management.




To manage
risks of changes in material prices and subcontracting costs used in tendering
bids for construction contracts, we obtain firm price quotations from our
suppliers, except for fuel, and subcontractors before submitting a bid. These
quotations do not include any quantity guarantees, and we have no obligation for
materials or subcontract services beyond those required to complete the
respective contracts that we are awarded for which quotations have been
provided.




Beginning
in January 2009, in order to reduce the volatility that we experienced in 2008
in our cost of diesel and gasoline fuel, we started a process of investing in
certain securities, the assets of which are a crude oil commodity
pool.  The change in the unit price of these securities generally
follows the change in percentage terms of the price of crude
oil.  Since there is a strong correlation between the price of crude
oil and our diesel and gasoline fuel costs, we believe that over future
reporting periods, the gains and losses on these securities will tend to offset
the increases and decreases in the price we pay for diesel and gasoline and thus
reduce the effect of the volatility of such fuel costs on our results of
operations.  There can, however, be no assurance that this process
will be successful.




Substantially
all of our contracts are entered into with governmental entities and are
generally awarded to the lowest bidder after a solicitation of bids by the
project owner. Requests for proposals or negotiated contracts with public or
private customers are generally awarded based on a combination of technical
capability and price, taking into consideration factors such as contract
schedule and prior experience.




During
the construction phase of a contract, we monitor our progress by comparing
actual costs incurred and quantities completed to date with budgeted amounts and
the contract schedule, and periodically prepare an updated estimate of total
forecasted revenue, cost and expected profit for the contract.




During
the normal course of most contracts, the customer, and sometimes the contractor,
initiates modifications or changes to the original contract to reflect, among
other things, changes in quantities, specifications or design, method or manner
of performance, facilities, materials, site conditions and the period for
completion of the work. In many cases, final contract quantities may differ from
those specified by the customer. Generally, the scope and price of these
modifications are documented in a “change order” to the original contract and
reviewed, approved and paid in accordance with the normal change order
provisions of the contract. We are often required to perform extra or change
order work as directed by the customer even if the customer has not agreed in
advance on the scope or price of the work to be performed. This process may
result in disputes over whether the work performed is beyond the scope of the
work included in the original contract plans and specifications or, even if the
customer agrees that the work performed qualifies as extra work, the price that
the customer is willing to pay for the extra work. These disputes may not be
settled to our satisfaction. Even when the customer agrees to pay for the extra
work, we may be required to fund the cost of the work for a lengthy period of
time until the change order is approved and funded by the customer. In addition,
any delay caused by the extra work may adversely impact the timely scheduling of
other work on the contract (or on other contracts) and our ability to meet
contract milestone dates.




The
process for resolving contract claims varies from one contract to another but,
in general, we attempt to resolve claims at the project supervisory level
through the normal change order process or, if necessary, with higher levels of
management within our organization and the customer’s organization. Regardless
of the process, when a potential claim arises on a contract, we typically have
the contractual obligation to perform the work and must incur the related costs.
We do not recoup the costs unless and until the claim is resolved, which could
take a significant amount of time.




Most of
our construction contracts provide for termination of the contract for the
convenience of the customer, with provisions to pay us only for work performed
through the date of termination. Our backlog and results of operations have not
been materially adversely affected by these provisions in the past.




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We act as
the prime contractor on almost all of the construction contracts that we
undertake. We complete the majority of our contracts with our own resources, and
we typically subcontract only specialized activities, such as traffic control,
electrical systems, signage and trucking. As the prime contractor, we are
responsible for the performance of the entire contract, including subcontract
work. Thus, we are subject to increased costs associated with the failure of one
or more subcontractors to perform as anticipated. We manage this risk by
reviewing the size of the subcontract, the financial stability of the
subcontractor and other factors. Although we generally do not require that our
subcontractors furnish a bond or other type of security to guarantee their
performance, we require performance and payment bonds on many specialized or
large subcontract portions of our contracts. Disadvantaged business enterprise
regulations require us to use our best efforts to subcontract a specified
portion of contract work performed for governmental entities to certain types of
subcontractors, including minority- and women-owned businesses. We have not
experienced significant costs associated with subcontractor performance
issues.




Insurance and
Bonding.  All of our buildings and equipment are covered by
insurance, at levels which our management believes to be adequate. In addition,
we maintain general liability and excess liability insurance, all in amounts
consistent with our risk of loss and industry practice. We self-insure our
workers’ compensation and health plan claims subject to stop-loss insurance
coverage.




As a
normal part of the construction business, we are generally required to provide
various types of surety and payment bonds that provide an additional measure of
security for our performance under public sector contracts. Typically, a bidder
for a contract must post a bid bond, generally for 5% to 10% of the amount bid,
and on winning the bid, must post a performance and payment bond for 100% of the
contract amount. Upon completion of a contract, before receiving final payment
on the contract, a contractor must post a maintenance bond for generally 1% of
the contract amount for one to two years. Our ability to obtain surety bonds
depends upon our capitalization, working capital, aggregate contract size, past
performance, management expertise and external factors, including the capacity
of the overall surety market. Surety companies consider such factors in light of
the amount of our backlog that we have currently bonded and their current
underwriting standards, which may change from time to time. As is customary, we
have agreed to indemnify our bonding company for all losses incurred by it in
connection with bonds that are issued, and we have granted our bonding company a
security interest in certain assets as collateral for such
obligation.




Employees.  At
February 15, 2009, we had approximately 1,200 employees, including 16 project
managers and approximately 50 superintendents who manage over 125 fully-equipped
crews in our construction business. Of such employees, approximately 50 were
located in our Houston headquarters, with most of the others being field
personnel. Of our Nevada employees, 70 are union members represented by three
unions.




Our
business is dependent upon a readily available supply of management, supervisory
and field personnel. Substantially all of our employees who work on our
contracts in Texas are a permanent part of our workforce, and we generally do
not rely on temporary employees to complete these contracts. In contrast, many
of our employees who work on our contracts in Nevada are temporary employees. In
the past, we have been able to attract sufficient numbers of personnel to
support the growth of our operations.




We
conduct extensive safety training programs, which have allowed us to maintain a
high safety level at our worksites. All newly-hired employees undergo an initial
safety orientation, and for certain types of projects, we conduct specific
hazard training programs. Our project foremen and superintendents conduct weekly
on-site safety meetings, and our full-time safety inspectors make random site
safety inspections and perform assessments and training if infractions are
discovered. In addition, all of our superintendents and project managers are
required to complete an OSHA-approved safety course.




Item
1A.                   Risk Factors.




The risks
described below are those we believe to be the material risks we
face.  Any of the risk factors described below could significantly and
adversely affect our business, prospects, financial condition, results of
operations and cash flows.




Risks Relating to
Our Business.




If we are unable to
accurately estimate the overall risks or costs when we bid on a contract that is
ultimately awarded to us, we may achieve a lower than anticipated profit or
incur a loss on the contract.




Substantially
all of our revenues and backlog are typically derived from fixed unit price
contracts. Fixed unit price contracts require us to perform the contract for a
fixed unit price irrespective of our actual costs. As a result, we realize a
profit on these contracts only if we successfully estimate our costs and then
successfully control actual costs and avoid cost overruns. If our cost estimates
for a contract are inaccurate, or if we do not execute the contract within our
cost estimates, then cost overruns may cause us to incur losses or cause the
contract not to be as profitable as we expected. This, in turn, could negatively
affect our cash flow, earnings and financial position.




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The costs
incurred and gross profit realized on such contracts can vary, sometimes
substantially, from the original projections due to a variety of factors,
including, but not limited to:




•
            onsite
      conditions that differ from those assumed in the original
    bid;




•
            delays
      caused by weather conditions;




•
            contract
      modifications creating unanticipated costs not covered by change
      orders;




•
            changes
      in availability, proximity and costs of materials, including steel,
      concrete, aggregates and other construction materials (such as stone,
      gravel, sand and oil for asphalt paving), as well as fuel and lubricants
      for our equipment;




•
            inability
      to predict the costs of accessing and producing aggregates and purchasing
      oil, required for asphalt paving
projects;




•
            availability
      and skill level of workers in the geographic location of a
      project;




•
            our
      suppliers’ or subcontractors’ failure to perform due to various reasons
      including bankruptcy;




•
            fraud
      or theft committed by our employees and
  management;




•
            mechanical
      problems with our machinery or
equipment;




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




•
            difficulties
      in obtaining required governmental permits or
  approvals;




•
            changes
      in applicable laws and regulations;
and




•
            claims
      or demands from third parties alleging damages arising from our work or
      from the project of which our work is
part.




Many of
our contracts with public sector customers contain provisions that purport to
shift some or all of the above risks from the customer to us, even in cases
where the customer is partly at fault. Our experience has often been that public
sector customers have been willing to negotiate equitable adjustments in the
contract compensation or completion time provisions if unexpected circumstances
arise. If public sector customers seek to impose contractual risk-shifting
provisions more aggressively, we could face increased risks, which may adversely
affect our cash flow, earnings and financial position.




Economic downturns or
reductions in government funding of infrastructure projects could reduce our
revenues and profits and have a material adverse effect on our results of
operations.




Our
business is highly dependent on the amount and timing of infrastructure work
funded by various governmental entities, which, in turn, depends on the overall
condition of the economy, the need for new or replacement infrastructure, the
priorities placed on various projects funded by governmental entities and
federal, state or local government spending levels. Spending on infrastructure
could decline for numerous reasons, including decreased revenues received by
state and local governments for spending on such projects, including federal
funding. For example, state spending on highway and other projects can be
adversely affected by decreases or delays in, or uncertainties regarding,
federal highway funding, which could adversely affect us. We are reliant upon
contracts with the Texas Department of Transportation, or TXDOT, and the Nevada
Department of Transportation, or NDOT, for a significant portion of our
revenues. Recent public statements by state officials indicate potential TXDOT
and NDOT funding shortfalls and reductions in spending.




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  While our
business does not include residential and commercial infrastructure work, the
severe fall-off in new projects in those markets in Nevada and to a lesser
extent in Texas, has caused a softer bidding climate in our infrastructure
markets and has caused some residential and commercial infrastructure
contractors to bid on public sector transportation and water infrastructure
projects, thus increasing competition and creating downward pressure on bid
prices in our markets.  These and other factors could adversely affect
our ability to maintain or increase our backlog through successful bids for new
projects and could adversely affect the profitability of new projects that we do
obtain through successful bids.




Recent
reductions in miles driven in the U.S. and more fuel efficient vehicles are
reducing federal and state gasoline taxes and tolls collected. Additionally, the
current credit crisis may limit the amount of state and local bonds that can be
sold at reasonable terms. Further, the nationwide decline in home sales,
increase in foreclosures and a prolonged recession may result in decreases in
user fees and property and sales taxes.  These and other factors could
adversely affect transportation and water infrastructure capital expenditures in
our markets.




The cancellation of
significant contracts or our disqualification from bidding for new contracts
could reduce our revenues and profits and have a material adverse effect on our
results of operations.




Contracts
that we enter into with governmental entities can usually be canceled at any
time by them with payment only for the work already completed. In addition, we
could be prohibited from bidding on certain governmental contracts if we fail to
maintain qualifications required by those entities. A cancellation of an
unfinished contract or our debarment from the bidding process could cause our
equipment and work crews to be idled for a significant period of time until
other comparable work became available, which could have a material adverse
effect on our business and results of operations.




We operate in Texas and
Nevada, and any adverse change to the economy or business environment in Texas
or Nevada could significantly and adversely affect our operations, which would
lead to lower revenues and reduced profitability.




We
operate in Texas and Nevada, and our Texas operations are particularly
concentrated in the Houston area. Because of this concentration in specific
geographic locations, we are susceptible to fluctuations in our business caused
by adverse economic or other conditions in these regions, including natural or
other disasters. A stagnant or depressed economy in Texas or Nevada could
adversely affect our business, results of operations and financial
condition.




Our acquisition strategy
involves a number of risks.




In
addition to organic growth of our construction business, we intend to continue
pursuing growth through the acquisition of companies or assets that may enable
us to expand our project skill-sets and capabilities, enlarge our geographic
markets, add experienced management and increase critical mass to enable us to
bid on larger contracts. However, we may be unable to implement this growth
strategy if we cannot reach agreements for potential acquisitions on acceptable
terms or for other reasons. Moreover, our acquisition strategy involves certain
risks, including:




•
            difficulties
      in the integration of operations and
systems;




•
            difficulties
      applying our expertise in one market into another
  market;




•
            the
      key personnel and customers of the acquired company may terminate their
      relationships with the acquired
company;




•
            we
      may experience additional financial and accounting challenges and
      complexities in areas such as tax planning and financial
      reporting;




•
            we
      may assume or be held liable for risks and liabilities (including for
      environmental-related costs and liabilities) as a result of our
      acquisitions, some of which we may not discover during our due
      diligence;




•
            our
      ongoing business may be disrupted or receive insufficient management
      attention; and




•
            we
      may not be able to realize cost savings or other financial benefits we
      anticipated.




Future
acquisitions may require us to obtain additional equity or debt financing, as
well as additional surety bonding capacity, which may not be available on terms
acceptable to us or at all. Moreover, to the extent that any acquisition results
in additional goodwill, it will reduce our tangible net worth, which might have
an adverse effect on our credit and bonding capacity.




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Our industry is highly
competitive, with a variety of larger companies with greater resources competing
with us, and our failure to compete effectively could reduce the number of new
contracts awarded to us or adversely affect our margins on contracts
awarded.




Essentially
all of the contracts on which we bid are awarded through a competitive bid
process, with awards generally being made to the lowest bidder, but sometimes
recognizing other factors, such as shorter contract schedules or prior
experience with the customer. Within our markets, we compete with many national,
regional and local construction firms. Some of these competitors have achieved
greater market penetration than we have in the markets in which we compete, and
some have greater financial and other resources than we do. In addition, there
are a number of national companies in our industry that are larger than we are
and that, if they so desire, could establish a presence in our markets and
compete with us for contracts. In some markets where home building projects have
slowed, construction companies that lack available work in the home building
market have begun on a limited scale bidding on highway and municipal
construction contracts. As a result, we may need to accept lower contract
margins in order to compete against competitors that have the ability to accept
awards at lower prices or have a pre-existing relationship with a customer. If
we are unable to compete successfully in our markets, our relative market share
and profits could be reduced.




Our dependence on
subcontractors and suppliers of materials (including petroleum-based products)
could increase our costs and impair our ability to complete contracts on a
timely basis or at all, which would adversely affect our profits and cash
flow.




We rely
on third-party subcontractors to perform some of the work on many of our
contracts. We generally do not bid on contracts unless we have the necessary
subcontractors committed for the anticipated scope of the contract and at prices
that we have included in our bid, except for trucking arrangements needed for
our Nevada operations. Therefore, to the extent that we cannot engage
subcontractors, our ability to bid for contracts may be impaired. In addition,
if a subcontractor is unable to deliver its services according to the negotiated
terms for any reason, including the deterioration of its financial condition, we
may suffer delays and be required to purchase the services from another source
at a higher price. This may reduce the profit to be realized, or result in a
loss, on a contract.




We also
rely on third-party suppliers to provide most of the materials (including
aggregates, asphalt, concrete, steel and pipe) for our contracts, except in
Nevada where we source and produce most of our own aggregates. We do not own or
operate any quarries in Texas, and there are no naturally occurring sources of
aggregates in the Houston metropolitan area. We normally do not bid on contracts
unless we have commitments from suppliers for the materials required to complete
the contract and at prices that we have included in our bid, except for some
aggregates we use in our Nevada construction projects. Thus, to the extent that
we cannot obtain commitments from our suppliers for materials, our ability to
bid for contracts may be impaired. In addition, if a supplier is unable to
deliver materials according to the negotiated terms of a supply agreement for
any reason, including the deterioration of its financial condition, we may
suffer delays and be required to purchase the materials from another source at a
higher price. This may reduce the profit to be realized, or result in a loss, on
a contract.




Diesel
fuel and other petroleum-based products are utilized to operate the plants and
equipment on which we rely to perform our construction contracts. In addition,
our asphalt plants and suppliers use oil in combination with aggregates to
produce asphalt used in our road and highway construction projects. Decreased
supplies of such products relative to demand, unavailability of petroleum
supplies due to refinery turnarounds, and other factors can increase the cost of
such products. Future increases in the costs of fuel and other petroleum-based
products used in our business, particularly if a bid has been submitted for a
contract and the costs of such products have been estimated at amounts less than
the actual costs thereof, could result in a lower profit, or a loss, on a
contract.




We may not accurately assess
the quality, and we may not accurately estimate the quantity, availability and
cost, of aggregates we plan to produce, particularly for projects in rural areas
of Nevada, which could have a material adverse effect on our results of
operations.




Particularly
for projects in rural areas of Nevada, we typically estimate these factors for
anticipated aggregate sources that we have not previously used to produce
aggregates, which increases the risk that our estimates may be inaccurate.
Inaccuracies in our estimates regarding aggregates could result in significantly
higher costs to supply aggregates needed for our projects, as well as potential
delays and other inefficiencies. As a result, our failure to accurately assess
the quality, quantity, availability and cost of aggregates could cause us to
incur losses, which could materially adversely affect our results of
operations.




We may not be able to fully
realize the revenue anticipated by our reported backlog.




Almost
all of the contracts included in backlog are awarded by public sector customers
through a competitive bid process, with the award generally being made to the
lowest bidder. We add new contracts to our backlog, typically when we are the
low bidder on a public sector contract and management determines that there are
no apparent impediments to award of the contract. As construction on our
contracts progresses, we increase or decrease backlog to take account of changes
in estimated quantities under fixed unit price contracts, as well as to reflect
changed conditions, change orders and other variations from initially
anticipated contract revenues and costs, including completion penalties and
bonuses. We subtract from backlog the amounts we bill on contracts.




Most of
the contracts with our public sector customers can be terminated at their
discretion. If a customer cancels, suspends, delays or reduces a contract, we
may be reimbursed for certain costs but typically will not be able to bill the
total amount that had been reflected in our backlog. Cancellation of one or more
contracts that constitute a large percentage of our backlog, and our inability
to find a substitute contract, would have a material adverse effect on our
business, results of operations and financial condition.




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 Table of Contents




If we are unable to attract
and retain key personnel and skilled labor, or if we encounter labor
difficulties, our ability to bid for and successfully complete contracts may be
negatively impacted.




Our
ability to attract and retain reliable, qualified personnel is a significant
factor that enables us to successfully bid for and profitably complete our work.
This includes members of our management, project managers, estimators,
supervisors, foremen, equipment operators and laborers. The loss of the services
of any of our management could have a material adverse effect on us. Our future
success will also depend on our ability to hire and retain, or to attract when
needed, highly-skilled personnel. Competition for these employees is intense,
and we could experience difficulty hiring and retaining the personnel necessary
to support our business. If we do not succeed in retaining our current employees
and attracting, developing and retaining new highly-skilled employees, our
reputation may be harmed and our future earnings may be negatively
impacted.




In Texas,
we rely heavily on immigrant labor. Any adverse changes to existing laws and
regulations, or changes in enforcement requirements or practices, applicable to
employment of immigrants could negatively impact the availability and cost of
the skilled personnel and labor we need, particularly in Texas. We may not be
able to continue to attract and retain sufficient employees at all levels due to
changes in immigration enforcement practices or compliance standards or for
other reasons.




In
Nevada, a substantial number of our equipment operators and laborers are
unionized. Any work stoppage or other labor dispute involving our unionized
workforce would have a material adverse effect on our operations and operating
results in Nevada.




Our contracts may require us
to perform extra or change order work, which can result in disputes and
adversely affect our working capital, profits and cash
flows.




Our
contracts generally require us to perform extra or change order work as directed
by the customer even if the customer has not agreed in advance on the scope or
price of the extra work to be performed. This process may result in disputes
over whether the work performed is beyond the scope of the work included in the
original project plans and specifications or, if the customer agrees that the
work performed qualifies as extra work, the price that the customer is willing
to pay for the extra work. These disputes may not be settled to our
satisfaction. Even when the customer agrees to pay for the extra work, we may be
required to fund the cost of such work for a lengthy period of time until the
change order is approved by the customer and we are paid by the
customer.




To the
extent that actual recoveries with respect to change orders or amounts subject
to contract disputes or claims are less than the estimates used in our financial
statements, the amount of any shortfall will reduce our future revenues and
profits, and this could have a material adverse effect on our reported working
capital and results of operations. In addition, any delay caused by the extra
work may adversely impact the timely scheduling of other project work and our
ability to meet specified contract milestone dates.




Our failure to meet schedule
or performance requirements of our contracts could adversely affect
us.




In most
cases, our contracts require completion by a scheduled acceptance date. Failure
to meet any such schedule could result in additional costs, penalties or
liquidated damages being assessed against us, and these could exceed projected
profit margins on the contract. Performance problems on existing and future
contracts could cause actual results of operations to differ materially from
those anticipated by us and could cause us to suffer damage to our reputation
within the industry and among our customers.




Unanticipated adverse
weather conditions may cause delays, which could slow completion of our
contracts and negatively affect our revenues and cash flow.




Because
all of our construction projects are built outdoors, work on our contracts is
subject to unpredictable weather conditions, which could become more frequent or
severe if general climatic changes occur. For example, evacuations in Texas due
to Hurricane Rita and Ike resulted in our inability to perform work on all
Houston-area contracts for several days. Lengthy periods of wet weather will
generally interrupt construction, and this can lead to under-utilization of
crews and equipment, resulting in less efficient rates of overhead recovery. For
example, during the first nine months of 2007, we experienced an above-average
number of days and amount of rainfall across our Texas markets, which impeded
our ability to work on construction projects and reduced our gross profit.
During the late fall to early spring months of the year, our work on
construction projects in Nevada may also be curtailed because of snow and other
work-limiting weather.  While revenues can be recovered following a
period of bad weather, it is generally impossible to recover the inefficiencies,
and significant periods of bad weather typically reduce profitability of
affected contracts both in the current period and during the future life of
affected contracts. Such reductions in contract profitability negatively affect
our results of operations in current and future periods until the affected
contracts are completed.




16
 Table of Contents




Timing of the award and
performance of new contracts could have an adverse effect on our operating
results and cash flow.




It is
generally very difficult to predict whether and when new contracts will be
offered for tender, as these contracts frequently involve a lengthy and complex
design and bidding process, which is affected by a number of factors, such as
market conditions, financing arrangements and governmental approvals. Because of
these factors, our results of operations and cash flows may fluctuate from
quarter to quarter and year to year, and the fluctuation may be
substantial.




The
uncertainty of the timing of contract awards may also present difficulties in
matching the size of our equipment fleet and work crews with contract needs. In
some cases, we may maintain and bear the cost of more equipment and ready work
crews than are currently required, in anticipation of future needs for existing
contracts or expected future contracts. If a contract is delayed or an expected
contract award is not received, we would incur costs that could have a material
adverse effect on our anticipated profit.




In
addition, the timing of the revenues, earnings and cash flows from our contracts
can be delayed by a number of factors, including adverse weather conditions such
as prolonged or intense periods of rain, snow, storms or flooding, delays in
receiving material and equipment from suppliers and changes in the scope of work
to be performed. Such delays, if they occur, could have adverse effects on our
operating results for current and future periods until the affected contracts
are completed.




Our dependence on a limited
number of customers could adversely affect our business and results of
operations.




Due to
the size and nature of our construction contracts, one or a few customers have
in the past and may in the future represent a substantial portion of our
consolidated revenues and gross profits in any one year or over a period of
several consecutive years. For example, in 2008, approximately 54.1% of our
revenue in Texas was generated from three customers, and approximately 95.3% of
our revenue in Nevada was generated from one customer. Similarly, our backlog
frequently reflects multiple contracts for individual customers; therefore, one
customer may comprise a significant percentage of backlog at a certain point in
time. An example of this is TXDOT, with which we had 14 contracts in our backlog
at December 31, 2008. The loss of business from any one of such customers could
have a material adverse effect on our business or results of operations. Recent
public statements by TXDOT and NDOT officials indicate potential funding
shortfalls and reductions in spending. Because we do not maintain any reserves
for payment defaults, a default or delay in payment on a significant scale could
materially adversely affect our business, results of operations and financial
condition.




We may incur higher costs to
lease, acquire and maintain equipment necessary for our operations, and the
market value of our owned equipment may decline.




We have
traditionally owned most of the construction equipment used to build our
projects. To the extent that we are unable to buy construction equipment
necessary for our needs, either due to a lack of available funding or equipment
shortages in the marketplace, we may be forced to rent equipment on a short-term
basis, which could increase the costs of performing our contracts.




The
equipment that we own or lease requires continuous maintenance, for which we
maintain our own repair facilities. If we are unable to continue to maintain the
equipment in our fleet, we may be forced to obtain third-party repair services,
which could increase our costs. In addition, the market value of our equipment
may unexpectedly decline at a faster rate than anticipated.




An inability to obtain
bonding could limit the aggregate dollar amount of contracts that we are able to
pursue.




As is
customary in the construction business, we are required to provide surety bonds
to secure our performance under construction contracts. Our ability to obtain
surety bonds primarily depends upon our capitalization, working capital, past
performance, management expertise and reputation and certain external factors,
including the overall capacity of the surety market. Surety companies consider
such factors in relationship to the amount of our backlog and their underwriting
standards, which may change from time to time. Events that affect the insurance
and bonding markets generally may result in bonding becoming more difficult to
obtain in the future, or being available only at a significantly greater cost.
Our inability to obtain adequate bonding, and, as a result, to bid on new
contracts, could have a material adverse effect on our future revenues and
business prospects.




17
 Table of Contents




Our operations are subject
to hazards that may cause personal injury or property damage, thereby subjecting
us to liabilities and possible losses, which may not be covered by
insurance.




Our
workers are subject to the usual hazards associated with providing construction
and related services on construction sites, plants and quarries. Operating
hazards can cause personal injury and loss of life, damage to or destruction of
property, plant and equipment and environmental damage. We self-insure our
workers’ compensation claims, subject to stop-loss insurance coverage. We also
maintain insurance coverage in amounts and against the risks that we believe are
consistent with industry practice, but this insurance may not be adequate to
cover all losses or liabilities that we may incur in our
operations.




Insurance
liabilities are difficult to assess and quantify due to unknown factors,
including the severity of an injury, the determination of our liability in
proportion to other parties, the number of incidents not reported and the
effectiveness of our safety program. If we were to experience insurance claims
or costs above our estimates, we might also be required to use working capital
to satisfy these claims rather than to maintain or expand our operations. To the
extent that we experience a material increase in the frequency or severity of
accidents or workers’ compensation claims, or unfavorable developments on
existing claims, our operating results and financial condition could be
materially and adversely affected.




Environmental and other
regulatory matters could adversely affect our ability to conduct our business
and could require expenditures that could have a material adverse effect on our
results of operations and financial condition.




Our
operations are subject to various environmental laws and regulations relating to
the management, disposal and remediation of hazardous substances and the
emission and discharge of pollutants into the air and water. We could be held
liable for such contamination created not only from our own activities but also
from the historical activities of others on our project sites or on properties
that we acquire or lease. Our operations are also subject to laws and
regulations relating to workplace safety and worker health, which, among other
things, regulate employee exposure to hazardous substances. Immigration laws
require us to take certain steps intended to confirm the legal status of our
immigrant labor force, but we may nonetheless unknowingly employ illegal
immigrants. Violations of such laws and regulations could subject us to
substantial fines and penalties, cleanup costs, third-party property damage or
personal injury claims. In addition, these laws and regulations have become, and
enforcement practices and compliance standards are becoming, increasingly
stringent. Moreover, we cannot predict the nature, scope or effect of
legislation or regulatory requirements that could be imposed, or how existing or
future laws or regulations will be administered or interpreted, with respect to
products or activities to which they have not been previously applied.
Compliance with more stringent laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies, could require us to make
substantial expenditures for, among other things, pollution control systems and
other equipment that we do not currently possess, or the acquisition or
modification of permits applicable to our activities.




Our
aggregate quarry lease in Nevada could subject us to costs and liabilities. As
lessee and operator of the quarry, we could be held responsible for any
contamination or regulatory violations resulting from activities or operations
at the quarry. Any such costs and liabilities could be significant and could
materially and adversely affect our business, operating results and financial
condition.




We may be unable to sustain
our historical revenue growth rate.




Our
revenue has grown rapidly in recent years. However, we may be unable to sustain
these recent revenue growth rates for a variety of reasons, including limits on
additional growth in our current markets, reduced spending by our customers,
less success in competitive bidding for contracts, limitations on access to
necessary working capital and investment capital to sustain growth, limitations
on access to bonding to support increased contracts and operations, inability to
hire and retain essential personnel and to acquire equipment to support growth,
and inability to identify acquisition candidates and successfully acquire and
integrate them into our business. A decline in our revenue growth could have a
material adverse effect on our financial condition and results of operations if
we are unable to reduce the growth of our operating expenses at the same
rate.




Our
growth has been funded in part by our utilization of net operating loss
carry-forwards, or NOLs, to reduce the amounts that we have paid for income
taxes, and we expect our NOLs to be fully utilized in our 2008 federal income
tax return. Paying taxes will reduce cash flows from operations compared to
prior periods, as we will be required to fund the payment of taxes in 2008 and
future periods. To the extent that cash flow from operations is insufficient to
fund future investments, make acquisitions or provide needed additional working
capital, we may require additional financing from other sources of
funds.




Terrorist attacks have
impacted, and could continue to negatively impact, the U.S. economy and the
markets in which we operate.




Terrorist
attacks, like those that occurred on September 11, 2001, have contributed to
economic instability in the United States, and further acts of terrorism,
violence or war could affect the markets in which we operate, our business and
our expectations. Armed hostilities may increase, or terrorist attacks, or
responses from the United States, may lead to further acts of terrorism and
civil disturbances in the United States or elsewhere, which may further
contribute to economic instability in the United States. These attacks or armed
conflicts may affect our operations or those of our customers or suppliers and
could impact our revenues, our production capability and our ability to complete
contracts in a timely manner.




18
 Table of Contents




Risks
Related to Our Financial Results and Financing Plans




Actual results could differ
from the estimates and assumptions that we use to prepare our financial
statements.




To
prepare financial statements in conformity with GAAP, management is required to
make estimates and assumptions, as of the date of the financial statements,
which affect the reported values of assets and liabilities, revenues and
expenses, and disclosures of contingent assets and liabilities. Areas requiring
significant estimates by our management include: contract costs and profits and
application of percentage-of-completion accounting and revenue recognition of
contract change order claims; provisions for uncollectible receivables and
customer claims and recoveries of costs from subcontractors, suppliers and
others; valuation of assets acquired and liabilities assumed in connection with
business combinations; and accruals for estimated liabilities, including
litigation and insurance reserves. Our actual results could differ from, and
could require adjustments to, those estimates.




In
particular, as is more fully discussed in Item 7 - “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Critical Accounting
Policies,” we recognize contract revenue using the percentage-of-completion
method. Under this method, estimated contract revenue is recognized by applying
the percentage of completion of the contract for the period to the total
estimated revenue for the contract. Estimated contract losses are recognized in
full when determined. Contract revenue and total cost estimates are reviewed and
revised on a continuous basis as the work progresses and as change orders are
initiated or approved, and adjustments based upon the percentage of completion
are reflected in contract revenue in the accounting period when these estimates
are revised. To the extent that these adjustments result in an increase, a
reduction or an elimination of previously reported contract profit, we recognize
a credit or a charge against current earnings, which could be
material.




We may need to raise
additional capital in the future for working capital, capital expenditures
and/or acquisitions, and we may not be able to do so on favorable terms or at
all, which would impair our ability to operate our business or achieve our
growth objectives.




Our
ability to obtain additional financing in the future will depend in part upon
prevailing credit and equity market conditions, as well as conditions in our
business and our operating results; such factors may adversely affect our
efforts to arrange additional financing on terms satisfactory to us. We have
pledged the proceeds and other rights under our construction contracts to our
bond surety, and we have pledged substantially all of our other assets as
collateral in connection with our credit facility and mortgage debt. As a
result, we may have difficulty in obtaining additional financing in the future
if such financing requires us to pledge assets as collateral. In addition, under
our credit facility, we must obtain the consent of our lenders to incur any
amount of additional debt from other sources (subject to certain exceptions). If
future financing is obtained by the issuance of additional shares of common
stock, our stockholders may suffer dilution. If adequate funds are not
available, or are not available on acceptable terms, we may not be able to make
future investments, take advantage of acquisitions or other opportunities, or
respond to competitive challenges.




We are subject to financial
and other covenants under our credit facility that could limit our flexibility
in managing our business.




We have a
credit facility that restricts us from engaging in certain activities, including
restrictions on our ability (subject to certain exceptions) to:




•
            make
      distributions, pay dividends and buy back
  shares;




•
            incur
      liens or encumbrances;




•
            incur
      indebtedness;




•
            guarantee
      obligations;




•
            dispose
      of a material portion of assets or otherwise engage in a merger with a
      third party;




•
            make
      acquisitions; and




•
            incur
      losses for two consecutive
quarters.




19
 Table of Contents




Our
credit facility contains financial covenants that require us to maintain
specified fixed charge coverage ratios, asset ratios and leverage ratios, and to
maintain specified levels of tangible net worth. Our ability to borrow funds for
any purpose will depend on our satisfying these tests. If we are unable to meet
the terms of the financial covenants or fail to comply with any of the other
restrictions contained in our credit facility, an event of default could occur.
An event of default, if not waived by our lenders, could result in the
acceleration of any outstanding indebtedness, causing such debt to become
immediately due and payable. If such an acceleration occurs, we may not be able
to repay such indebtedness on a timely basis. Acceleration of our credit
facility could result in foreclosure on and loss of our operating assets. In the
event of such foreclosure, we would be unable to conduct our business and forced
to discontinue operations.




Item
1B.                  Unresolved Staff
Comments.




None




Item
2.                     Properties.




We own
our 25,304 square-foot headquarters office building in Houston, Texas, which is
located on a seven-acre parcel of land on which our Texas equipment repair
center is also located. We also own land in Dallas and San Antonio on which we
plan to construct regional offices and repair facilities. Pending completion of
these regional offices, we lease office facilities in these locations. In order
to complete most contracts in Texas, we lease small parcels of real estate near
the site of a contract job site to store materials, locate equipment, conduct
concrete crushing and pugging operations, and provide offices for the
contracting customer, its representatives and our employees.




For our
Nevada operations, we lease office space in Reno, Nevada, and we have an office
and repair facilities located on a forty-five acre parcel of land in Lovelock,
Nevada. We also lease the right to mine stone and sand at a quarry in Carson
City, Nevada. Unlike in Texas where we acquire aggregates from third-party
suppliers, in Nevada, we generally source and produce our own aggregates, either
from the Carson City quarry or from other sources near job sites where we enter
into short-term leases to acquire the aggregates necessary for the job. In order
to complete most contracts in Nevada, we also lease small parcels of real estate
near the site of a contract job site to store materials, locate equipment, and
provide offices for the contracting customer, its representatives and our
employees.




Item
3.                     Legal
Proceedings.




We are
and may in the future be involved as a party to various legal proceedings that
are incidental to the ordinary course of business. We regularly analyze current
information about these proceedings and, as necessary, provide accruals for
probable liabilities on the eventual disposition of these matters.




In the
opinion of management, after consultation with legal counsel, there are
currently no threatened or pending legal matters that would reasonably be
expected to have a material adverse impact on our consolidated results of
operations, financial position or cash flows.




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




None




20
 Table of Contents




PART
II




Item
      5.
            Market
      for the Registrant’s Common Equity, Related Stockholder
      Matters


and Issuer Purchases of Equity
      Securities..




The
Company's common stock is traded on the NASDAQ Global Select Market
("NGS").  The table below shows the market high and low closing sales
prices of the common stock for 2007 and 2008 by quarter and for the period from
January 1, through February 28, 2009.




High
            LowYear
      Ended December 31, 2007First Quarter
            $22.74
            $17.42Second Quarter
            $23.86
            $18.90Third Quarter
            $23.97
            $18.64Fourth Quarter
            $26.60
            $20.45Year Ended December 31,
      2008First
      Quarter
            $21.84
            $16.37Second Quarter
            $21.02
            $18.70Third Quarter
            $20.80
            $16.16Fourth Quarter
            $19.30
            $9.40January
      1 through February 28, 2009
            $19.69
            $15.32




On
February 28, 2009, there were approximately 1,181 holders of record of our
common stock.




Dividend
Policy.  We have never paid any cash dividends on our common
stock.  For the foreseeable future, we intend to retain any earnings
in our business, and we do not anticipate paying any cash
dividends.  Whether or not we declare any dividends will be at the
discretion of the Board of Directors considering then-existing conditions,
including the Company's financial condition and results of operations, capital
requirements, bonding prospects, contractual restrictions (including those under
the Company's Credit Facility) business prospects and other factors that our
Board of Directors considers relevant.




Equity
Compensation Plan Information.Certain
information about the Company's equity compensation plans is set forth in Item 12. — Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.




Performance
Graph.The following graph compares the percentage change in
the Company's cumulative total stockholder return on its common stock for the
last five years with the Dow
Jones US Index, a broad market index, and the Dow Jones US Heavy Construction
Index, a group of companies whose marketing strategy is focused on a
limited product line, such as civil construction.  Both indices are
published in The Wall Street
Journal.




The
returns are calculated assuming that an investment with a value of $100 was made
in the Company's common stock and in each index at the end of 2003 and that all
dividends were reinvested in additional shares of common stock; however, the
Company has paid no dividends during the periods shown.  The graph
lines merely connect the measuring dates and do not reflect fluctuations between
those dates.  The stock performance shown on the graph is not intended
to be indicative of future stock performance.




21
 Table of Contents









December 2003
            December
      2004
            December
      2005
            December
      2006
            December
      2007
            December
      2008Sterling
      Construction Company, Inc
            100.00
            114.57
            371.52
            480.35
            481.68
            409.05Dow
      Jones US
            100.00
            112.01
            119.10
            137.64
            145.91
            91.69Dow
      Jones US Heavy Construction
            100.00
            121.26
            175.23
            218.58
            415.21
            186.34




22
 Table of Contents




Item
6.                     Selected Financial
Data.




The
following table sets forth selected financial and other data of the Company and
its subsidiaries and should be read in conjunction with both Item 7. —Management’s Discussion and
Analysis of Financial Condition and Results of Operations, which follows,
and Item 8. — Financial
Statements and Supplementary Data.




Year
      Ended December 312008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(Amounts
      in thousands except per-share data)Operating
      Results:Revenues
            
            $
            415,074
            
            
            $
            306,220
            
            
            $
            249,348
            
            
            $
            219,439
            
            
            $
            132,478Income
      from continuingoperations
      before income taxes andminority interest
            
            
            28,999
            
            
            
            22,396
            
            
            
            19,204
            
            
            
            13,329
            
            
            
            4,109Income
      tax (expense)/benefit
            
            
            (10,025
            )
            
            
            (7,890
            )
            
            
            (6,566
            )
            
            
            (2,788
            )
            
            
            2,134Minority
      interest
            
            
            (908
            )
            
            
            (62
            )
            
            
            --
            
            
            
            --
            
            
            
            (962
            )Income
      from continuing operations
            
            
            18,066
            
            
            
            14,444
            
            
            
            12,638
            
            
            
            10,541
            
            
            
            5,281Income
      (loss) from discontinued operations,including
      gain on sale in 2006
            
            
            
            
            
            
            
            
            
            
            682
            
            
            
            559
            
            
            
            372Net
      income
            
            $
            18,066
            
            
            $
            14,444
            
            
            $
            13,320
            
            
            $
            11,100
            
            
            $
            5,653Basic
      and diluted per share amounts:Basic
      earnings per share from -Continuing
      operations
            
            $
            1.38
            
            
            $
            1.31
            
            
            $
            1.19
            
            
            $
            1.36
            
            
            $
            0.99Discontinued
      operations
            
            
            --
            
            
            
            --
            
            
            $
            0.06
            
            
            $
            0.07
            
            
            $
            0.07Basic
      earnings per share
            
            $
            1.38
            
            
            $
            1.31
            
            
            $
            1.25
            
            
            $
            1.43
            
            
            $
            1.06Basic
      weighted average shares outstanding
            
            
            13,120
            
            
            
            11,044
            
            
            
            10,583
            
            
            
            7,775
            
            
            
            5,343Diluted
      earnings per share from -Continuing
      operations
            
            $
            1.32
            
            
            $
            1.22
            
            
            $
            1.08
            
            
            $
            1.11
            
            
            $
            0.75Discontinued
      operations
            
            
            --
            
            
            
            --
            
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.05Diluted
      earnings per share
            
            $
            1.32
            
            
            $
            1.22
            
            
            $
            1.14
            
            
            $
            1.16
            
            
            $
            0.80Diluted
      weighted average shares outstanding
            
            
            13,702
            
            
            
            11,836
            
            
            
            11,714
            
            
            
            9,538
            
            
            
            7,028Cash
      dividends declared
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Balance
      Sheet:Total
      assets
            
            $
            289,615
            
            
            $
            274,515
            
            
            $
            167,772
            
            
            $
            118,455
            
            
            $
            89,544Long-term
      debt
            
            
            55,483
            
            
            
            65,556
            
            
            
            30,659
            
            
            
            14,570
            
            
            
            21,979Equity
            
            
            159,116
            
            
            
            138,612
            
            
            
            90,991
            
            
            
            48,612
            
            
            
            35,208Book
      value per share of outstandingcommon
      stock
            
            $
            12.07
            
            
            $
            10.66
            
            
            $
            8.37
            
            
            $
            5.95
            
            
            $
            4.77Shares
      outstanding
            
            
            13,185
            
            
            
            13,007
            
            
            
            10,875
            
            
            
            8,165
            
            
            
            7,379




23
 Table of Contents




In
January 2006 the Company completed a public offering of approximately 2.0
million shares of its common stock at $15.00 per share.  The Company
received proceeds, net of underwriting commissions, of approximately $28.0
million ($13.95 per share) and paid approximately $907,000 in related offering
expenses.  In addition, the Company received approximately $484,000
from the exercise of warrants and options to purchase 321,758 shares in December
2005.  These shares were sold by the option and warrant holders in the
offering.  From the proceeds of the offering, the Company repaid its
outstanding promissory notes and related interest aggregating approximately $5.5
million to the executive management, directors and former
directors.




During
2006, the Company utilized part of the offering proceeds to purchase additional
capital equipment for the construction business and to replenish funds that had
been used for the 2006 acquisition of a drill shaft business.




In
December 2007, the Company completed an additional public offering of 1.84
million shares of its common stock at $20.00 per share.  The Company
received proceeds, net of underwriting commissions, of approximately $35.0
million ($19.00 per share) and paid approximately $0.5 million in related
offering expenses.  Between the purchase date of RHB and the 2007
public offering of stock, the Company used the proceeds from the sale of its
investments in short-term securities and cash provided by operations to reduce
the Credit Facility borrowings used to purchase RHB by $22.4
million.  The proceeds of the public stock offering were used to
replenish the investment in short-term securities.




Item
7.                     Management’s Discussion and Analysis
of Financial Condition and Results of Operation.




Overview




For an
overview of the Company's business and its associated risks, see Item 1. BusinessandItem 1A. Risk
Factors.




Critical
Accounting Policies




Our
significant accounting policies are described in Note 1 of Notes to Consolidated Financial
Statements for the year ended December 31, 2008.




Use
of Estimates.




The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Our business involves making significant
estimates and assumptions in the normal course of business relating to our
contracts due to, among other things, different project scopes and
specifications, the long-term duration of our contract cycle and the type of
contract utilized.  Therefore, management believes that “Revenue
Recognition” is the most important and critical accounting
policy.  The most significant estimates with regard to these financial
statements relate to the estimating of total forecasted construction contract
revenues, costs and profits in accordance with accounting for long-term
contracts.  Actual results could differ from these estimates and such
differences could be material.




Our
estimates of contract revenue and cost are highly detailed.  We
believe, based on our experience, that our current systems of management and
accounting controls allow management to produce reliable estimates of total
contract revenue and cost during any accounting period.  However, many
factors can and do change during a contract performance period, which can result
in a change to contract profitability from one financial reporting period to
another.  Some of the factors that can adversely change the estimate
of total contract revenue, cost and profit include differing site conditions (to
the extent that contract remedies are unavailable), the failure of major
material suppliers to deliver on time, the failure of subcontractors to perform
as agreed, unusual weather conditions, our failure to achieve expected
productivity and efficient use of labor and equipment and the inaccuracies of
our original bid estimate.  Because we have a large number of
contracts in process at any given time, these changes in estimates can sometimes
offset each other without affecting overall profitability.  However,
significant changes in cost estimates on larger, more complex projects can have
a material impact on our financial statements and are reflected in our results
of operations when they become known.




When
recording revenue from change orders on contracts that have been approved as to
scope but not price, we include in revenue an amount equal to the amount that we
currently expect to recover from customers in relation to costs incurred by us
for changes in contract specifications or designs, or other unanticipated
additional costs.  Revenue relating to change order claims is
recognized only if it is probable that the revenue will be
realized.  When determining the likelihood of eventual recovery, we
consider such factors as evaluation of entitlement, settlements reached to date
and our experience with the customer.  When new facts become known, an
adjustment to the estimated recovery is made and reflected in the current period
results.




24
 Table of Contents




Revenue
Recognition.




The
majority of our contracts with our customers are “fixed unit price.” Under such
contracts, we are committed to providing materials or services required by a
contract at fixed unit prices (for example, dollars per cubic yard of concrete
poured or per cubic yard of earth excavated).  To minimize increases
in the material prices and subcontracting costs used in submitting bids, we
obtain firm quotations from our suppliers and subcontractors.  After
we are advised that our bid is the winning bid, we enter into firm contracts
with most of our materials suppliers and sub-contractors, thereby mitigating the
risk of future price variations affecting those contract costs.  Such
quotations do not include any quantity guarantees, and we therefore have no
obligation for materials or subcontract services beyond those required to
complete the respective contracts that we are awarded for which quotations have
been provided.  As a result, we have rarely been exposed to material
price or availability risk on contracts in our contract
backlog.  Assuming performance by our suppliers and subcontractors,
the principal remaining risks under our fixed price contracts relate to labor
and equipment costs and productivity levels.  Most of our state and
municipal contracts provide for termination of the contract for the convenience
of the owner, with provisions to pay us only for work performed through the date
of termination.




We use
the percentage of completion accounting method for construction contracts in
accordance with the American Institute of Certified Public Accountants Statement
of Position 81-1, “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.” Revenue and earnings on construction contracts are
recognized on the percentage of completion method in the ratio of costs incurred
to estimated final costs.  Revenue is recognized as costs are incurred
in an amount equal to cost plus the related expected profit.  Contract
cost consists of direct costs on contracts, including labor and materials,
amounts payable to subcontractors and equipment expense (primarily depreciation,
fuel, maintenance and repairs).  Depreciation is computed using the
straight-line method for construction equipment.  Contract cost is
recorded as incurred, and revisions in contract revenue and cost estimates are
reflected in the accounting period when known.




The
accuracy of our revenue and profit recognition in a given period is dependent on
the accuracy of our estimates of the cost to finish uncompleted
contracts.  Our cost estimates for all of our significant contracts
use a highly detailed “bottom up” approach, and we believe our experience allows
us to produce reliable estimates.  However, our contracts can be
highly complex, and in almost every case, the profit margin estimates for a
contract will either increase or decrease to some extent from the amount that
was originally estimated at the time of bid.  Because we have a large
number of contracts of varying levels of size and complexity in process at any
given time, these changes in estimates can sometimes offset each other without
materially impacting our overall profitability.  However, large
changes in revenue or cost estimates can have a significant effect on
profitability.




There are
a number of factors that can contribute to changes in estimates of contract cost
and profitability.  The most significant of these include the
completeness and accuracy of the original bid, recognition of costs associated
with scope changes, extended overhead due to customer-related and
weather-related delays, subcontractor and supplier performance issues, site
conditions that differ from those assumed in the original bid (to the extent
contract remedies are unavailable), the availability and skill level of workers
in the geographic location of the contract and changes in the availability and
proximity of materials.  The foregoing factors, as well as the stage
of completion of contracts in process and the mix of contracts at different
margins, may cause fluctuations in gross profit between periods, and these
fluctuations may be significant.




Valuation
of Long-Term Assets.




Long-lived
assets, which include property, equipment and acquired identifiable intangible
assets, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable.  Impairment evaluations involve management estimates of
useful asset lives and future cash flows.  Actual useful lives and
cash flows could be different from those estimated by management, and this could
have a material effect on operating results and financial
position.  In addition, we had goodwill with a carrying amount of
approximately $57 million at December 31, 2008, which must be reviewed for
impairment at least annually in accordance with Statement of Financial Accounting
Standards No. 142, or SFAS 142.  The impairment testing
required by SFAS 142 requires considerable judgment, and an impairment charge
may be required in the future.  We completed our annual impairment
review for goodwill during the fourth quarter of 2008, and it did not result in
an impairment.




Income
Taxes.




Deferred
tax assets and liabilities are recognized based on the differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and,
where necessary, establish a valuation allowance. Reflecting management’s
assessment of expected future operating profitability and expectation that the
Company would utilize all remaining net operating loss carry forwards ("NOLs"),
we eliminated our valuation allowance in 2005. We are subject to the alternative
minimum tax (AMT). When we utilize our NOLs to offset taxable income, payment of
AMT results in a reduction of our deferred tax liability.


Our
deferred tax assets related to our NOLs for financial statement purposes were
fully utilized during 2007. In addition to the utilization of those NOLs, we had
available to us the excess tax benefit resulting from exercise of a significant
number of non-qualified in-the-money options amounting to $1.2 million,
which we expect to utilize in the preparation of our 2008 federal income tax
return.  Accordingly, because we will no longer have the significant
offsets provided by the NOLs, a comparison of our future cash flows to our
historic cash flows may not be meaningful.


On
January 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, (FIN 48) which establishes the criteria that an
individual tax position must meet for some or all of the benefits of that
position to be recorded. Adoption of FIN 48 did not have a material impact on
our consolidated financial statements.
  Discontinued
Operations.
  In August
2005, our board of directors authorized management to sell our distribution
business.  In accordance with the provisions of SFAS 144, we
determined in the third quarter of 2005 that the distribution business became a
long-lived asset held for sale and a discontinued operation.  In
October 2006, we sold the distribution business to an industry-related buyer for
gross proceeds of approximately $5.4 million.  We recognized a pre-tax
gain on the sale in 2006 of approximately $249,000, equal to $121,000 after
taxes.
  25
 Table of Contents


Results of
Operations




Fiscal
Year Ended December 31, 2008 (2008) Compared with Fiscal Year Ended December 31,
2007 (2007).




2008
            
            
            2007
            
            
            %
      Change(Dollar
      amounts in thousands)Revenues
            
            $
            415,074
            
            
            $
            306,220
            
            
            
            35.5
            %Gross
      profit
            
            
            41,972
            
            
            
            33,686
            
            
            
            24.6Gross
      margin
            
            
            10.1
            %
            
            
            11.0
            %
            
            
            (8.2
            )General
      and administrative expenses, net
            
            
            (13,763
            )
            
            
            (13,231
            )
            
            
            4.0Other
      income (loss)
            
            
            (81
            )
            
            
            549
            
            
            
            (114.8
            )Operating
      income
            
            
            28,128
            
            
            
            21,004
            
            
            
            33.9Operating
      margin
            
            
            6.8
            %
            
            
            6.9
            %
            
            
            (1.5
            )Interest
      income
            
            
            1,070
            
            
            
            1,669
            
            
            
            (35.9
            )Interest
      expense
            
            
            (199
            )
            
            
            (277
            )
            
            
            28.2Income
      before taxes
            
            
            28,999
            
            
            
            22,396
            
            
            
            29.5Income
      taxes
            
            
            (10,025
            )
            
            
            (7,890
            )
            
            
            27.1Minority
      interest in subsidiary
            
            
            (908
            )
            
            
            (62
            )
            
            
            (1,364.5
            )Net
      income
            
            $
            18,066
            
            
            $
            14,444
            
            
            
            25.1Contract
      backlog, end of year
            
            $
            448,000
            
            
            $
            450,000
            
            
            
            (0.4
            )




Revenues. Revenues
increased $109 million, or 35.5%, from 2007 to 2008.  A majority of
the increase was due to the revenues earned by our Nevada operations, acquired
on October 31, 2007, which were included in the consolidated results of
operations for the full year of 2008 versus only two months in
2007.  The remainder of the increase in revenues is the result of an
increase in work performed by our Texas operations as a result of better weather
throughout 2008 than 2007.  Management estimates that revenues would
have been $10 to $12 million greater had our Houston operations not been
interrupted by Hurricane Ike and its after effects in September,
2008.  Additionally, one of our oil suppliers in Nevada filed for
bankruptcy in July 2008 and failed to furnish contracted oil for our production
of asphalt on two of our jobs-in-progress, which delayed job performance and
deferred approximately $25.0 million of revenue into 2009.  The
Company has negotiated with NDOT and does not anticipate the profitability on
these contracts will be materially impacted by this matter.




Contract
receivables are directly related to revenues and include both amounts currently
due and retainage. The increase of $6.2 million in contracts receivable to $60.6
million at December 31, 2008 versus 2007 is due to the increase in revenue for
the year 2008. The days revenue in contract receivables is approximately 53 days
and 65 days at December 31, 2008 and 2007, respectively.  The days
revenue in contract receivables would have been similar for the two years if the
revenues of our Nevada operations had been included in our revenues for a full
year in 2007.




Revenue
in the fourth quarter of 2008 increased $21 million to $109 million versus 2007
for the same reasons as discussed above for the full year.  See note
17 to the consolidated financial statements for unaudited quarterly financial
information.




26
 Table of Contents




Gross
profit




Gross
profit increased $8.3 million in 2008 over 2007.  This was due to the
contribution of our Nevada operations in 2008 and better weather in Texas during
most of 2008 than during 2007 (other than for the period during Hurricane Ike),
which allowed our crews and equipment to be more productive.  While
Hurricane Ike affected our work in 2008, a hurricane usually does not adversely
affect our profitability as much as the consistent rainy periods we had in
2007.  Our gross margin decreased in 2008 from 2007 because of
operating inefficiencies on certain contracts in Texas, higher fuel costs and
lower profit margins on certain contracts started in the last half of
2008.  We expect the trend of lower profit margins on contracts awards
to continue at least in the first half of 2009.




Gross
profit in the fourth quarter of 2008 decreased $2.5 million or 21% from the same
quarter in 2007.  Gross profit was 13.7% of revenues in the 2007
fourth quarter versus 8.7% in the fourth quarter of 2008 as a result of some
unusually profitable municipal projects being performed primarily in the 2007
fourth quarter.  Without those projects, the gross margins for the
2007 fourth quarter would have been more in line with normal margins, although
still somewhat better than that of the fourth quarter of 2008.





Contract
Backlog


At
December 31, 2008, our backlog of construction projects was $448 million, as
compared to $450 million at December 31, 2007. We were awarded approximately
$413 million of new projects and change orders and recognized $415 million of
earned revenue in 2008.  Approximately $69 million of the backlog at
December 31, 2008 is expected to be completed after 2009.  The
decrease in backlog from 2007 was due to increased competition and economic
conditions in certain of our markets.




While our
business does not include residential and commercial infrastructure work, the
severe fall-off in new projects in those markets in Nevada and to a lesser
extent in Texas, has caused a softer bidding climate in our infrastructure
markets and has caused some residential and commercial infrastructure
contractors to bid on public sector transportation and water infrastructure
projects, thus increasing competition and creating downward pressure on bid
prices in our markets.  These and other factors could adversely affect
our ability to maintain or increase our backlog through successful bids for new
projects and could adversely affect the profitability of new projects that we do
obtain through successful bids.




Recent
reductions in miles driven in the U.S. and more fuel efficient vehicles are
reducing federal and state gasoline taxes and tolls collected. Additionally, the
current credit crisis may limit the amount of state and local bonds that can be
sold at reasonable terms. Further, the nationwide decline in home sales, the
increase in foreclosures and a prolonged recession may result in decreases in
user fees and property and sales taxes.  These and other factors could
adversely affect transportation and water infrastructure capital expenditures in
our markets.




General and administrative
expenses, and other income




General
and administrative expenses, net, increased by $0.5 million in 2008 from 2007
primarily due to a full year of G&A at our Nevada operations offset by lower
stock compensation expense.




Despite
the increase in absolute G&A expenses, the percentage of G&A to revenue
decreased to 3.3% in 2008 from 4.3% in 2007 as the Nevada operations' G&A is
not as large a percentage of revenues as Sterling's G&A which includes
corporate overhead and expenses associated with being a public
company.




Other
income decreased $0.6 million and consists of gains and losses on disposal of
equipment which depends on, among other things, age and condition of equipment
disposed of, insurance recoveries and the market for used
equipment.




Operating
income




Operating
income increased $7.1 million due to the factors discussed above regarding gross
profit and general and administrative expenses and other income.




27
 Table of Contents




Interest income and
expense




Net
interest income was $0.5 million less for 2008 than 2007 due to a decrease in
interest rates on cash and short-term investments combined with the imputed
interest expense of $0.2 million on the put option related to the minority
interest in RHB.




Income
taxes




Our
effective income tax rate for the year ended December 31, 2008 was 34.6%
compared to 35.2% for 2007.  The difference between the effective tax
rate and the statutory tax rate is due to the portion of earnings of a
subsidiary taxed to the minority interest owner partially offset by the revised
Texas franchise tax which became effective July 1, 2007.




Minority interest in
subsidiary




The
increase of $0.8 million is due to the minority interest's share of the results
of RHB included in the consolidated results of operations for a full year in
2008 versus two months in 2007.




Fiscal
Year Ended December 31, 2007 (2007) Compared with Fiscal Year Ended December 31,
2006 (2006).




2007
            
            
            2006
            
            
            %
      Change(Dollar
      amounts in thousands)Revenues
            
            $
            306,220
            
            
            $
            249,348
            
            
            
            22.8
            %Gross
      profit
            
            
            33,686
            
            
            
            28,547
            
            
            
            18.0
            %Gross
      margin
            
            
            11.0
            %
            
            
            11.4
            %
            
            
            (3.5
            )%General
      and administrative expenses, net
            
            
            (13,231
            )
            
            
            (10,825
            )
            
            
            22.0
            %Other
      income
            
            
            549
            
            
            
            276
            
            
            
            98.9
            %Operating
      income
            
            
            21,004
            
            
            
            17,998
            
            
            
            16.8
            %Operating
      margin
            
            
            6.9
            %
            
            
            7.2
            %
            
            
            (4.2
            )%Interest
      income
            
            
            1,669
            
            
            
            1,426
            
            
            
            17.0
            %Interest
      expense
            
            
            (277
            )
            
            
            (220
            )
            
            
            26.5
            %Income
      from continuing operations before taxes
            
            
            22,396
            
            
            
            19,204
            
            
            
            16.4
            %Income
      taxes
            
            
            (7,890
            )
            
            
            6,566
            
            
            
            20.2
            %Minority
      interest in subsidiary
            
            
            (62
            )
            
            
            --
            
            
            
            100.0
            %Net
      income from continuing operations
            
            
            14,444
            
            
            
            12,638
            
            
            
            14.5
            %Net
      income (loss) from discontinued operations, including gain on
      sale
            
            
            --
            
            
            
            682
            
            
            
            (100.0
            )%Net
      income
            
            $
            14,444
            
            
            $
            13,320
            
            
            
            8.4
            %Contract
      backlog, end of year
            
            $
            450,000
            
            
            $
            395,000
            
            
            
            13.9
            %




Revenues. Revenues
increased $57 million, or 23%, from 2006 to 2007 reflecting the effect of
continued expansion of our construction fleet, addition of a concrete plant and
addition of crews.  Our workforce grew by 18% year-over-year, and we
purchased over $36 million in property, plant and equipment, including that
acquired in the purchase of RHB, within the twelve month period ending December
31, 2007.




The
increased revenue came strictly from the state market resulting from the Company
being the successful low bidder in the state market which was assisted by an
improved bidding climate in 2006 due to a large state highway program and
increased total funding in the Dallas and Houston areas.  The
improvement in the weather in the fourth quarter 2007 offset much of the lower
than expected revenue of the first three quarters of 2007 due to heavy rainfall
during those months.  Due to seasonality of the Nevada market, the
contracts of RHB had only a modest effect on revenues for the two months they
were included in 2007 revenues.




28
 Table of Contents




Contract
receivables are directly related to revenues and include both amounts currently
due and retainage. The increase of $11.6 million in contracts receivable to
$54.4 million at December 31, 2007 versus 2006 is due to the increase in revenue
for the year 2007. The days revenue in contract receivables is approximately 65
days and 62 days at December 31, 2007 and 2006, respectively.  The
increase in days revenue in contract receivables is primarily the result of the
Nevada operations receivables at December 31, 2007.




Gross Profit.  The improvement
in gross profits in 2007 was due principally to the increase in
revenues.  The slight margin reduction was attributable to a decrease
of margin in backlog due to poor weather for the first three quarters of the
year, and an increase in sales from the state contracts which have historically
had lower gross than municipal contracts.




State
highway contracts generally allow us to achieve greater revenue and gross profit
production from our equipment and work crews, although on average the gross
margins on this work tend to be slightly lower than on our water infrastructure
contracts in the municipal markets. The lower margins reflect proportionally
larger material inputs in the state contracts as we typically receive lower
margins on materials than on labor.Partially offsetting the
margin reduction was our ability to continue to redesign some jobs, achieve
incentive awards and maintain good execution levels during dry
weather.  Due to the large number of contracts in different stages of
completion and in different locations, it is not practical to quantify the
impact of each of these matters on revenues and gross profit.




Contract Backlog.  The increase in
contract backlog is related to the Nevada acquisition in 2007. There was $16
million included in our 2007 year-end backlog on which we were the apparent low
bidder and have subsequently been officially awarded these contracts.
Historically, subsequent non-awards of such low bids have not materially
affected our backlog or financial condition.




General and Administrative
Expenses, Net of Other Income and Expense.  The increase in
general and administrative expenses, or G&A, in 2007 was principally due to
higher employee expenses, including an increase in staff, and higher
professional fees.  Despite these increases in G&A expenses in
support of our growing business, our ratio of G&A expenses to revenue
remained essentially unchanged from 2006 to 2007, at 4%.




Operating Income.  The 2007
increase in operating income resulted principally from the higher revenues and
gross profits as discussed above.




Interest Income and
Expense.  The interest
income net of interest expense remained virtually unchanged from 2006 to 2007
given the high cash and short term investments maintained throughout the year
and the offering completed in December 2007.  A total of $53,000 of
interest expense was capitalized as part of our office and shop
expansion.




Income Taxes.  Income taxes
increased due to increased income, the Texas margin tax and an increase in the
statutory tax rate.




Minority
Interest.  As discussed in Part I, Item 1. Business, on October
31, 2007, the Company acquired a 91.67% interest in RHB.  The minority
interest's share of RHB's income before income taxes was $62,000 for the two
months ended December 31, 2007 that was included in the consolidated results of
operations.




Net Income from Continuing
Operations.  The 2007
increase in net income from continuing operations was the result of the various
factors discussed above.




Discontinued Operations, Net
of Tax.  Discontinued
operations for 2006 represents the results of operations of our distribution
business, which was operated by Steel City Products, LLC.




The
distribution business was sold on October 27, 2006.  The Company
recorded proceeds from the sale of approximately $5.4 million and recorded a
pre-tax gain on the sale of approximately $249,000 and recorded $128,000 in
income tax expense related to that gain in 2006.




29
 Table of Contents




Historical
Cash Flows




The
following table sets forth information about our cash flows for the years ended
December 31, 2008, 2007 and 2006.




Year Ended December
      31,2008
            
            
            2007
            
            
            2006(Amounts
      in thousands)Cash
      and cash equivalents (at end of period)
            
            $
            55,305
            
            
            $
            80,649
            
            
            $
            28,466Net
      cash provided by (used in)Continuing
      operations:Operating
      activities
            
            
            26,721
            
            
            
            29,542
            
            
            
            23,089Investing
      activities
            
            
            (42,923
            )
            
            
            (47,935
            )
            
            
            (52,358
            )Financing
      activities
            
            
            (9,142
            )
            
            
            70,576
            
            
            
            35,468Discontinued
      operationsOperating
      activities
            
            
            --
            
            
            
            --
            
            
            
            495Investing
      activities
            
            
            --
            
            
            
            --
            
            
            
            4,739Financing
      activities
            
            
            --
            
            
            
            --
            
            
            
            (5,357
            )Supplementary
      information:Capital
      expenditures
            
            
            19,896
            
            
            
            26,319
            
            
            
            24,849Working
      capital (at end of  period)
            
            
            95,123
            
            
            
            82,063
            
            
            
            62,874




Operating
Activities




Significant
non-cash items included in operating activities are:




●
            depreciation
      and amortization, which for 2008 totaled $13.2 million, an increase of
      $3.6 million from 2007 and $6.2 million from 2006, as a result of the
      continued increase in the size of our construction fleet in recent years
      and a full year's depreciation on equipment purchased in the RHB
      acquisition on October 31, 2007;●
            deferred
      tax expense was $8.9 million, $6.6 million and $6.3 million in 2008, 2007
      and 2006, respectively, mainly attributable to accelerated depreciation
      methods used on equipment for tax purposes and amortization for tax return
      purposes of goodwill arising in the acquisition of
  RHB.




Besides
net income of $18.1 million and the non-cash items discussed above, other
significant components of cash flows from operations are as
follows:




●
            contracts
      receivable increased by $6.2 million in the current year due to the
      increase in revenues of $109 million, including those of the Nevada
      operations, as compared to an increase of $6.6 million in 2007 which was
      also due to an increase in revenue and a higher level of customer
      retentions;●
            the
      increase in cost and estimated earnings in excess of billings on
      uncompleted contracts of $3.8 million as of December 31, 2008, versus a
      decrease  of $0.6 million as of December 31, 2007, which was due
      to an increase in the volume of materials purchased for certain projects
      at December 31, 2008, but not billed to the customer until 2009 and timing
      of other billings.


●
            accounts
      payable decreased by $1.1 million in 2008 and increased $6.1 million in
      2007 as a result of changes in the volume of materials and sub-contractor
      services purchased in later months of each
  period.




30
 Table of Contents




Investing
activities




Expenditures
for the replacement of certain equipment and to expand our construction fleet
and office and shop facilities totaled $19.9 million in 2008, compared with a
total of $26.3 million of property and equipment purchases in
2007.  Capital equipment is acquired as needed to support work crews
required by increased backlog and to replace retiring equipment.  The
decrease in capital expenditures in 2008 was principally due to management's
cautious view regarding certain of the Company's markets in 2009 and current
economic uncertainties.  Unless such factors change, management
expects capital expenditures in 2009 to be equal to or less than in
2008.




During
the twelve months ended December 31, 2008, the Company had purchases of
short-term securities of $24.3 million versus a net reduction of $26.1 million
in 2007 primarily due to the longer term of the securities
purchased.




In
October 2007, we purchased a 91.67% equity interest in RHB which we acquired for
a net cash purchase price of $49.3 million in order to expand our construction
operations to Nevada.




Financing
activities




Financing
activities in 2008 primarily reflect a reduction of $10.0 million in borrowings
under our $75.0 million Credit Facility as compared to an increase of $35.0
million of borrowings in 2007.  The amount of borrowings under the
Credit Facility is based on the Company's expectations of working capital
requirements.




Additionally,
the Company sold common stock in 2007 and 2006 for net proceeds of $34.5 million
and $27.0 million, respectively.




Liquidity





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


·
            customer
      receivables and contract retentions;·
            costs
      and estimated earnings in excess of
billings;


·
            billings
      in excess of costs and estimated earnings;·
            the
      size and status of contract mobilization payments and progress
      billings;


·
            the
      amounts owed to suppliers and
subcontractors.




Some of
these fluctuations can be significant.





As of
December 31, 2008, we had working capital of $95.1 million, an increase of $13.1
million over December 31, 2007.  Increasing working capital is an
important element in expanding our bonding capacity, which enables us to bid on
larger and longer-lived projects.  The increase in working capital was
mainly the result of net income plus depreciation and deferred tax expense
totaling $40.2 million reduced by purchases of property and equipment of $19.9
million and net repayment of debt of $10 million.





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





Sources
of Capital





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





The
financial markets have recently experienced substantial volatility as a result
of disruptions in the credit markets.  However, to date we have not
experienced any difficulty in borrowing under our Credit Facility or any change
in its terms.




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 Table of Contents




We have a
$75.0 million Credit Facility with a bank syndicate for which Comerica Bank is a
participant and agent.  The Credit Facility entered into on October
31, 2007 replaced a similar $35.0 million revolver that had been renewed in
April 2006.  The Credit Facility has a maturity date of October 31,
2012, and is secured by all assets of the Company, other than proceeds and other
rights under our construction contracts which are pledged to our bond
surety.  Borrowings under the Credit Facility were used to finance the
RHB acquisition, repay indebtedness outstanding under the Revolver, and finance
working capital. At December 31, 2008, the aggregate borrowings outstanding
under the Credit Facility were $55.0 million, and the aggregate amount of
letters of credit outstanding under the Credit Facility was $1.8 million,
which reduces availability under the Credit Facility.  Availability
under the Credit Facility was, therefore, $18.2 million.




The
Credit Facility is subject to our compliance with certain covenants, including
financial covenants relating to fixed charges, leverage, tangible net worth,
asset coverage and consolidated net losses.




The
Credit Facility contains restrictions on our ability to:




·
            Make
      distributions and dividends;


·
            Incur
      liens and encumbrances;


·
            Incur
      further indebtedness;


·
            Guarantee
      obligations;


·
            Dispose
      of a material portion of assets or merge with a third
    party;


·
            Incur
      negative income for two consecutive
quarters.





The
Company was in compliance with all covenants under the Credit Facility as of
December 31, 2008.




The
unpaid principal balance of each prime-based loan will bear interest at a
variable rate equal to Comerica’s prime rate plus an amount ranging from 0% to
0.50% depending on the pricing leverage ratio that we achieve. If we achieve a
pricing leverage ratio of (a) less than 1.00 to 1.00; (b) equal to or
greater than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than
or equal to 1.75 to 1.00, then the applicable prime margins will be 0.0%, 0.25%
or 0.50%, respectively.  The interest rate on funds borrowed under
this revolver during the year ended December 31, 2008 ranged from 3.5% to
7.5%.




Management
believes that the new Credit Facility will provide adequate funding for the
Company’s working capital, debt service and capital expenditure requirements,
including seasonal fluctuations at least through December 31, 2009.




At our
election, the loans under the new Credit Facility bear interest at either a
LIBOR-based interest rate or a prime-based interest rate. The unpaid principal
balance of each LIBOR-based loan bears interest at a variable rate equal to
LIBOR plus an amount ranging from 1.25% to 2.25% depending on the pricing
leverage ratio that we achieve. The “pricing leverage ratio” is determined by
the ratio of our average total debt, less cash and cash equivalents, to earnings
before interest, taxes, depreciation and amortization ("EBITDA") that we achieve
on a rolling four-quarter basis. The pricing leverage ratio is measured
quarterly. If we achieve a pricing leverage ratio of (a) less than 1.00 to
1.00; (b) equal to or greater than 1.00 to 1.00 but less than 1.75 to 1.00;
or (c) greater than or equal to 1.75 to 1.00, then the applicable LIBOR
margins will be 1.25%, 1.75% or 2.25%, respectively. Interest on LIBOR-based
loans is payable at the end of the relevant LIBOR interest period, which must be
one, two, three or six months. The new Credit Facility is subject to our
compliance with certain covenants, including financial covenants relating to
fixed charges, leverage, tangible net worth, asset coverage and consolidated net
losses.


32
 Table of Contents




Mortgages




In 2001
we completed the construction of a new headquarters building on land owned by us
adjacent to our equipment repair facility in Houston.  The building
was financed principally through an additional mortgage of $1.1 million on the
land and facilities at a floating interest rate which at December 31, 2008 was
3.5% per annum, repayable over 15 years.




Uses
of Capital




Contractual
Obligations.




The
following table sets forth our fixed, non-cancelable obligations at December 31,
2008.




Payments due by PeriodTotal
            
            
            Less
      Than
              One Year
            
            
            1—3 Years
            
            
            4—5
              Years
            
            
            More
      Than
              5
      Years(Amounts
      in thousands)Credit
      Facility
            
            $
            55,000
            
            
            $
            —
            
            
            $
            —
            
            
            $
            55,000
            
            
            $
            —Operating
      leases
            
            
            2,146
            
            
            
            721
            
            
            
            1,425
            
            
            
            --
            
            
            
            —Mortgages
            
            
            556
            
            
            
            73
            
            
            
            220
            
            
            
            147
            
            
            
            116$
            57,702
            
            
            $
            794
            
            
            $
            1,645
            
            
            $
            55,147
            
            
            $
            116




Our
obligations for interest are not included in the table above as these amounts
vary according to the levels of debt outstanding at any
time.  Interest on our Credit Facility is paid monthly and fluctuates
with the balances outstanding during the year, as well as with fluctuations in
interest rates.  In 2008 interest on the Credit Facility was
approximately $91,000.  The mortgages are expected to have future
annual interest expense payments of approximately $18,000 in less than one year,
$40,000 in one to three years, $14,000 in four to five years and $3,000 for all
years thereafter.




To manage
risks of changes in the material prices and subcontracting costs used in
submitting bids for construction contracts, we generally obtain firm quotations
from our suppliers and subcontractors before submitting a bid.  These
quotations do not include any quantity guarantees, and we have no obligation for
materials or subcontract services beyond those required to complete the
contracts that we are awarded for which quotations have been
provided.




As is
customary in the construction business, we are required to provide surety bonds
to secure our performance under construction contracts.  Our ability
to obtain surety bonds primarily depends upon our capitalization, working
capital, past performance, management expertise and reputation and certain
external factors, including the overall capacity of the surety
market.  Surety companies consider such factors in relationship to the
amount of our backlog and their underwriting standards, which may change from
time to time.  Events that affect the insurance and bonding markets
generally may result in bonding becoming more difficult to obtain in the future,
or being available only at a significantly greater cost.  We have
pledged all proceeds and other rights under our construction contracts to our
bond surety to the surety company.




Capital
Expenditures.




Our
capital expenditures during 2008 were $19.9 million, and during 2007 were $36.0
million including property, plant and equipment acquired with the purchase of
RHB.  In 2009 we expect that our capital expenditure spending will be
equal to or less than the 2008 level due to management's cautious view regarding
certain of the Company's markets and current economic
uncertainties.




33
 Table of Contents




Off-Balance Sheet
Arrangements




We have
no off-balance sheet arrangements.




New
Accounting Pronouncements




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





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, "Fair Value Measurements" (SFAS 157) which establishes a framework for
measuring fair value and requires expanded disclosure about the information used
to measure fair value.  The statement applies whenever other
statements require or permit assets or liabilities to be measured at fair value,
and does not expand the use of fair value accounting in any new
circumstances.  In February 2008, the FASB delayed the effective date
by which companies must adopt the provisions of SFAS 157 for nonfinancial assets
and liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis (at least
annually).  The new effective date of SFAS 157 deferred implementation
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years.  The adoption of this standard is not anticipated
to have a material impact on our financial position, results of operations, or
cash flows.







In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment to FASB
Statement No. 115" ("SFAS No. 159").  This statement allows a company
to irrevocably elect fair value as a measurement attribute for certain financial
assets and financial liabilities with changes in fair value recognized in the
results of operations.  SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007.  Adoption of this pronouncement did not have
a material impact on the Company's results of operations and financial
position.




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




Item 7A.
            Quantitative and Qualitative
      Disclosures about Market
Risk.




Changes
in interest rates are one of our sources of market risks.  At December
31, 2008, $55 million of our outstanding indebtedness was at floating interest
rates.  Based on our average debt outstanding during 2008, we estimate
that an increase of 1.0% in the interest rate would have resulted in an increase
in our interest expense of approximately $15,000 in 2008.




To manage
risks of changes in material prices and subcontracting costs used in tendering
bids for construction contracts, we obtain firm price quotations from our
suppliers, except for fuel, and subcontractors before submitting a
bid.  These quotations do not include any quantity guarantees, and we
have no obligation for materials or subcontract services beyond those required
to complete the respective contracts that we are awarded for which quotations
have been provided.




During
2009, we have started a process of investing in certain securities, the assets
of which are a crude oil commodity pool.  We believe that the gains
and losses on these securities will tend to offset increases and decreases in
the price we pay for diesel and gasoline fuel and reduce the volatility of such
fuel costs in our operations.  There can, however, be no assurance
that this process will be successful.




34
 Table of Contents




Item 8.
            Financial Statements and
      Supplementary Data.




Financial
statements start on page F-1.




Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.










Item 9A.
            Controls and
      Procedures.




Evaluation of
Disclosure Controls and Procedures




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




The
Company’s principal executive officer and principal financial officer reviewed
and evaluated the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934).  Based on that evaluation, the Company’s principal executive
officer and principal financial officer concluded that the Company’s disclosure
controls and procedures were effective at December 31, 2008 to ensure that the
information required to be disclosed by the Company in this Annual Report on
Form 10-K is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and is accumulated and communicated to the Company's management including the
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.




Management’s
Report on Internal Control over Financial Reporting




The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f)) under
the Securities Exchange Act of 1934).  Under the supervision and with
the participation of the Company’s management, including the principal executive
officer and principal financial officer, the Company conducted an evaluation of
the effectiveness of internal control over financial reporting at December 31,
2008.  In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.  The Company’s
management has concluded that, at December 31, 2008, the Company’s internal
control over financial reporting is effective based on these
criteria.




Our
internal control over financial reporting has been audited by Grant Thornton
LLP, an independent registered public accounting firm, as stated in their report
included herein.




Changes in
Internal Control over Financial Reporting




We
maintain a system of internal control over financial reporting that is designed
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. Based on the
most recent evaluation, we have concluded that no significant changes in our
internal control over financial reporting occurred during the last fiscal
quarter that have materially affected or are reasonably likely to materially
affect, our internal control over financial reporting.




Inherent
Limitations on Effectiveness of Controls




Internal
control over financial reporting may not prevent or detect all errors and all
fraud.  Also, projections of any evaluation of effectiveness of
internal control 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.




Item 9B.
            Other
      Information.










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 Table of Contents




PART
III




Item 10.
            Directors and Executive
      Officers of the Registrant.




Directors.  The
following table sets forth the name and age of each of the Company's current
directors and the positions each held on February 16, 2009.




Name
            Position
            Age
            Director
      Since
            Year
              Term
      of Office ExpiresPatrick
      T. Manning
            Chairman
      of the Board of Directors & Chief Executive Officer
            63
            2001
            2011Joseph
      P. Harper, Sr.
            President,
      Treasurer & Chief Operating Officer, Director
            63
            2001
            2011John
      D. Abernathy
            Director
            71
            1994
            2009Robert
      W. Frickel
            Director
            65
            2001
            2009Donald
      P. Fusilli, Jr.
            Director
            57
            2007
            2010Maarten
      D. Hemsley
            Director
            59
            1998
            2010Christopher
      H. B. Mills
            Director
            56
            2001
            2010Milton
      L. Scott
            Director
            52
            2005
            2009David
      R. A. Steadman
            Director
            71
            2005
            2009




Patrick T.
Manning. 
Mr. Manning joined the predecessor of Texas Sterling Construction Co., the
Company's Texas construction subsidiary, which along with its predecessors is
referred to as TSC, in 1971 and led its move from Detroit, Michigan into the
Houston market in 1978. He has been TSC’s President and Chief Executive Officer
since 1998 and Chairman of the Board of Directors and Chief Executive Officer of
the Company since July 2001.  Mr. Manning has served on a variety
of construction industry committees, including the Gulf Coast Trenchless
Association and the Houston Contractors’ Association, where he served as a
member of the board of directors and as President from 1987 to 1993. He attended
Michigan State University from 1969 to 1972.




Joseph P.
Harper, Sr.Mr. Harper
has been employed by TSC since 1972. He was Chief Financial Officer of TSC for
approximately 25 years until August 2004, when he became Treasurer of
TSC.  In addition to his financial responsibilities, Mr. Harper
has performed both estimating and project management
functions.  Mr. Harper has been a director and the Company's
President and Chief Operating Officer since July 2001, and in May 2006 was
elected Treasurer.  Mr. Harper is a certified public
accountant.




John D.
Abernathy. 
Mr. Abernathy was Chief Operating Officer of Patton Boggs LLP, a Washington
D.C. law firm, from January 1995 through May 2004 when he retired.  He
is also a director of Par Pharmaceutical Companies, Inc., a New York Stock
Exchange-listed company that manufactures generic and specialty drugs, and
Neuro-Hitech, Inc., a company that manufactures generic drugs, the shares of
which are traded on the over-the-counter market.  Mr. Abernathy
is a certified public accountant.  In December 2005,
Mr. Abernathy was first elected Lead Director by the independent members of
the Board of Directors.




Robert W.
Frickel. 
Mr. Frickel is the founder and President of R.W. Frickel
Company, P.C., a public accounting firm that provides audit, tax and
consulting services primarily to companies in the construction
industry.  Prior to the founding of R.W. Frickel Company in 1974,
Mr. Frickel was employed by Ernst &
Ernst.  Mr. Frickel is a certified public
accountant.




Donald P.
Fusilli, Jr.Mr. Fusilli is presently the principal of the Telum Group, a
professional consulting firm.  From January 2008 to January 2009, he
was the Chief Executive Officer of a marine services subsidiary of David Evans
and Associates, Inc., a company that provides underwater mapping and analysis
services.  From May 1973 until September 2006, Mr. Fusilli served
in a variety of capacities at Michael Baker Corporation, a public company listed
on the American Stock Exchange that provides a variety of professional
engineering services spanning the complete life cycle of infrastructure and
managed asset projects.  Mr. Fusilli joined Michael Baker
Corporation as an engineer and over the course of his career rose to president
and chief executive officer in April 2001.  From September 2006 to
January 2008, Mr. Fusilli was an independent consultant providing strategic
planning, marketing development and operations management
services.  Mr. Fusilli is a director of RTI International Metals,
Inc., a New York Stock Exchange-listed company that is a leading
U.S. producer of titanium mill products and fabricated metal
components.  He holds a Civil Engineering degree from Villanova
University, a Juris Doctor degree from Duquesne University School of Law and
attended the Advanced Management Program at the Harvard Business
School.




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 Table of Contents




Maarten D.
Hemsley. 
Mr. Hemsley served as the Company's President and Chief Operating Officer
from 1988 until 2001, and as Chief Financial Officer from 1998 until August
2007.  From January 2001 to May 2002, Mr. Hemsley was also a
consultant to, and thereafter has been an employee of, JO Hambro Capital
Management Limited, which is part of JO Hambro Capital Management Group Limited,
or JOHCMG, an investment management company based in the United
Kingdom.  Mr. Hemsley has served since 2001 as Fund Manager
of JOHCMG’s Leisure & Media Venture Capital Trust, plc, and since
February 2005, as Senior Fund Manager of its Trident Private Equity II
LLP investment fund.  Mr. Hemsley is a director of Tech/Ops
Sevcon, Inc., a U.S. public company that manufactures electronic controls
for electric vehicles and other equipment, and of a number of privately-held
companies in the United Kingdom.  Mr. Hemsley is a Fellow of the
Institute of Chartered Accountants in England and Wales.




Christopher H. B.
Mills. 
Mr. Mills is a director of JOHCMG.  Prior to founding JOHCMG in
1993, Mr. Mills was employed by Montagu Investment Management and its
successor company, Invesco MIM, as an investment manager and director, from 1975
to 1993.  He is the Chief Executive of North Atlantic Smaller
Companies Investment Trust plc, which is a part of JOHCMG and a 3.82% holder of
the Company's common stock.  Mr. Mills is a director of two
U.S. public companies, W-H Energy Services, Inc., a New York Stock
Exchange-listed company that is in the oilfield services industry, and SunLink
Healthcare Systems, Inc., a publicly-traded, non-urban community healthcare
provider for seven hospitals and related businesses in four states in the
Southwest and Midwest.  Mr. Mills also serves as a director of a
number of public and private companies outside of the U.S. in which JOHCMG
funds have investments.




Milton L. Scott.  Mr. Scott is
Chairman and Chief Executive Officer of the Tagos Group, a strategic advisory
and services company in supply chain management, transportation and logistics,
and integrated supply.  He was previously associated with Complete
Energy Holdings, LLC, a company of which he was Managing Director until January
2006 and which he co-founded in January 2004 to acquire, own and operate power
generation assets in the United States.  From March 2003 to January
2004, Mr. Scott was a Managing Director of The StoneCap Group, an entity
formed to acquire, own and operate power generation assets.  From
October 1999 to November 2002, Mr. Scott served as Executive Vice President
and Chief Administrative Officer at Dynegy Inc., a public company that was a
market leader in power distribution, marketing and trading of gas, power and
other commodities, midstream services and electric distribution.  From
July 1977 to October 1999, Mr. Scott was with the Houston office of Arthur
Andersen LLP, a public accounting firm, where he served as partner in charge of
the Southwest Region Technology and Communications practice.




David R. A.
Steadman. 
Mr. Steadman is President of Atlantic Management Associates, Inc., a
management services and investment group.  An engineer by profession,
Mr. Steadman served as Vice President of the Raytheon Company from 1980 until
1987 where he was responsible for commercial telecommunications and data systems
businesses in addition to setting up a corporate venture capital
portfolio.  Subsequent to that and until 1989, Mr. Steadman was
Chairman and Chief Executive Officer of GCA Corporation, a manufacturer of
semiconductor production equipment.  Mr. Steadman serves as a
director of Aavid Thermal Technologies, Inc., a provider of thermal management
solutions for the electronics industry, a privately-held
company.  Mr. Steadman also serves as Chairman of Tech/Ops
Sevcon, Inc., a public company that manufactures electronic controls for
electric vehicles and other equipment.  Mr. Steadman is a
Visiting Lecturer in Business Administration at the Darden School of the
University of Virginia.




Executive
Officers.In
addition to Messrs. Manning and Harper, whose backgrounds are described above,
the following are the Company's other executive officers:




James H.
Allen, Jr.Mr. Allen became the Company's Senior Vice President & Chief
Financial Officer in August 2007.  He spent approximately
30 years with Arthur Andersen & Co., including 19 years as an
audit and business advisory partner and as head of the firm’s Houston office
construction industry practice.  After being retired for several
years, he became chief financial officer of a process chemical manufacturer and
served in that position for over three years prior to joining the
Company.  Mr. Allen is a certified public
accountant.




Roger M. Barzun.  Mr. Barzun has
been the Company's Vice President, Secretary and General Counsel since August
1991.  He was elected a Senior Vice President from May 1994 until July
2001 and again in March 2006.  Mr. Barzun has been a lawyer since
1968 and is a member of the bar of both New York and
Massachusetts.  Mr. Barzun also serves as general counsel to
other corporations from time to time on a part-time basis.




Section 16(a)
Beneficial Ownership Reporting Compliance.  Section 16(a) of
the Exchange Act requires the Company’s officers and directors, and persons who
own more than 10% of the Company’s equity securities, or insiders, to file with
the Securities and Exchange Commission (SEC) reports of beneficial ownership of
those securities and certain changes in beneficial ownership on Forms 3, 4 and
5, and to give the Company a copy of those reports.




Based
solely upon a review of Forms 3 and 4 and amendments to them furnished to the
Company during 2008, any Forms 5 and amendments to them furnished to the Company
relating to 2008, and any written representations that no Form 5 is required,
all Section 16(a) filing requirements applicable to the Company’s insiders were
satisfied except as follows:




In
December 2008, Mr. Mills shared voting and investment power over 400,000 shares
of the Company's common stock with North Atlantic Smaller Companies Investment
Trust plc, or NASCIT, of which he is chief executive officer.  Mr.
Mills failed to timely file a Form 4 covering sales by NASCIT on December
5, 2008 of 39,400 shares.  A Form 4 reporting that sale was filed with
the SEC on December 12, 2008.




37
 Table of Contents




Code of
Ethics.  The Company has adopted a Code of Business Conduct
& Ethics that complies with SEC rules.  The Code applies to all
the officers and in-house counsel of the Company and its subsidiaries, and is
posted on the Company’s website at www.sterlingconstructionco.com.




The Audit
Committee.  The Company has a standing audit committee as
defined in Section 3(a)(58)(A) of the Securities Exchange Act of
1934.  The members of the Audit Committee are  John D.
Abernathy, Chairman, Donald P. Fusilli, Jr., and Milton L.
Scott.




Each of
the members of the Audit Committee is an independent director under the
independence standards of both Nasdaq and the SEC.  The Board of
Directors has determined that each of Messrs. Abernathy and Scott is an audit
committee financial expert.  The independent members of the Board have
appointed Mr. Abernathy Lead Director.




Item
      11.
            Executive
      Compensation




Introduction






ThisItem 11 has two main
parts.  The first contains information about the compensation of the
executive officers of the Company and the second contains information about the
compensation of directors who are not also executive officers.




The
Company is required under applicable rules and regulations to furnish
information about the compensation of four of its top executive
officers.  Because these executive officers are named in the Summary Compensation Table for 2008in this Item 11, theyare sometimes referred
to as the named executive officers.  The named executive officers are
as follows:




Patrick
      T. Manning
            Chairman
      & Chief Executive OfficerJoseph
      P. Harper, Sr.
            President,
      Treasurer & Chief Operating OfficerJames
      H. Allen, Jr.
            Senior
      Vice President & Chief Financial OfficerRoger
      M. Barzun
            Senior
      Vice President, Secretary & General
Counsel




The
compensation of these executives, which is based on employment agreements
between the Company and the executives, is described and discussed in the
subsections listed below:




·
            The
      Compensation Discussion
      and Analysis, which covers how and why executive compensation was
      determined.




·
            The
      Employment Agreements of
      Named Executive Officers, which describes the important terms of
      the executives' employment
agreements.




·
            The
      Potential Payments upon
      Termination or Change-in-Control, which as its name indicates,
      describes particular provisions of the executives' employment agreements
      relating to the termination of their employment and a change in control of
      the Company.




·
            The
      Summary Compensation
      Table for 2008, which shows the cash and equity compensation the
      Company paid to the named executive officers for
  2008.




·
            The
      table of Grants of
      Plan-Based Awards for 2008, which shows details of any equity and
      non-equity awards made to the named executive officers for 2008 and
      describes the plans under which the Company made those
    awards.




·
            The
      table of Option
      Exercises and Stock Vested for 2008, which shows the number of
      shares the named executive officers purchased under their stock options in
      2008 and the dollar value of the difference between the market value of
      the shares purchased on the date of purchase and the option exercise
      price.




·
            The
      table of Outstanding
      Equity Awards at December 31, 2008, which as its name indicates,
      shows the stock options held by the named executive officers at year's end
      and gives other details of their option
awards.




38
 Table of Contents




Compensation
Discussion and Analysis






Introduction.  This
discussion and analysis of executive compensation is designed to show how and
why the compensation of the named executive officers was
determined.  Their compensation is determined by the Compensation
Committee of the Board of Directors, or the Committee, whose members are three
independent directors of the Company.




Compensation
Objectives.  The Committee's compensation objectives for each
of the named executive officers as well as for other management employees is to
provide the employee with a rate of pay for the work he does that is appropriate
in comparison to similar companies in the industry and that is considered fair
by the executive and the Company; to give the executive a significant incentive
to make the Company financially successful; and to give him an incentive to
remain with the Company.




Employment
Agreements.  The Company believes that compensating an
executive under an employment agreement has the benefit of assuring the
executive of continuity, both as to his employment and the amounts and elements
of his compensation.  At the same time, an employment agreement gives
the Company some assurance that the executive will remain with the Company for
the duration of the agreement and enables the Company to budget salary costs
over the term of the agreement.  All elements of the compensation of
the named executive officers are paid according to the terms of their employment
agreements.




How the Terms of the
Employment Agreements Were Determined.  The agreements under
which the Company compensated the executives in 2008 became effective as of July
2007, when the prior employment agreements of Messrs. Manning and Harper expired
and when Mr. Allen was first employed by the Company.  The
Committee's starting point was a written salary and cash incentive bonus
proposal made by Messrs. Manning and Harper for themselves and for the five
senior managers of TSC.  Mr. Allen had not then joined the
Company.  In connection with the proposal, Messrs. Manning and Harper
stressed their belief in the importance of a team approach to compensation, an
approach that is designed to avoid the disruptive effects of variations in
compensation levels between managers of equal responsibility and importance to
the Company.  The Committee discussed the proposal in the course of
several meetings.  No member of senior management to be covered by the
employment agreements, including Messrs Manning and Harper, was present at any
of the Committee's deliberations and discussions.




Compensation Principles and
Policies.  In the course of their discussions, members of the
Committee came to a consensus on the following general compensation principles
as a guide for their further discussion of the compensation of Messrs. Manning,
Harper and Allen as well as of the five senior managers of TSC:




·
            Compensation
      should consist of two main elements, base salary and cash incentive bonus
      to achieve all of the compensation objectives discussed
    above.




·
            Equity
      compensation should not be an element of compensation for executives who
      already hold a substantial number of shares of the Company's common stock
      or who already hold options to purchase a substantial number of shares of
      common stock, or both.




·
            The
      cash incentive bonus element of compensation should be divided into two
      parts: one part, 60%, of the incentive bonus should be based on the
      achievement by the Company, on a consolidated basis, of financial
      goals.  The other part, 40%, should be based on the achievement
      by the executive of personal goals to be established annually in advance
      by the Committee in consultation with the
  executive.




·
            Perquisites
      such as car allowances, reimbursement of club dues and the like should not
      be an element of compensation because salaries are designed to be
      sufficient for the executive to pay these items
  personally.




·
            The
      Committee should determine at the end of each year the extent to which
      each of Messrs. Manning, Harper and Allen has achieved his personal goals,
      as provided in the Committee’s
charter.




·
            In
      determining individual compensation levels, the Committee should take into
      account, among other things, the
following:




·
            The
      elimination of stock options as an element of compensation (except for
      Mr. Allen, who was a new employee in
2007.)




·
            The
      executives' existing salaries.




·
            Salaries
      of comparable executives in the
industry.




39
 Table of Contents




·
            Wage
      inflation from 2004 through 2007, to the extent
  applicable.




·
            The
      Company's growth since July 2004 when the prior employment agreements of
      Messrs. Manning and Harper became effective and the resulting increase in
      senior management responsibilities.




·
            The
      total amount that is appropriate for the Company to allocate to the
      compensation of  the Company's senior management given the
      Company's size and industry.




·
            The
      elimination of perquisites.




Compensation
Consultant.  To assist them in evaluating management's proposed
salary and bonus structure, in May 2007, the Committee authorized its Chairman
to retain the services of Hay Group, a large firm that performs a number of
consulting services, including the benchmarking of executive
compensation.  The Committee's Chairman instructed Hay Group to
prepare an analysis of the levels of compensation payable under the July 2004
employment agreements to Messrs. Manning, Harper and the five senior managers of
TSC, and to compare them to a representative group of similar
companies.  Mr. Allen joined the Company in July 2007 just before
Hay Group's report was finished and as a result, its analysis did not cover his
compensation.




The peer
group was selected by Hay Group in consultation with the Chairman of the
Committee and Messrs. Manning and Harper.  The peer group consisted of
eight engineering and construction companies with 2006 revenues of between $85
million and $651 million.  The following is a list of companies in the
peer group:




·
            Devcon
      International Corp.




·
            Furmanite
      Corporation




·
            Modtech
      Holdings Inc.




·
            Meadow
      Valley Corporation




·
            SPARTA,
      Inc. (Delaware)




·
            Great
      Lakes Dredge & Dock Company




·
            Insituform
      Technologies Inc.




·
            Michael
      Baker Corporation




The
Committee determined that although these companies are in different areas of the
construction and engineering industry, they present an appropriate range in size
and types of construction-related businesses to which to compare the
Company.




After
distributing its report to members of the Committee, two representatives of Hay
Group reviewed its findings in detail at a meeting of the Committee held at the
end of July 2007.   Hay Group performed no other services for the
Committee.  Because of the work Hay Group did for the Committee, the
Board's Corporate Governance & Nominating Committee retained Hay Group to do
a similar analysis and report relating to the compensation of the Company's
non-employee directors.




40
 Table of Contents




The
following is a summary of the Hay Group's Executive Compensation Report, which
was delivered to Committee members in mid 2007 and was based on financial
information for calendar year 2006, the then most recently completed full fiscal
year:




·
            Except
      for net income, the Company was at or about the median of the peer group
      in sales, assets, market capitalization and number of
      employees.  In total shareholder return, growth in income before
      interest and taxes, and return on investment, the Company was ahead of the
      peer group.




·
            The
      Company's 2006 net income was above the peer group and its stockholders'
      equity was 135% of the peer-group
median.




·
            Using
      the peer group, the base salaries of Messrs. Manning and Harper under
      their July 2004 agreements were 64% and 81%, of the median, respectively;
      the sum of their base salaries and annual incentive awards were 130% and
      150% of the median, respectively; and their total direct compensation
      (which includes equity compensation) was 86% and 93% of the median,
      respectively.




·
            Using
      Hay Group's so called national general industry database updated to July
      2007, the base salaries of Messrs. Manning and Harper under the July 2004
      agreements were below the median, 91% and 81% respectively, but their
      total cash compensation was above the median, 144% and 132%,
      respectively.




The
Committee concluded from these numbers that it is the financial success of the
Company and the resulting incentive bonuses that results in the total
compensation of Messrs. Manning and Harper to be above the median.




Compensation
Levels.  It was the consensus of the Committee that both the
salary and cash incentive bonus levels of Messrs. Manning and Harper should be
significantly above the peer-group median to reflect the following:




·
            The
      Company's excellent, above-median performance in net income and
      stockholders' equity;




·
            The
      growth of the Company since 2004 and the resulting increase in the
      complexity of the business; and




·
            The
      elimination of equity as an element of
  compensation.




To
account for the elimination of long-standing perquisites, the Committee added
$25,000 to the proposed base salaries of both executives.  In
addition, the Committee took into account the fact that under the accounting
rules of FAS 123R, the elimination of equity compensation causes the proposed
$3.41 million of total compensation for the seven-person management group
consisting of Messrs. Manning, Harper and the five TSC senior managers, to be
below the total of prior years.




Because
of management's expressed desire for a team concept of compensation, the
Committee agreed with the proposal of Messrs. Manning and Harper that their own
salaries and cash incentive bonuses be the same, reflecting their belief that
each has different but equal levels of responsibility and
expertise.




The
Committee determined that performance-based compensation, including deferred
salary as described below, should be approximately equal to base
salary.  In the case of Mr. Allen, his performance-based
compensation when combined with his equity compensation is approximately 60% of
his base salary.




As noted
above, Mr. Allen's compensation was not a subject of Hay Group's report
because he joined the Company just before the report was
presented.  The Committee established his salary based on a number of
factors, including Mr. Allen's thirty years of experience in Houston with a
major public accounting firm, nineteen of those years consisting of
concentration in the construction industry; his financial and business
experience; the compensation package requested by Mr. Allen; and Committee
members' own judgment of what is a reasonable level of
compensation.  The Committee granted him the stock option described
below so that like other members of senior management, he would have a long-term
equity interest in the Company.  The Committee determined that
Mr. Allen would be compensated under the same form of employment agreement
as the one agreed upon with Messrs. Manning and Harper.




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Deferred
Salary.  The Committee's first inclination was to have cash
incentive bonuses tied solely to a financial measurement found in the Company's
annual audited financial statements.  Mr. Harper advised the
Committee that EBITDA was used in the past as a measure of financial performance
because it was the number on which management believes that its performance has
the most direct effect.  Mr. Harper also noted that the threshold
for bonus achievement was 75% instead of 100% of budgeted EBITDA because in the
past, base salaries had been set at a relatively low level, a fact supported by
the Hay Group report.  The relatively easily achieved cash incentive
bonus together with base salary was intended to yield fair base compensation,
but was also intended to conserve cash by keeping salaries low in years in which
the Company had especially poor financial performance and did not even achieve
75% of budgeted EBITDA.




The
Committee agreed to maintain this concept, but determined that it would be
better structured by revising the base salary arrangements.  The
Committee divided base salary into two parts; the larger part to be paid in
periodic installments through the payroll system, or base payroll salary, and
the balance to be deferred, or base deferred salary, to be paid in a lump sum
after year end only if 75% of budgeted EBITDA is achieved.  EBITDA is
defined in the agreements as annual net income determined in accordance with
generally accepted accounting principles —




Plus
            Interest
      expense for the period;




Plus
            Depreciation
      and amortization expense for the
period;




Plus
            Federal
      and state income tax expense incurred for the
  period;




Plus
            Extraordinary
      items (to the extent negative) if any, for the
  period;




Minus
            Extraordinary
      items (to the extent positive) if
any




Minus
            Interest
      income for the period; and




Minus
            Any
      fees paid to non-employee
directors.




Cash
Incentive Bonus.  In keeping with its principle of basing cash
incentive bonuses on the achievement of a financial measurement that can be
determined by direct reference to the Company's audited annual financial
statements, the Committee decided to base 60% of the bonus on achieving budgeted
fully-diluted earnings per share in the belief that it is a measure that most
directly affects a stockholder's investment in the Company, and 40% on the
achievement of personal goals by the executives.




Termination
Events.  The obligations of the Company under the employment
agreements in the event of the termination of the employment of the named
executive officers or a change in control of the Company are described in detail
in the section entitled Potential Payments Upon Termination
or Change-in-Control, below.




The
Committee's principle in setting termination provisions was based on the belief
that absent a termination for cause, an employee should at least receive the
base deferred salary and cash incentive bonus that he would have earned had his
employment not terminated, but prorated for the portion of the year that he was
an employee.  The Committee made an exception to this in the event the
executive voluntarily resigns, in which case the Committee determined that
payment of any cash incentive bonus is not warranted because incentive bonuses
are designed in part to encourage the employee to remain in the Company's
employ.




In
accordance with a sense of basic fairness, the Committee determined that in the
event that termination is by the Company without cause or because of an uncured
breach by the Company of the employment agreement, the executive should also
receive the benefit of his base salary for the balance of the term of the
agreement, but at least for twelve months.




The
Committee did not believe that any special payments should be made to executives
in the event of a change in control of the Company because the protections
afforded by their employment agreements against termination without cause would
be unaffected by a change in control.  The executives' outstanding
stock options by their terms vest in full in the event of a change in
control.  The acceleration of vesting is based on the assumption that
a change in control often results in a change in senior
management.  Absent accelerated vesting, a termination without cause
after a change in control could unfairly reduce or eliminate the benefit of a
stock option depending on when the change occurs.  If the executive is
terminated for cause, all of the executives' stock options immediately
terminate.




Deferred Salary and Incentive Awards
for 2008.  In 2008, the Company exceeded the 75% of budgeted
EBITDA goal, but did not achieve the budgeted, fully-diluted earnings-per-share
goal.  In February 2009, the Committee reviewed the personal goals of
each of Messrs. Manning, Harper and Allen and determined that they had
substantially completed all of them to the satisfaction of the
Committee.  Therefore, the Committee approved the payment to each of
Messrs. Manning, Harper and Allen of his base deferred salary and 40% of his
cash incentive bonus.




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 Table of Contents




The
Committee, in the
exercise of its discretionand based on the
personal judgment of the Committee members, awarded Mr. Barzun a cash
incentive bonus of $30,000 and increased his annual salary to
$80,000.




All base
deferred salary payments and cash incentive bonuses for 2008, are more fully
described in the following sections:




Employment
Agreements of Named Executive Officers




Summary
Compensation Table for 2008




Grants
of Plan-Based Awards for 2008




Employment
Agreements of Named Executive Officers




During
2008, Messrs. Manning, Harper and Allen were compensated under similar
employment agreements that became effective in July of 2007 and that expire on
December 31, 2010.  The following table describes the material
financial features of each of the employment agreements.




Mr. Manning
            Mr. Harper
            Mr. AllenBase
      Salary
            $365,000
            $365,000
            $250,000Base
      Deferred Salary
            $162,500
            $162,500
            $75,000Maximum
      Incentive Bonus
            $162,500
            $162,500
            $75,000Equity
      Compensation
            None
            None
            13,707-share
      stock option award (1)Vacation
            Discretionary
      (2)
            Discretionary
      (2)
            5
      weeksBenefits
      Paid by the Company
            None
            None
            None(3)




(1)
            Information
      about this stock option, which was granted in August 2007, is set forth
      below in the section entitledOutstanding Equity Awards at
      December 31, 2008.




(2)
            The
      executive is entitled to take as many days vacation per year as he
      believes is appropriate in light of the needs of the
    business.




(3)
            At
      Mr. Allen's request when he joined the Company, the Company agreed
      that he would continue his then current health plan rather than
      participate in the Company's health plan and that he would be reimbursed
      for up to $1,000 of the monthly premiums of his plan.  This
      arrangement is less expensive for the Company than if Mr. Allen had
      joined the Company's health plan.




Mr. Barzun's
Employment Agreement.  Mr. Barzun's employment agreement
became effective in March 2006 and continues until terminated by the Company or
by Mr. Barzun.  His base salary in 2008 under the terms of his
employment agreement was $75,000, and is subject to merit
increases.  He is also eligible to receive an annual cash incentive
bonus in the discretion of the Committee.  Because he is a part-time
employee, there is no provision in his agreement for paid vacation
time.




All of
the foregoing agreements provide for the election of the executive to his
current positions with the Company.  The employment agreements of
Messrs. Manning, Harper and Allen provide that they may not compete with the
Company after termination of employment for a period of twelve months or for the
period, if any, during which the Company is obligated to continue to pay him his
base payroll salary, whichever period is longer




43
 Table of Contents




Potential
Payments upon Termination or Change-in-Control




The
following table describes the payment and other obligations of the Company and
the named executive officers under their employment agreements in the event of a
termination of employment or a change in control of the Company.  The
table also shows the estimated cost to the Company had the executive's
employment been terminated on December 31, 2008.




Patrick
T. Manning, Joseph P. Harper, Sr. & James H. Allen, Jr.




Event
            Payment
      and/or Other Obligations *1.Termination
      by the Company without cause
            The
      Company must —
              ·Continue
      to pay the executive his base salary for the balance of the term of his
      employment agreement or for one year, whichever period is
      longer;
              ·Continue
      to cover him under its medical and dental plans provided the executive
      reimburses the Company the COBRA cost thereof, in which event the Company
      must reimburse the amount of the COBRA payments to the executive;
      and
              ·Pay
      him a portion of any base deferred salary and cash incentive bonus that he
      would have earned had he remained an employee of the Company through the
      end of the calendar year in which his employment is terminated, based on
      the number of days during the year that he was an employee of the
      Company.Estimated
      December 31, 2008 termination payments:
              Messrs. Manning & Harper
      (each)
            $730,000
      plus COBRA payment reimbursement, which currently would be approximately
      $32,219 for Mr. Manning and $20,885 for Mr. Harper for the two-year
      period.Mr. Allen
            $500,000
      plus $24,000 in health insurance reimbursements.2.Termination
      by reason of the executive's death
            The
      Company is obligated to pay the executive a portion of any base deferred
      salary and of any cash incentive bonus that he would have earned had he
      remained an employee of the Company through the end
      of the calendar year in which his employment terminated, based on the
      number of days during the year that he was an employee of the
      Company.Estimated
      December 31, 2008 termination payments:
            None3.Termination
      by the Company for cause(1)
            The
      Company is required to pay the executive any accrued but unpaid base
      payroll salary through the date of termination and any other
      legally-required payments through that date.
              All
      of the executive's stock options terminate.Estimated
      December 31, 2008 termination payments:
            None4.Involuntary
      resignation of the executive(2)
            An
      involuntary resignation, also known as a constructive termination, is
      treated under the agreement as a termination by the Company without
      cause.Estimated
      December 31, 2008 termination payments:
            See
      Event #1, above.5.Voluntary
      resignation by the executive
            The
      Company is obligated to pay the executive a portion of any base deferred
      salary that he would have earned had he remained an employee of the
      Company through the end of the calendar year in which he resigned, based
      on the number of days during the year that he was an employee of the
      Company.Estimated
      December 31, 2008 termination payments:
            None6.A
      change in control of the Company.
            All the
      executives' un-exercisable
      but in-the-money stock options become exercisable in full.  At
      December 31, 2008, those options had the following values based on the
      difference between the market value of a share of the Company's common
      stock at that date and each option's per-share exercise
price:
              Mr.
      Manning                                
      $11,851
              Mr.
      Harper                                      
      $1,050
              Mr.
      Allen                                               
      -0-









*
            The
      base payroll salaries, base deferred salaries and cash incentive bonus
      eligibility of the executives are set forth above under the heading Employment Agreements of Named
      Executive Officers.




(1)
            The
      term "cause" is defined in the employment agreements and means what is
      commonly referred to as cause in employment matters, such as gross
      negligence, dishonesty, insubordination, inadequate performance of
      responsibilities after notice and the like.  A termination
      without cause is a termination for any reason other than for cause, death
      or voluntary resignation.




(2)
            The
      executive is entitled to "involuntarily" resign in the event that the
      Company commits a material breach of a material provision of his
      employment agreement and fails to cure the breach within thirty days, or,
      if the nature of the breach is one that cannot practicably be cured in
      thirty days, if the Company fails to diligently and in good faith commence
      a cure of the breach within the thirty-day
  period.




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 Table of Contents




Roger M.
Barzun.  In the event that Mr. Barzun's employment is
terminated for cause, the Company is only obligated to pay him his salary
through the date of termination, and his outstanding options terminate on that
date.  In the event that his employment is terminated without cause,
or by reason of his death or permanent disability, the Company is obligated to
pay him his salary then in effect for a period of six months, which at December
31, 2008 would be $37,500, and to pay him within thirty days of his termination
a portion of any cash incentive bonus to which he would otherwise have been
entitled had his employment not been terminated, based on the number of days
during the year that he was an employee of the Company.  For purposes
of determining the amount of the cash incentive bonus to which he would have
been entitled, the Company is required to make such reasonable assumptions as it
determines in good faith.  In the event of a change in control of the
Company, all of Mr. Barzun’s options become exercisable in
full.  At December 31, 2008, his only un-exercisable, in-the-money
option had a value of $700 based upon the difference between the market value of
a share of the Company's common stock at that date and the option's per-share
exercise price.




Summary
Compensation Table for 2008




The
following table sets forth for calendar years 2006, 2007 and 2008 all
compensation awarded to, earned by, or paid to, Patrick T. Manning, the
Company's principal executive officer, and James H. Allen, Jr., its principal
financial officer, who joined the Company in July 2007.




The table
also shows the same compensation information of Joseph P. Harper, Sr., the
Company's President, Treasurer & Chief Operating Officer, and Roger M.
Barzun, its Senior Vice President, Secretary & General Counsel, who are the
only other executive officers whose compensation for 2008 exceeded
$100,000.




The
Company pays compensation to these executive officers according to the terms of
their employment agreements.  The Company does not pay Messrs. Manning
or Harper additional compensation for service on the Board of
Directors.  The amounts include any compensation that was deferred by
the executive through contributions to his defined contribution plan account
under Section 401(k) of the Internal Revenue Code.  All amounts are
rounded to the nearest dollar.




Name
              and
              Principal
      Position
            Year
            Salary
              ($)
            Option
              Awards(1)
              ($)
            Non-Equity
              Incentive
      Plan
              Compensation(2)
              ($)
            All
      Other
              Compensation
              ($)(3)
            Total
              ($)Patrick
      T. Manning
              Chairman
      of the Board
              &
      Chief Executive
              Officer
      (principal executive officer)
            2006
              2007
              2008
            240,000
              296,500
              365,000
            82,883
              —
              —
            341,000
              325,000
              227,500
            38,950
              31,258
              6,900
            702,833
              652,758
              599,400Joseph
      P. Harper, Sr.
              President,
      Treasurer & Chief Operating Officer
            2006
              2007
              2008
            235,800*
              282,500
              365,000
            82,883
              —
              —
            318,500
              325,000
              227,500
            21,150
              14,396
              7,300
            658,333
              621,896
              599,800James
      H. Allen, Jr.
              Senior
      Vice President & Chief Financial Officer (principal financial
      officer)
            2007
              2008
            115,500
              250,000
            14,553
              —
            100,000
              105,000
            865
              7,500
            230,918
              362,500Roger
      M. Barzun
              Senior
      Vice President & General Counsel, Secretary
            2007
              2008
            62,500
              76,800
            —
              —
            75,000
              30,000
            —
              —
            137,500
              106,800




*
            This
      includes $20,800 paid to Mr. Harper for foregoing approximately five
      weeks of the vacation he was entitled to in 2006 under his prior
      employment agreement, which expired in July
  2007.




(1)
            The
      value of these stock option awards is the total dollar cost of the award
      recognized by the Company in the year of grant for financial reporting
      purposes in accordance with FAS 123R.  No amounts earned by the
      executive officers have been capitalized on the balance sheet for
      2008.  The cost does not reflect any estimates made for
      financial statement reporting purposes of forfeitures by the executive
      officers related to service-based vesting
  conditions.


The
      valuation of these options was made on the equity valuation assumptions
      described in Note 8 of Notes to Consolidated
      Financial Statements.  None of the awards has been
      forfeited.  The following section, entitled Grants of Plan-Based Awards
      for 2008, contains a description of the basis on which these stock
      options were awarded and their full grant date fair market
      value.




(2)
            Cash
      incentive bonuses were calculated and approved by the Committee in
      February 2009.  The bonuses for 2006 were determined in part by
      the application of a formula found in the prior employment agreement of
      each executive officer and in part by the Committee exercising its
      discretion as to the amount of additional cash incentive bonus within the
      range provided for in his employment agreements.  Footnotes (1)
      and (2) to the table in the following section, entitled Grants of Plan-Based Awards
      for 2008, contain a description of the formula and its
      application.




(3)
            The
      following table shows a breakdown of the amounts shown above in the column
      entitled All Other
      Compensation.  The dollar amounts are the costs of the
      items to the Company.




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 Table of Contents




Type
      of Other Compensation
            Year
            Mr. 
      Manning
            Mr. Harper
            Mr.
      AllenCar
      allowance
            2006
              2007
              2008
            $8,400
              $5,000
              —
            $8,400
              $5,000
              —
            —
              —Expenses
      of commuting to work
            2006
              2007
              2008
            $2,500
              $2,400
              —
            $1,800
              $1,750
              —
            —
              —Country
      club dues
            2006
              2007
              2008
            $25,000
              $15,000
              —
            $4,500
              $3,420
              —
            —
              —Company
      contribution to 401(k) Plan account
            2006
              2007
              2008
            $3,050
              $8,858
              $6,900
            $6,450
              $4,226
              $7,300
            —
              $865
              $7,500




Grants
of Plan-Based Awards for 2008




The
following table shows each grant of an award for 2008 to a named executive
officer under a Company plan.  The Company did not award any SAR's,
stock, restricted stock, restricted stock units, or similar instruments to any
of the named executive officers in 2008.




Grant
      Date
              Estimated
      Possible Payouts Under
                Non-Equity
      Incentive Plan Awards (1)
              All
      Other Option Awards: Number of Securities Underlying
    Options
              Exercise
      or Base Price of Option Awards
              Grant
      Date Fair Value of Option Awards($)
              
              (#)
              ($/share)
              ($)Threshold
              Target
              MaximumPatrick
      T. Manning
              N/A
              162,500
              260,000
              325,000
              —
              N/A
              N/AJoseph
      P. Harper, Sr.
              N/A
              162,500
              260,000
              325,000
              —
              N/A
              N/AJames
      H. Allen, Jr.
              N/A
              75,000
              120,000
              150,000
              —
              N/A
              N/ARoger
      M. Barzun
              N/A
              —
              $75,000
              —
              —
              N/A
              N/A




46
 Table of Contents




(1)
            Non-Equity
      Incentive Plan Awards.  In the
      table above, "possible" payouts mean the payouts that were available to be
      earned by the executive for calendar year
2008.




Messrs. Manning,
      Harper and Allen.As more fully described above under the heading Employment Agreements of Named
      Executive Officers, the employment agreements of Messrs. Manning,
      Harper and Allen provide each executive annually with the ability to earn
      compensation in addition to his base salary.  The additional
      compensation is divided into three parts, each based on the achievement of
      an annual goal, as follows:




·
            The
      achievement by the Company of 75% of budgeted
  EBITDA.




·
            The
      achievement by the Company of budgeted fully-diluted earnings per
      share.




·
            The
      achievement by the executive of personal goals approved by the Committee
      at the beginning of the year.




As
      a result, in any given year, the executive may earn all, some or none of
      the additional compensation.  In the table above
    —




·
            TheThreshold is the
      amount that the executive will earn if the Company achieves the 75% of
      budgeted EBITDA goal.  It is designated the threshold because,
      as described above in the section entitled Compensation Discussion and
      Analysis, this amount is considered by the Committee to be salary
      that is deferred pending the achievement by the Company of a relatively
      modest financial goal.  In 2008 the goal was more than met by
      achieving 92% of budgeted
EBITDA.




·
            The
      Target is the
      amount that the executive will earn if both the EBITDA and the
      earnings-per-share goals are achieved.  In 2008, the Company did
      not achieve the earnings-per-share
goal.




·
            TheMaximum is the sum of
      the Target amount
      and the amount the executive will earn if, in addition to the financial
      goals, he achieves all of his personal goals for the year.  In
      2008 the Committee determined that each executive completed substantially
      all of his personal goals.




Mr. Barzun.  Mr. Barzun's
      cash incentive bonus for a given year is entirely in the discretion of the
      Committee and is based on the Company's consolidated financial results for
      the year, the number of non-routine legal transactions to which he devoted
      substantial time during the year, and such other matters as the Committee
      deems relevant.  Accordingly, because Mr. Barzun's possible
      payout for 2008 cannot be estimated at the beginning of the year, the
      Target amount included in the table is the bonus paid to him for
      2007.




For
      the actual amounts paid to the executives for 2008, see the Summary Compensation Table for
      2008, above.




47
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Option
Exercises and Stock Vested for 2008




The
following table contains information on an aggregated basis about each exercise
of a stock option during 2008 by each of the named executive
officers.




Name
            Option
      AwardsNumber
      of Shares Acquired
              on
      Exercise
              (#)
            Value
      Realized Upon
              Exercise(1)
              ($)Patrick
      T. Manning
            17,200
            $221,380Joseph
      P. Harper, Sr.
            —
            —James
      H. Allen, Jr.
            —
            —Roger
      M. Barzun
            1,190
            $24,722




(1)
            SEC
      regulations define the "Value Realized Upon Exercise" as the difference
      between the market price of the shares on the date of the purchase, and
      the option exercise price of the shares, whether or not the shares are
      sold, or if they are sold, whether or not the sale occurred on the date of
      the exercise.




Outstanding
      Equity Awards at December 31, 2008




The
following table shows certain information concerning un-exercised stock options
and stock options that have not vested that were outstanding on December 31,
2008 for each named executive officer.  No other equity awards have
been made to the named executive officers.




Option
      AwardsName
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Exercisable
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Unexercisable
            Option
              Exercise
              Price/Share
              ($)
            Option
              Grant
              Date
            Option
              Expiration
              Date
            Vesting
      Date
              FootnotesPatrick
      T. Manning
            400
            600
            $25.21
            8/08/2006
            9/08/2011
            (1)10,000
            —
            $24.96
            7/18/2006
            7/18/2011
            (2)300
            600
            $16.78
            8/12/2005
            9/12/2010
            (1)10,000
            —
            $9.69
            7/18/2005
            7/18/2010
            (2)2,800
            700
            $3.10
            8/12/2004
            8/12/2014
            (1)—
            —
            $3.10
            8/12/2004
            8/12/2009
            (2)3500
            —
            $3.05
            8/20/2003
            8/20/2013
            (1)Joseph
      P. Harper, Sr.
            400
            600
            $25.21
            8/08/2006
            9/08/2011
            (1)10,000
            —
            $24.96
            7/18/2006
            7/18/2011
            (2)900
            600
            $16.78
            8/12/2005
            9/12/2010
            (1)10,000
            —
            $9.69
            7/18/2005
            7/18/2010
            (2)3,500
            —
            $3.10
            8/12/2004
            8/12/2014
            (3)10,000
            —
            $3.10
            8/12/2004
            8/12/2009
            (2)3,500
            —
            $3.05
            8/20/2003
            8/20/2013
            (3)3,500
            —
            $1.725
            7/24/2002
            7/24/2012
            (3)3,700
            —
            $1.50
            7/23/2001
            7/23/2011
            (1)James
      H. Allen, Jr.
            13,707
            9,138
            $18.99
            8/7/2007
            8/7/2012
            (3)Roger
      M. Barzun
            240
            360
            $25.21
            8/8/2006
            9/8/2011
            (1)600
            400
            $16.78
            8/12/2005
            9/12/2010
            (1)2,000
            —
            $3.10
            8/12/2004
            8/12/2014
            (4)




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 Table of Contents




Vesting of Stock
Options.  If there is a change in control of the Company, all
the stock options then held by a named executive officer become exercisable in
full.  Absent a change in control of the Company, the options listed
above vest as described in the following footnotes:




(1)
            This
      option vests in equal installments on the first five anniversaries of its
      grant date.




(2)
            This
      option vested in a single installment on July 18,
  2007.




(3)
            This
      option vests in equal installments on the first three anniversaries of its
      grant date.




(4)
            This
      option vested in a single installment on its grant
  date.




Director
Compensation for 2008




The
Company does not pay additional compensation for serving on the Board of
Directors to directors who are employees of the Company, namely Messrs. Manning
and Harper.  The following table contains information concerning the
compensation paid for 2008 to non-employee directors.  All dollar
numbers are rounded to the nearest dollar.




Name
            Fees
      Earned
              or
      Paid in
              Cash
              ($)
            Stock
              Awards
              (1)(3)
              ($)
            Total(2)
              ($)John
      D. Abernathy (Lead director)
              Chairman
      of the Audit Committee
              Member
      of the Compensation and Corporate Governance & Nominating
      Committees
            39,184
            50,000
            89,184Robert
      W. Frickel
              Chairman
      of the Compensation Committee
              Member
      of the Corporate Governance & Nominating Committee
            29,884
            50,000
            79,884Donald
      P. Fusilli, Jr.
              Member of the Audit
      Committee
              Member
      of the Compensation Committee
            26,956
            50,000
            76,956Maarten
      D. Hemsley
            21,406
            50,000
            71,406Christopher
      H. B. Mills
            18,756
            50,000
            68,756Milton
      L. Scott
              Chairman
      of the Corporate Governance & Nominating Committee
              Member
      of the Audit Committee
            30,998
            50,000
            80,998David
      R. A. Steadman
              Member
      of the Corporate Governance & Nominating Committee
            25,542
            50,000
            75,542




(1)
            The
      aggregate value of these restricted stock awards was $350,000, including
      $220,833 recognized in 2008 for financial reporting purposes in accordance
      with FAS 123R.  No amounts earned by a director have been
      capitalized on the balance sheet for 2008.  The cost does not
      reflect any estimates made for financial statement reporting purposes of
      future forfeitures related to service-based vesting
      conditions.  The valuation of the awards was made on the equity
      valuation assumptions described in Note 8 of Notes to Consolidated
      Financial Statements.  None of the awards has been
      forfeited to date.




(2)
            During 2008, none
      of the non-employee directors received any other compensation for any
      service provided to the Company.  All directors are reimbursed
      for their reasonable out-of-pocket expenses incurred in attending meetings
      of the Board and Board committees.  Directors living outside of
      North America, currently only Mr. Mills, have the option of attending
      regularly-scheduled in-person meetings by telephone, and if they choose to
      do so, they are paid an attendance fee as if they had attended in
      person.




(3)
            The
      following table shows for each non-employee director the grant date fair
      value of each stock award that has been expensed, the aggregate number of
      shares of stock awarded, and the number of shares underlying stock options
      that were outstanding on December 31,
2008.




49
 Table of Contents




Name
            Grant
      Date
            Securities
      Underlying Option Awards Outstanding
              at
      December 31, 2008
              (#)
            Aggregate
      Stock Awards Outstanding
              at
      December 31, 2008
              (#)
            Grant
      Date Fair
              Value
      of Stock and
              Option
      Awards
              ($)John
      D. Abernathy
            5/19/2005
            5,000
            
            27,9505/8/2008
            
            2,564
            50,000Total
            
            5,000
            2,564
            77,950Robert
      W. Frickel
            7/23/2001
            12,000
            
            57,6005/19/2005
            5,000
            
            27,9505/8/2008
            
            2,564
            50,000Total
            
            17,000
            2,564
            135,550Donald
      P. Fusilli, Jr.
            5/8/2008
            —
            2,564
            50,000Maarten
      D. Hemsley
            7/18/2007
            2,800
            
            27,6407/18/2006
            2,800
            
            45,9177/18/2005
            2,800
            
            17,5345/8/2008
            
            2,564
            50,000Total
            
            8,400
            2,564
            141,091Christopher
      H. B. Mills
            5/19/2005
            5,000
            
            27,9505/8/2008
            
            2,564
            50,000Total
            
            5,000
            2,564
            77,950Milton
      L. Scott
            5/8/2008
            
            2,564
            50,000David
      R. A. Steadman
            5/8/2008
            
            2,564
            50,000




Standard Director
Compensation Arrangements.  The following table shows the
standard compensation arrangements for non-employee directors that were adopted
by the Board on May 8, 2008.




Annual
      FeesAnnual
      Fees
            Each
      Non-Employee Director$17,500An
      award (on the date of each Annual Meeting of Stockholders) of restricted
      stock that has an accounting income charge under FAS 123R of $50,000 per
      grant.*Additional
      Annual Fees for Committee ChairmenChairman
      of the Audit Committee
            $12,500Chairman
      of the Compensation Committee
            $7,500Chairman
      of the Corporate Governance & Nominating Committee
            $7,500Meeting
      FeesIn-Person
      Meetings
            Per
      Director Per MeetingBoard Meetings
            $1,500CommitteeMeetingsAudit Committee
      Meetings
              in connection with a Board
      meeting
              not in connection with a Board
      meeting
              Other Committee
      Meetings
              in connection with a Board
      meeting
              not in connection with a Board
      meeting
            $1,000
              $1,500
              
              $500
              $750Telephonic Meetings(Board & committee
      meetings)One hour or
    longer
            $1,000Less than one
    hour
            $300




*
            The
      shares awarded are considered restricted because they may not be sold,
      assigned, transferred, pledged or otherwise disposed of until the
      restrictions expire.  The restrictions for the award made on May
      8, 2008 expire on May 5, 2009, the day before the 2009 Annual Meeting of
      Stockholders, but earlier if the director dies or becomes disabled or if
      there is a change in control of the Company.  The shares are
      forfeited if before the restrictions expire, the director ceases to be a
      director other than because of his death or
  disability.




50
 Table of Contents




Compensation
Committee Interlocks and Insider Participation




During
2008, Robert W. Frickel (Chairman), John D. Abernathy and Donald P. Fusilli, Jr.
served on the Compensation Committee.  None of these Compensation
Committee members is or has been an officer or employee of the
Company.  Mr. Frickel is President of R.W. Frickel Company, P.C.,
an accounting firm that performs certain accounting and tax services for the
Company.  In 2008, the Company paid or accrued for payment to R.W.
Frickel Company approximately $39,700 in fees.  The Company estimates
that during 2009, the fees of R.W. Frickel Company will be approximately the
same as in 2008.




None of
the Company's executive officers served as a director or member of the
compensation committee, or any other committee serving an equivalent function,
of any other entity that has an executive officer who is serving or during 2008
served as a director or member of the Compensation Committee of the
Company.




Compensation
Committee Report




The
Compensation Committee of the Board of Directors has reviewed and discussed with
management the Compensation
Discussion and Analysis set forth above in this Item 11.  Based
on that review and those discussions, the Compensation Committee recommended to
the Board of Directors that the Compensation Discussion and
Analysis be included in this Annual Report on Form 10-K.




Submitted
by the members of the Compensation Committee on March 16, 2009




Robert W.
Frickel, Chairman


John D.
Abernathy


Donald P.
Fusilli, Jr.




Item 12.
            Security Ownership of Certain
      Beneficial Owners and Managementand Related Stockholder
      Matters.




Equity
Compensation Plan Information.  The following table contains
information at December 31, 2008 about compensation plans (including individual
compensation arrangements) under which the Company has authorized the issuance
of equity securities.




Plan Category(1)
            Number
      of Securities to be issued upon exercise of outstanding options, warrants
      and rights
            Weighted-average
              exercise
      price of outstanding options,
              warrants
      and rights
            Number
      of securities remaining available for future issuance under equity
      compensation plans, excluding securities reflected in
              column
      (a)(a)
            (b)
            (c)Equity
      compensation plans approved by security holders:
            411,000
            $9.753
            397,690




(1)
            There
      is no outstanding compensation plan (including individual compensation
      arrangements) under which the Company has authorized the issuance of
      equity securities that has not been approved by
    stockholders.




Security
Ownership of Certain Beneficial Owners and Management.  The
following table sets forth certain information at February 16, 2009 about the
beneficial ownership of shares of the Company's common stock by each person or
entity known to the Company to own beneficially more than 5% of the outstanding
shares of common stock; by each director; by each executive officer named above
in Item 11. — Executive
Compensation, under the heading Summary Compensation Table for
2008; and by all directors and executive officers as a
group.  The Company has no other class of equity securities
outstanding.




51
 Table of Contents




Based on
information furnished by the beneficial owners, the Company believes that those
owners have sole investment and voting power over the shares of common stock
shown as beneficially owned by them, except as stated otherwise in the footnotes
to the table.




Rule
13d-3(d)(1) of the Securities Exchange Act of 1934 requires that the percentages
listed in the following table assume for each person or group the acquisition of
all shares that the person or group can acquire within sixty days of February
16, 2009, for instance by the exercise of a stock option, but not the
acquisition of the shares that can be acquired in that period by any other
person or group listed.




Except
for Mr. Mills and the entities listed below, the address of each person is the
address of the Company.




Name
      and Address of Beneficial Owner
            Number
      of
              Outstanding
      Shares of
              Common
      StockOwned
            Shares
      Subject to
              Purchase*
            Total
      Beneficial
              Ownership
            Percent
              of
      ClassWellington
      Management Company, LLP
              75
      State Street
              Boston,
      Massachusetts 02109 (2)
            1,646,870(1)
            —
            1,646,870
            12.49%T.
      Rowe Price Associates, Inc.
              100
      E. Pratt Street
              Baltimore,
      Maryland 21201 (1)
            1,086,413(2)
            —
            1,086,413
            8.24%John
      D. Abernathy
            54,531(3)
            5,000
            59,531
            †Robert
      W. Frickel
            67,369(3)
            17,000
            84,369
            †Donald
      P. Fusilli, Jr.
            4,162(3)
            —
            4,162
            †Joseph
      P. Harper, Sr.
            520,444(4)
            173,074
            693,518
            5.19%Maarten
      D. Hemsley
            184,238(3)(5)
            8,400
            192,638
            1.46%Patrick
      T. Manning
            100,295(6)
            27,600
            127,895
            †Christopher
      H. B. Mills
              c/o
      North Atlantic Value LLP
              Ryder
      Court, 14 Ryder Street,
              London
      SW1Y 6QB, England
            317,369(3)(7)
            5,000
            519,805
            2.44%Milton
      L. Scott
            5,369(3)
            —
            5,369
            †David
      R. A. Steadman
            24,369(3)
            —
            24,369
            †All
      directors and executive officers as a group (11 persons)
            1,305,307(8)
            243,483(8)
            1,548,790
            11.53%




*
            These
      are the shares that the entity or person can acquire within sixty days of
      February 16, 2009.


†
            Less
      than one percent.


(1)
            This
      number is based on a Schedule 13G/A filed with the Securities and Exchange
      Commission on February 10, 2009.  Of this number, Wellington
      Management Company, LLP claims shared voting power over 1,438,659 of the
      shares and shared dispositive power over all of the
  shares.


(2)
            This
      number is based on a Schedule 13G filed with the Securities and Exchange
      Commission on February 10, 2009.  Of this number, T. Rowe Price
      claims sole voting power over 461,613 of the shares and sole dispositive
      power over all of the shares.


(3)
            This
      number includes 2,564 restricted shares awarded to non-employee directors
      as described above in Item 11. — Executive
      Compensation in footnote (1) to the Director Compensation Table
      for 2008.  The restrictions expire on May 5, 2009, the
      day preceding the 2009 Annual Meeting of Stockholders, but earlier if the
      director dies or becomes disabled or if there is a change in control of
      the Company.  The shares are forfeited before the expiration of
      the restrictions if the director ceases to be a director other than
      because of his death or disability.


(4)
            This
      number includes 8,000 shares held by Mr. Harper as custodian for his
      grandchildren.


(5)
            This
      number includes 10,000 shares owned by the Maarten and Mavis Hemsley
      Family Foundation as to which Mr. Hemsley has shared voting and investment
      power with his wife and two daughters.  Of the total number of
      shares, 155,924 shares are pledged as
security.


(6)
            Of
      these shares 92,795, have been pledged as
  security.


(7)
            This
      number consists of 300,000 shares owned by NASCIT of which Mr. Mills is
      Chief Executive Officer; 14,805 shares owned by Mr. Mills personally over
      which he claims sole voting and investment power; and 2,564 restricted
      shares that are described above in footnote
(3).


(8)
            See
      the footnotes above for a description of certain of the shares included in
      this total.




52
 Table of Contents




Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence




Transactions with
Related Persons.




Maarten D.
Hemsley.  At December 31, 2008, NASCIT held 2.28% of the
Company's outstanding common stock.  NASCIT is a part of JO Hambro
Capital Management Group Limited, or JOHCMG, an investment company and fund
manager located in the United Kingdom.  From January 2001 until May
2002, Mr. Hemsley was a consultant to JO Hambro Capital Management Limited,
or JOHCM, which is part of JOHCMG, and since May 2002 has been an employee of
JOHCM.  Mr. Hemsley has served since 2001 as Fund Manager of JOHCMG's
Leisure & Media Venture Capital Trust, plc, and since February 2005, as
Senior Fund Manager of its Trident Private Equity II LLP investment
fund.  Neither of those funds was or is an investor in the Company or
any of the Company's affiliates.




Robert W.
Frickel.  Mr. Frickel is President of R.W. Frickel Company,
P.C., an accounting firm based in Michigan that performs certain accounting and
tax services for the Company.  In 2008, the Company paid or accrued
for payment to R.W. Frickel Company approximately $39,700 in
fees.  The Company estimates that during 2009, the fees of R.W.
Frickel Company will be approximately the same as in 2008.




Joseph P. Harper,
Jr.  Joseph P. Harper, Jr. is Chief Financial Officer of the
Company's wholly-owned subsidiary, Texas Sterling Construction Co., or TSC, and
the son of Joseph P. Harper, Sr., who is President, Treasurer & Chief
Operating Officer of the Company.  For 2008 Mr. Harper Jr.
received salary of $200,000 and deferred salary and cash incentive bonus of
$140,000.




The Paradigm
Companies.  Since July 2005, Patrick T. Manning has been the
husband of the sole beneficial owner of Paradigm Outdoor Supply, LLC, Paradigm
Outsourcing, Inc. and Paradigm Consultants, Inc.  The Paradigm
companies have provided materials and services to the Company and to other
contractors for many years.  In 2008, the Company paid a total of
approximately $436,262 to the Paradigm companies.  The Audit Committee
reviews and approves these payments in the manner described below.




Policies and
Procedures for the Review, Approval or Ratification of Transactions with Related
Persons.




General.  The
Board of Directors' policy on transactions between the Company and related
parties is set forth in the written charter of the Audit
Committee.  The policy requires that the Audit Committee must review
in advance the terms of any transaction by the Company with a director;
executive officer; nominee for election as director; stockholder; or any
affiliate or any of their immediate family members that involves more than
$50,000.  If the Audit Committee approves the transaction, it must do
so in compliance with Delaware law and report it to the full Board of
Directors.




Mr.
Hemsley.  Mr. Hemsley's relationship with JOHCM has not been
the subject of any approval process by the Board or the Audit Committee because,
as noted above, neither of the funds he manages were or are an investor in the
Company or any of its affiliates.




Mr.
Frickel.  The Company's Audit Committee reviews and approves
the retention of Mr. Frickel's firm and the payment of its
fees.  A description of this written procedure is found in Item 14. — Principal Accounting Fees
and Services, below, under the heading Audit and Non-Audit Service Approval
Policy.




Joseph P. Harper,
Jr.  The Compensation Committee reviews Mr. Harper, Jr.'s
salary and bonus as well as the salary and bonus of other senior managers of
TSC.  Neither Mr. Harper, Sr. nor Mr. Harper, Jr. is a
member of the Compensation Committee, which is made up entirely of independent
directors.




The Paradigm
Companies.  TSC engages the Paradigm companies primarily for
City of Houston projects to comply with requirements that a portion of project
contracts be subcontracted to minority and/or women-owned
businesses.  Both Paradigm companies are woman-owned
businesses.  Paradigm Outdoor Supply arranges for the purchase of
construction materials.  Paradigm delivers the materials directly to
the project site and bills the Company for them.  Paradigm Outdoor
Supply and similar companies charge a percentage commission ranging from 2% to
3% of the cost of the materials.  Paradigm Outsourcing provides
flagmen and other temporary construction personnel to contractors and charges
competitive rates for those services.  During 2008, the Company paid
Paradigm Outdoor Supply a total of approximately $326,520 for the materials it
purchased for the Company; and paid Paradigm Outsourcing $109,548 for temporary
personnel supplied to the Company.




The Audit
Committee has engaged a separate auditing firm to review on a quarterly basis
the purchases of materials and services from Paradigm and to furnish the Audit
Committee with a report of the rates charged by the Paradigm companies compared
to rates charged by similar firms.  The Audit Committee then
determines whether to approve the continuation of business with the Paradigm
companies for the succeeding quarter.




53
 Table of Contents




Director
Independence.  The following table shows the Company's
independent directors in 2008 and the committees of the Board of Directors on
which they served.  Each of the directors listed has in the past and
continues to satisfy Nasdaq's definition of an independent
director.  Each member of the Audit Committee, Compensation Committee,
and Corporate Governance & Nominating Committee also satisfies Nasdaq's
independence standards for service on those committees.  In addition,
the members of the Audit Committee satisfy the independence requirements of the
SEC's Regulation §240.10A-3.




Name
            Committee
      AssignmentJohn
      D. Abernathy
            Audit
      Committee (Chairman)
              Compensation
      Committee
              Corporate
      Governance and Nominating CommitteeRobert
      W. Frickel
            Compensation
      Committee (Chairman)
              Corporate
      Governance & Nominating CommitteeMilton
      L. Scott
            Corporate
      Governance & Nominating Committee (Chairman)
              Audit
      CommitteeDonald
      P. Fusilli, Jr.
            Audit
      Committee
              Compensation
      CommitteeDavid
      R. A. Steadman
            Corporate
      Governance & Nominating CommitteeChristopher
      H. B. Mills
            None




The
relationship between Mr. Frickel's accounting firm and the Company is described
above in this Item 12 under the heading Transactions with Related
Persons.




In determining that Mr. Mills is
independent under Nasdaq rules, the Board of Directors considered the fact that
Mr. Mills is the Chief Executive Officer of NASCIT, which is a stockholder
holding less than 10% of the Company's outstanding common stock and therefore
under applicable rules and regulations is not an affiliate of the
Company.  The Board also considered the payments of interest that the
Company made on a promissory note it issued to NASCIT in 2001 in connection with
the Company's acquisition of TSC and the fact that the note was paid in full on
June 30, 2005.  The Board has concluded that under Nasdaq's standards
for independence, neither of Mr. Frickel's nor Mr. Mills' relationship to the
Company adversely affects his independence.  In reaching this
conclusion, the Board also relied on the fact that both Messrs. Frickel and
Mills were directors at the time that theCompany appliedfor the listing of its common stock on
Nasdaq and that they qualified as independent at that
time.




Item
14.                  Principal Accountant Fees and
Services.




The
following table sets forth the aggregate fees that the Company's independent
registered public accounting firm, Grant Thornton LLP, billed to the Company for
the years ended December 31, 2008 and 2007.




Fee
      Category
            2008
            Percentage
      Approved by the Audit Committee
            2007
            Percentage
      Approved by the Audit CommitteeAudit
      Fees:
            $529,000
            100%
            $574,000
            100%Audit-Related
      Fees:
            --
            NA
            $25,500
            100%Tax
      Fees:
            $3,000
            NA
            $3,300
            100%All
      Other Fees:
            $20,000
            100%
            —
            NA




Audit
Fees. In 2008
and 2007 audit fees include the fees for Grant Thornton's audit of the
consolidated financial statements included in the Company's Annual Report on
Form 10-K; reviews of the consolidated financial statements included in the
Company's quarterly reports on Form 10-Q; the resolution of issues that arose
during the audit process; attestation work required by Section 404 of the
Sarbanes-Oxley Act of 2002; and other audit services that are normally provided
in connection with statutory and regulatory filings.  For 2008, only
$349,000 of the expected billings as reflected in the above table had been
billed by December 31, 2008.  For 2007, the audit fees have been
updated since the 2007 Form 10-K filing to reflect a reduction of $29,000 from
the estimate at the time of filing as compared to the actual fees
incurred.




Audit-Related
Fees.In 2007
audit-related fees included fees in connection with the Company's October 2007
acquisition of RHB.




Tax
Fees.Our independent registered public accounting firm
provides tax consulting services to the Company.




All Other Fees.In 2008, these fees consist of accounting services performed in
connection with our shelf registration filing with the SEC and various other
consulting fees on accounting issues.




54
 Table of Contents




Audit and
Non-Audit Service Approval Policy.  In accordance with the
requirements of the Sarbanes-Oxley Act of 2002 and related rules and
regulations, the Audit Committee has adopted a policy that it believes will
result in an effective and efficient procedure to approve the services of the
Company's independent registered public accounting firm.




Audit
Services.  The Audit Committee annually approves specified
audit services engagement terms and fees and other specified audit
fees.  All other audit services must be specifically pre-approved by
the Audit Committee.  The Audit Committee monitors the audit services
engagement and must approve, if necessary, any changes in terms, conditions and
fees resulting from changes in audit scope or other items.




Audit-Related
Fees.  Audit-related services are assurance and related
services that are reasonably related to the performance of the audit or review
of the Company's financial statements, which historically have been provided by
our independent registered public accounting firm, and are consistent with the
SEC’s rules on auditor independence.  The Audit Committee annually
approves specified audit-related services within established fee
levels.  All other audit-related services must be pre-approved by the
Audit Committee.




Tax
Fees.  As the fees related to these services are de minimis in amount, they
are approved by the Chairman of the Audit committee prior to being
incurred.




All Other
Fees.  Other services, if any, are services provided by our
independent registered public accounting firm that do not fall within the
established audit, audit-related and tax services categories.  The
Audit Committee must pre-approve specified other services that do not fall
within any of the specified prohibited categories of services.




Procedures.  All
requests for services that are to be provided by our independent registered
public accounting firm, which must include a detailed description of the
services to be rendered and the amount of corresponding estimated fees, are
submitted to both the Company's President and the Chairman of the Audit
Committee.  The Chief Financial Officer authorizes services that have
been approved by the Audit Committee within the pre-set limits.  If
there is any question as to whether a proposed service fits within an approved
service, the Chairman of the Audit Committee is consulted for a
determination.  The Chief Financial Officer submits to the Audit
Committee any requests for services that have not already been approved by the
Audit Committee.  The request must include an affirmation by the Chief
Financial Officer and the independent registered public accounting firm that the
request is consistent with the SEC’s rules on auditor independence.




PART
IV




Item 15.
            Exhibits, Financial Statements
      and Schedules.




The
      following Financial Statements and Financial Statement Schedules are filed
      with this Report:




Financial
Statements




Reports
of the Company's Independent Registered Public Accounting Firm




Consolidated
Balance Sheets at December 31, 2008 and December 31, 2007




Consolidated
Statements of Operations for the fiscal periods ended December 31, 2008,
December 31, 2007 and December 31, 2006




Consolidated
Statements of Stockholders' Equity for the fiscal periods ended December 31,
2008, December 31, 2007 and December 31, 2006




Consolidated
Statements of Cash Flows for the fiscal periods ended December 31, 2008,
December 31, 2007 and December 31, 2006




Notes to
the Consolidated Financial Statements




Financial
Statement Schedules: None




55
 Table of Contents




Exhibits




The
following exhibits are filed with this Report:




Explanatory
Note




Prior to
changing its name to Sterling Construction Company, Inc. in November 2001, the
Company had the following names during the following periods:




Hallwood
      Holdings Incorporated
            May
      1991 to July 1993Oakhurst
      Capital, Inc.
            July
      1993 to April 1995Oakhurst
      Company, Inc.
            April
      1995 to November 2001


References
in the following exhibit list use the name of the Company in effect at the date
of the exhibit.




Number
            Exhibit
      Title2.1
            Purchase
      Agreement by and among Richard H. Buenting, Fisher Sand & Gravel Co.,
      Thomas Fisher and Sterling Construction Company, Inc. dated as of
      October 31, 2007 (incorporated by reference to Exhibit number 2.1 to
      Sterling Construction Company, Inc.'s Current Report on Form 8-K,
      Amendment No. 1 filed on November 21, 2007 (SEC File No.
      1-31993)).2.2
            Escrow
      Agreement by and among Sterling Construction Company, Inc., Fisher Sand
      & Gravel Co., Richard H. Buenting and Comerica Bank as Escrow Agent,
      dated as of October 31, 2007 (incorporated by reference to Exhibit number
      2.2 to Sterling Construction Company, Inc.'s Current Report on Form 8-K,
      Amendment No. 1 filed on November 21, 2007 (SEC File No.
      1-31993)).3.1
            Certificate
      of Incorporation of Sterling Construction Company, Inc. incorporating all
      amendments made thereto through May 8, 2008 (incorporated by reference to
      Exhibit 3.1 to Sterling Construction Company, Inc.'s Quarterly Report on
      Form 10-Q, filed on August 11, 2008 (SEC File No.
      333-129780)).3.2
            Bylaws
      of Sterling Construction Company, Inc. as amended through March 13, 2008
      (incorporated by reference to Exhibit 3.1 to Sterling Construction
      Company, Inc.'s Current Report on Form 8-K, filed on March 19, 2008 (SEC
      File No. 333-129780)).4.1
            Form
      of Common Stock Certificate of Sterling Construction Company, Inc.
      (incorporated by reference to Exhibit 4.5 to its Form 8-A, filed on
      January 11, 2006 (SEC File No. 011-31993)).10.1#
            Oakhurst
      Company, Inc. 2001 Stock Incentive Plan (incorporated by reference to
      Exhibit 10.6 to Sterling Construction Company, Inc.'s Registration
      Statement on Form S-1, filed on November 17, 2005 (SEC File No.
      333-129780)).10.2#
            Forms
      of Stock Option Agreement under the Oakhurst Company, Inc. 2001 Stock
      Incentive Plan (incorporated by reference to Exhibit 10.51 to Sterling
      Construction Company, Inc.'s Annual Report on Form 10-K for the year ended
      December 31, 2004, filed on March 29, 2005 (SEC File No.
      001-31993)).10.3#
            Summary
      of the Compensation Plan for Non Employee Directors of Sterling
      Construction Company, Inc. (incorporated by reference to Exhibit 10.1 to
      Sterling Construction Company, Inc.'s Quarterly Report on Form 10-Q, filed
      on August 11, 2008 (SEC File No. 333-129780)).10.4
            Credit
      Agreement by and among Sterling Construction Company, Inc., Texas Sterling
      Construction Co., Oakhurst Management Corporation and Comerica Bank and
      the other lenders from time to time party thereto, and Comerica Bank as
      administrative agent for the lenders, dated as of October 31, 2007
      (incorporated by reference to Exhibit 10.1 to Sterling Construction
      Company, Inc.'s Current Report on Form 8-K, Amendment No. 1 filed on
      November 21, 2007 (SEC File No. 1-31993)).10.5
            Security
      Agreement by and among Sterling Construction Company, Inc., Texas Sterling
      Construction Co., Oakhurst Management Corporation and Comerica Bank as
      administrative agent for the lenders, dated as of October 31, 2007
      (incorporated by reference to Exhibit 10.2 to Sterling Construction
      Company, Inc.'s Current Report on Form 8-K, Amendment No. 1 filed on
      November 21, 2007 (SEC File No. 1-31993)).10.6
            Joinder
      Agreement by Road and Highway Builders, LLC and Road and Highway Builders
      Inc, dated as of October 31, 2007 (incorporated by reference to Exhibit
      10.3 to Sterling Construction Company, Inc.'s Current Report on Form 8-K,
      Amendment No. 1 filed on November 21, 2007 (SEC File No.
      1-31993)).10.7#
            Employment
      Agreement dated as of July 19, 2007 between Sterling Construction Company,
      Inc. and Patrick T. Manning (incorporated by reference to Exhibit 10.1 to
      Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
      January 17, 2008 (SEC File No. 1-31993))10.8#
            Employment
      Agreement dated as of July 19, 2007 between Sterling Construction Company,
      Inc. and Joseph P. Harper, Sr. (incorporated by reference to Exhibit 10.2
      to Sterling Construction Company, Inc.'s Current Report on Form 8-K filed
      on January 17, 2008 (SEC File No. 1-31993))10.09#
            Employment
      Agreement dated as of July 16, 2007 between Sterling Construction Company,
      Inc. and James H. Allen, Jr. (incorporated by reference to Exhibit 10.3 to
      Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
      January 17, 2008 (SEC File No. 1-31993))10.10#
            Option
      Agreement dated August 7, 2007 between Sterling Construction Company, Inc.
      and James H. Allen, Jr. (incorporated by reference to Exhibit 10.4 to
      Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
      January 17, 2008 (SEC File No. 1-31993))10.11#*
            Employment
      Agreement dated as of March 17, 2006 between Sterling Construction
      Company, Inc. and Roger M. Barzun.21
            Subsidiaries
      of Sterling Construction Company, Inc.:
              Name                                                                                   
      State of Incorporation
              Texas
      Sterling Construction
      Co.                                     
      Delaware
              Road
      and Highway Builders,
      LLC                                   Nevada
              Road
      and Highway Builders
      Inc.                                    
      Nevada
              Road
      and Highway Builders of California,
      Inc.             California23.1*
            Consent
      of Grant Thornton LLP.31.1*
            Certification
      of Patrick T. Manning, Chief Executive Officer of Sterling Construction
      Company, Inc.31.2*
            Certification
      of James H. Allen, Jr., Chief Financial Officer of Sterling Construction
      Company, Inc.32.0*
            Certification
      pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
      Code (18 U.S.C. 1350) of Patrick T. Manning, Chief Executive Officer, and
      James H. Allen, Jr., Chief Financial
Officer.




#  Management
      contract or compensatory plan or arrangement.*  Filed
      herewith.




56
 Table of Contents




Signatures




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






Sterling
Construction Company, Inc.




Dated:
March 16,
2009                                                
By:/s/ Patrick
T.
Manning


Patrick T. Manning, Chief Executive
Officer


(duly authorized officer)






Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Signature
            Title
            Date/s/
      Patrick T.
      Manning
              PatrickT. Manning
            Chairman
      of the Board of Directors; Chief Executive Officer
              (principal
      executive officer)
            March
      16, 2009/s/ Joseph P. Harper,
      Sr.
              Joseph
      P. Harper, Sr.
            President,
      Treasurer & Chief Operating Officer; Director
            March
      16, 2009/s/James H. Allen,
      Jr.
              James
      H. Allen, Jr.
            Senior
      Vice President & Chief Financial Officer (principal financial officer
      and principal accounting officer)
            March
      16, 2009/s/ John D.
      Abernathy
              John
      D. Abernathy
            Director
            March
      16, 2009/s/ Robert W.
      Frickel
              Robert
      W. Frickel
            Director
            March
      16, 2009/s/ Donald P. Fusilli,
      Jr.
              Donald
      P. Fusilli, Jr.
            Director
            March
      16, 2009/s/Maarten D.
      Hemsley
              Maarten
      D. Hemsley
            Director
            March
      16, 2009/s/ Christopher H. B.
      Mills
              Christopher
      H. B. Mills
            Director
            March
      16, 2009/s/ Milton L.
      Scott
              Milton
      L. Scott
            Director
            March
      16, 2009/s/ David R. A.
      Steadman
              David
      R. A. Steadman
            Director
            March
      16, 2009





57
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the
Board of Directors and Shareholders of
 Sterling
Construction Company, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Sterling Construction
Company, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2008
and 2007, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years in the period ended December
31, 2008.These
financial statements are the responsibility of the Company’s management.Our responsibility is
to express an opinion on these 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 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 audits provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sterling
Construction Company, Inc. and subsidiaries as of December 31, 2008 and 2007,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Sterling Construction Company, Inc. and
subsidiaries’ internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO)and our report dated March 16, 2009 expressed an unqualified opinion that
Sterling Construction Company, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting.
 
 /s/ GRANT
THORNTON LLP
 
 Houston,
Texas
 March 16,
2009




F1
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Shareholders
 Sterling
Construction Company, Inc.
 
 We have
audited Sterling Construction Company, Inc. (a Delaware Corporation) and
subsidiaries’ internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Sterling Construction Company, Inc. and
subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on Sterling Construction Company, Inc.
and subsidiaries’ internal control over financial reporting based on 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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.
 
 In our
opinion, Sterling Construction Company Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Sterling
Construction Company Inc. and subsidiaries as of December 31, 2008 and 2007 and
the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31,
2008and our
report dated March 16, 2009 expressed an unqualified opinion on those
consolidated financial statements.
 
 /s/ GRANT
THORNTON LLP
  Houston,
Texas
 March 16,
2009




F2
 Table of Contents




STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


As
of December 31, 2008 and 2007


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





2008
            
            
            2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            55,305
            
            
            $
            80,649Short-term
      investments
            
            
            24,379
            
            
            
            54Contracts
      receivable, including retainage
            
            
            60,582
            
            
            
            54,394Costs
      and estimated earnings in excess of billings on uncompletedcontracts
            
            
            7,508
            
            
            
            3,747Inventories
            
            
            1,041
            
            
            
            1,239Deferred
      tax asset, net
            
            
            1,203
            
            
            
            1,088Deposits
      and other current assets
            
            
            2,704
            
            
            
            1,779Total
      current assets
            
            
            152,722
            
            
            
            142,950Property
      and equipment, net
            
            
            77,993
            
            
            
            72,389Goodwill
            
            
            57,232
            
            
            
            57,232Other
      assets, net
            
            
            1,668
            
            
            
            1,944Total
      assets
            
            $
            289,615
            
            
            $
            274,515LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            26,111
            
            
            $
            27,190Billings
      in excess of cost and estimated earnings on uncompletedcontracts
            
            
            23,127
            
            
            
            25,349Current
      maturities of long-term debt
            
            
            73
            
            
            
            98Income
      taxes payable
            
            
            547
            
            
            
            1,102Other
      accrued expenses
            
            
            7,741
            
            
            
            7,148Total
      current liabilities
            
            
            57,599
            
            
            
            60,887Long-term
      liabilities:Long-term
      debt, net of current maturities
            
            
            55,483
            
            
            
            65,556Deferred
      tax liability, net
            
            
            11,117
            
            
            
            3,098Minority
      interest in RHB
            
            
            6,300
            
            
            
            6,36272,900
            
            
            
            75,016Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, par value $0.01 per share; authorized 1,000,000, none
      issued
            
            
            --
            
            
            
            --Common
      stock, par value $0.01 per share; authorized 19,000,000 shares, 13,184,638
      and 13,006,502  shares issued and outstanding
            
            
            131
            
            
            
            130Additional
      paid in capital
            
            
            150,223
            
            
            
            147,786Retained
      earnings (deficit)
            
            
            8,762
            
            
            
            (9,304
            )Total
      stockholders’ equity
            
            
            159,116
            
            
            
            138,612Total
      liabilities and stockholders’ equity
            
            $
            289,615
            
            
            $
            274,515




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





F3
 Table of Contents





STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the years ended December 31, 2008, 2007 and 2006


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





2008
            
            
            2007
            
            
            2006Revenues
            
            $
            415,074
            
            
            $
            306,220
            
            
            $
            249,348Cost
      of revenues
            
            
            373,102
            
            
            
            272,534
            
            
            
            220,801Gross Profit
            
            
            41,972
            
            
            
            33,686
            
            
            
            28,547General
      and administrative expenses
            
            
            (13,763
            )
            
            
            (13,231
            )
            
            
            (10,825
            )Other
      income (expense)
            
            
            (81
            )
            
            
            549
            
            
            
            276Operating
      income
            
            
            28,128
            
            
            
            21,004
            
            
            
            17,998Interest
      income
            
            
            1,070
            
            
            
            1,669
            
            
            
            1,426Interest
      expense
            
            
            (199
            )
            
            
            (277
            )
            
            
            (220
            )Income
      from continuing operations beforeincome taxes and minority
      interest
            
            
            28,999
            
            
            
            22,396
            
            
            
            19,204Income
      tax expense:Current
            
            
            (1,087
            )
            
            
            (1,290
            )
            
            
            (310
            )Deferred
            
            
            (8,938
            )
            
            
            (6,600
            )
            
            
            (6,256
            )Total Income tax
      expense
            
            
            (10,025
            )
            
            
            (7,890
            )
            
            
            (6,566
            )Minority
      interest in earnings of RHB
            
            
            (908
            )
            
            
            (62
            )
            
            
            --Net
      Income from continuing operations
            
            
            18,066
            
            
            
            14,444
            
            
            
            12,638Income
      from discontinued operations, including gain on disposal of $121 in
      2006
            
            
            --
            
            
            
            --
            
            
            
            682Net
      income
            
            $
            18,066
            
            
            $
            14,444
            
            
            $
            13,320Basic
      net income per share:Net income from continuing
      operations
            
            $
            1.38
            
            
            $
            1.31
            
            
            $
            1.19Net income from discontinued
      operations
            
            
            --
            
            
            
            --
            
            
            $
            0.06Net income
            
            $
            1.38
            
            
            $
            1.31
            
            
            $
            1.25Weighted
      average number of shares outstanding in computing basic per share
      amounts
            
            
            13,119,987
            
            
            
            11,043,948
            
            
            
            10,582,730Diluted
      net income per share:Net income from continuing
      operations
            
            $
            1.32
            
            
            $
            1.22
            
            
            $
            1.08Net income from discontinued
      operations
            
            
            --
            
            
            
            --
            
            
            $
            0.06Net income
            
            $
            1.32
            
            
            $
            1.22
            
            
            $
            1.14Weighted
      average number of shares outstanding in computing diluted per share
      amounts
            
            
            13,702,488
            
            
            
            11,836,176
            
            
            
            11,714,310




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




F4
 Table of Contents





STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES




CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


For
the years ended December 31, 2008, 2007 and 2006


(Amounts
in thousands)




Common
      stock
              
              
              Additional
              
              
              Retained
      earningsShares
              
              
              Amount
              
              
              paid
      in capital
              
              
              (deficit)
              
              
              TotalBalance
      at December 31, 2005
              
              
              8,165
              
              
              $
              82
              
              
              $
              82,822
              
              
              $
              (34,293
              )
              
              $
              48,611Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,320
              
              
              
              13,320Stock
      issued upon option
    and  warrant  exercises
              
              
              701
              
              
              
              7
              
              
              
              906
              
              
              
              
              
              
              
              913Stock
      based compensation expense
              
              
              
              
              
              
              
              
              
              
              991
              
              
              
              
              
              
              
              991Stock
      issued in equity offering, net  of expenses
              
              
              2,003
              
              
              
              20
              
              
              
              27,019
              
              
              
              
              
              
              
              27,039Issuance
      and amortization of  restricted stock
              
              
              6
              
              
              
              --
              
              
              
              117
              
              
              
              
              
              
              
              117Excess
      tax benefits from exercise of stock options
              
              
              
              
              
              
              109
              
              
              
              2,775
              
              
              
              (2,775
              )
              
              
              --Balance
      at December 31, 2006
              
              
              10,875
              
              
              
              109
              
              
              
              114,630
              
              
              
              (23,748
              )
              
              
              90,991Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              14,444
              
              
              
              14,444Stock
      issued upon option and  warrant exercises
              
              
              241
              
              
              
              2
              
              
              
              511
              
              
              
              
              
              
              
              513Stock
      based compensation expense
              
              
              
              
              
              
              
              
              
              
              912
              
              
              
              
              
              
              
              912Stock
      issued in equity offering, net of expenses
              
              
              1,840
              
              
              
              18
              
              
              
              34,471
              
              
              
              
              
              
              
              34,489Issuance
      and amortization of  restricted stock
              
              
              10
              
              
              
              --
              
              
              
              198
              
              
              
              
              
              
              
              198Excess
      tax benefits from exercise of stock options
              
              
              
              
              
              
              
              
              
              
              1,480
              
              
              
              
              
              
              
              1,480Issuance
      of stock to minority  interest
              
              
              41
              
              
              
              1
              
              
              
              999
              
              
              
              
              
              
              
              1,000Excess
      fair value over book value of minority interest in RHB
              
              
              
              
              
              
              
              
              
              
              (5,415
              )
              
              
              
              
              
              
              (5,415
              )Balance
      at December 31, 2007
              
              
              13,007
              
              
              
              130
              
              
              
              147,786
              
              
              
              (9,304
              )
              
              
              138,612Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              18,066
              
              
              
              18,066Stock
      issued upon option and warrant exercises
              
              
              154
              
              
              
              1
              
              
              
              237
              
              
              
              
              
              
              
              238Stock
      based compensation expense
              
              
              
              
              
              
              
              
              
              
              210
              
              
              
              
              
              
              
              210Issuance
      and amortization of restricted stock
              
              
              24
              
              
              
              --
              
              
              
              307
              
              
              
              
              
              
              
              307Excess
      tax benefits from exercise of stock options
              
              
              
              
              
              
              
              
              
              
              1,218
              
              
              
              
              
              
              
              1,218Revaluation
      of minority interest put call liability
              
              
              
              
              
              
              
              
              
              
              607
              
              
              
              
              
              
              
              607Expenditures
      related to 2007 equity offering
              
              
              
              
              
              
              
              
              
              
              (142
              )
              
              
              
              
              
              
              (142
              )Balance
      at December 31, 2008
              
              
              13,185
              
              
              $
              131
              
              
              $
              150,223
              
              
              $
              8,762
              
              
              $
              159,116


The
accompanying notes are an integral part of this consolidated financial
statement




F5
 Table of Contents





STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the years ended December 31, 2008, 2007 and 2006


(Amounts
in thousands, except share data)





2008
            
            
            2007
            
            
            2006Net
      income
            
            $
            18,066
            
            
            $
            14,444
            
            
            $
            13,320Net
      income from discontinued operations
            
            
            --
            
            
            
            --
            
            
            
            682Net
      income from continuing operations
            
            
            18,066
            
            
            
            14,444
            
            
            
            12,638Adjustments
      to reconcile income from continuing operations to net cash provided by
      continuing operating activities:Depreciation
      and amortization
            
            
            13,168
            
            
            
            9,544
            
            
            
            7,011(Gain)
      loss on sale of property and equipment
            
            
            81
            
            
            
            (501
            )
            
            
            (276
            )Deferred
      tax expense
            
            
            8,938
            
            
            
            6,600
            
            
            
            6,256Stock
      based compensation expense
            
            
            517
            
            
            
            1,110
            
            
            
            1,108Excess
      tax benefits from exercise of stock options
            
            
            (1,218
            )
            
            
            (1,480
            )
            
            
            --Minority
      interest in net earnings of subsidiary
            
            
            908
            
            
            
            62
            
            
            
            --Interest
      expense accreted on minority interest
            
            
            199
            
            
            
            --
            
            
            
            --Other
      changes in operating assets and liabilities:(Increase)
      in contracts receivable
            
            
            (6,188
            )
            
            
            (6,588
            )
            
            
            (7,893
            )(Increase)
      decrease in costs and estimated earnings in excess of billings on
      uncompleted contracts
            
            
            (3,761
            )
            
            
            648
            
            
            
            (958
            )(Increase)
      decrease in prepaid expenses and other assets
            
            
            (1,945
            )
            
            
            (629
            )
            
            
            (1,011
            )(Decrease)
      increase in trade payables
            
            
            (1,079
            )
            
            
            6,064
            
            
            
            (3,043
            )(Decrease)
      increase in billings in excess of costs and estimated earnings on
      uncompleted contracts
            
            
            (2,222
            )
            
            
            646
            
            
            
            7,901(Decrease)
      increase in accrued compensation and other liabilities
            
            
            1,257
            
            
            
            (378
            )
            
            
            1,356Net
      cash provided by continuing operations operating
activities
            
            
            26,721
            
            
            
            29,542
            
            
            
            23,089Cash
      flows from continuing operations investing activities:Cash
      paid for business combinations, net of cash acquired
            
            
            --
            
            
            
            (49,334
            )
            
            
            (2,206
            )Additions
      to property and equipment
            
            
            (19,896
            )
            
            
            (26,319
            )
            
            
            (24,849
            )Proceeds
      from sale of property and equipment
            
            
            1,298
            
            
            
            1,603
            
            
            
            866Purchases
      of short-term securities, available for sale
            
            
            (24,325
            )
            
            
            (123,797
            )
            
            
            (144,192
            )Sales
      of short-term securities, available for sale
            
            
            --
            
            
            
            149,912
            
            
            
            118,023Net
      cash used in continuing operations investing activities
            
            
            (42,923
            )
            
            
            (47,935
            )
            
            
            (52,358
            )Cash
      flows from continuing operations financing activities:Cumulative
      daily drawdowns – Credit Facility
            
            
            235,000
            
            
            
            190,199
            
            
            
            106,025Cumulative
      daily reductions – Credit Facility
            
            
            (245,000
            )
            
            
            (155,199
            )
            
            
            (89,813
            )Repayments
      under related party long term debt
            
            
            --
            
            
            
            --
            
            
            
            (8,449
            )Repayments
      under long-term obligations
            
            
            (98
            )
            
            
            (129
            )
            
            
            (123
            )Increase
      in deferred loan costs
            
            
            --
            
            
            
            (1,197
            )
            
            
            (124
            )Issuance
      of common stock pursuant to warrants and options exercised
            
            
            238
            
            
            
            513
            
            
            
            913Utilization
      of excess tax benefits from exercise of stock options
            
            
            1,218
            
            
            
            1,480
            
            
            
            --Distributions
      to RHB minority interest owner
            
            
            (562
            )
            
            
            --
            
            
            
            --Payments
      on note receivable
            
            
            204
            
            
            
            420
            
            
            
            --Net
      proceeds from sale of common stock
            
            
            (142
            )
            
            
            34,489
            
            
            
            27,039Net
      cash provided by (used in) continuing operations financing
      activities
            
            
            (9,142
            )
            
            
            70,576
            
            
            
            35,468Net
      increase (decrease) in cash and cash equivalents from continuing
      operations
            
            
            (25,344
            )
            
            
            52,183
            
            
            
            6,199Cash
      provided by discontinued operations
            
            
            --
            
            
            
            --
            
            
            
            495Cash
      used in discontinued investing activities
            
            
            --
            
            
            
            --
            
            
            
            4,739Cash
      used in discontinued operations financing activities
            
            
            --
            
            
            
            --
            
            
            
            (5,357
            )Net
      cash used in discontinued operations
            
            
            --
            
            
            
            --
            
            
            
            (123
            )Cash
      and cash equivalents at beginning of period
            
            
            80,649
            
            
            
            28,466
            
            
            
            22,267Cash
      and cash equivalents at end of period
            
            $
            55,305
            
            
            $
            80,649
            
            
            $
            28,466Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest, net of $107, $53 and $14 of
      capitalized interest expense in 2008, 2007 and 2006,
      respectively
            
            $
            167
            
            
            $
            216
            
            
            $
            199Cash
      paid during the period for income taxes
            
            $
            3,000
            
            
            $
            1,300
            
            
            $
            300




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




F6
 Table of Contents





STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




1.  Summary
of Business and Significant Accounting Policies




Basis
of Presentation:




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




Sterling
owns four  subsidiaries; Texas Sterling Construction Co. (“TSC”), a
Delaware corporation, Road and Highway Builders, LLC (“RHB”), a Nevada limited
liability company, Road and Highway Builders, Inc. ("RHB Inc"), a Nevada
corporation and Road and Highway Builders of California, Inc., ("RHB
Cal").  TSC, RHB and RHB Cal perform construction contracts and RHB
Inc produces aggregates from a leased quarry.




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




Organization
and Business:




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




Use
of Estimates:




The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.




Certain
of the Company's accounting policies require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from construction contracts under the percentage of completion method,
the valuation of long-term assets, and income taxes.  Management
evaluates all of its estimates and judgments on an on-going basis.




F7
 Table of Contents




Revenue
Recognition:




Construction




The
Company's primary business since July 2001 has been as a general contractor in
the States of Texas and, with the acquisition of RHB, Nevada where it engages in
various types of heavy civil construction projects principally for public
(government) owners. Credit risk is minimal with public owners since the Company
ascertains that funds have been appropriated by the governmental project owner
prior to commencing work on such projects. While most public contracts are
subject to termination at the election of the government entity, in the event of
termination the Company is entitled to receive the contract price for completed
work and reimbursement of termination-related costs. Credit risk withprivate
owners is minimized because of statutory mechanics liens, which give the Company
high priority in the event of lien foreclosures following financial difficulties
of private owners.




Revenues
are recognized on the percentage-of-completion method, measured by the ratio of
costs incurred up to a given date to estimated total costs for each
contract.




Contract
costs include all direct material, labor, subcontract and other costs and those
indirect costs related to contract performance, such as indirect salaries and
wages, equipment repairs and depreciation, insurance and payroll taxes.
Administrative and general expenses are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability, including those changes arising from contract
penalty provisions and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. An amount attributable to contract claims is included in revenues
when realization is probable and the amount can be reliably
estimated.  Cost and estimated earnings in excess of billings included
$0.2 million and $0.5 million at December 31, 2008 and 2007, respectively, for
contract claims not approved by the customer (which includes out-of-scope work,
potential or actual disputes, and claims). The Company generally provides a
one-year warranty for workmanship under its contracts.  Warranty
claims historically have been insignificant.




The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts” represents revenues recognized in excess of amounts billed on these
contracts. The liability “Billings in excess of costs and estimated earnings on
uncompleted contracts” represents billings in excess of revenues recognized on
these contracts.




Cash
and Cash Equivalents and Short-term Investments:




The
Company considers all highly liquid investments with original or remaining
maturities of three months or less at the time of purchase to be cash
equivalents.  At December 31, 2008, all cash and cash equivalents were
fully insured by the FDIC under its Transaction Account Guarantee
Program.  At December 31, 2008 there were uninsured short-term
investments of $13.1 million.




The
Company classified investments in U.S. treasury bills of $5.0 million at
December 31, 2008, as securities available for sale in accordance with
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”. At December 31, 2008 we had certificates of deposits of $19.4
million with original maturities of greater than 90 days, but less than one year
which were included along with the treasury bills in short-term
investments.  There was no material unrealized gain or loss on these
securities at December 31, 2008, as the market value of these securities
approximated their cost. For
the years ended December 31, 2008, 2007 and 2006, the Company recorded interest
income of $1.1 million, $1.7 million and $1.4 million,
respectively.




Contracts
Receivable:




Contracts
receivable are generally based on amounts billed to the customer. At December
31, 2008, contracts receivable included retainage of $25.9 million discussed
below which is being withheld by customers until completion of the contracts and
$2.1 million of unbilled receivables on contracts completed or substantially
complete at that date (the latter amount is expected to be billed in 2009). All
other contracts receivable include only balances approved for payment by the
customer. Based upon a review of outstanding contracts receivable, historical
collection information and existing economic conditions, management has
determined that all contracts receivable at December 31, 2008 and 2007 are fully
collectible, and accordingly, no allowance for doubtful accounts against
contracts receivable is necessary. Contracts receivable are written off based on
individual credit evaluation and specific circumstances of the customer, when
such treatment is warranted.




F8
 Table of Contents




Retainage:




Many of
the contracts under which the Company performs work contain retainage
provisions. Retainage refers to that portion of billings made by the Company but
held for payment by the customer pending satisfactory completion of the project.
Unless reserved, the Company assumes that all amounts retained by customers
under such provisions are fully collectible. Retainage on active contracts is
classified as a current asset regardless of the term of the contract and is
generally collected within one year of the completion of a contract. Retainage
was approximately $25.9 million and $21.1 million at December 31, 2008 and
December 31, 2007, respectively, of which $0.2 million at December 31, 2008 is
expected to be collected beyond 2009.




Inventories:




The
Company's inventories are stated at the lower of cost or market as determined by
the average cost method.  Inventories at December 31, 2008 and 2007
consist primarily of raw materials, such as concrete and millings which are
expected to be utilized on construction projects in the future.  The
cost of inventory includes labor, trucking and other equipment
costs.




Property
and Equipment:




Property
and equipment are stated at cost. Depreciation and amortization are computed
using the straight-line method. The estimated useful lives used for computing
depreciation and amortization are as follows:




Building
            39
      yearsConstruction
      equipment
            5-15
      yearsLand
      improvements
            5-15
      yearsOffice
      furniture and fixtures
            3-10
      yearsTransportation
      equipment
            5
      years




Depreciation
expense was approximately $12.9 million, $9.5 million, and $6.9 million in 2008,
2007 and 2006, respectively.




Equipment
under Capital Leases:




The
Company’s policy is to account for capital leases, which transfer substantially
all the benefits and risks incident to the ownership of the leased property to
the Company, as the acquisition of an asset and the incurrence of an obligation.
Under this method of accounting, the recorded value of the leased asset is
amortized principally using the straight-line method over its estimated useful
life and the obligation, including interest thereon, is reduced through payments
over the life of the lease.  Depreciation expense on leased equipment
and the related accumulated depreciation is included with that of owned
equipment.




Deferred
Loan Costs:




Deferred
loan costs represent loan origination fees paid to the lender and related
professional fees such as legal fees related to drafting of loan agreements.
These fees are amortized over the term of the loan. In 2007, the Company entered
into a new syndicated term Credit Facility (see Note 4) and incurred $1.3
million of loan costs, which are being amortized over the five-year term of the
loan. In 2006, TSC renewed its line of credit and incurred loan costs in the
amount of $123,000, which were being amortized over the three year term of the
Credit Facility; however, the unamortized loan costs were charged to expense in
2007 with the execution of a new line of credit.  Loan cost
amortization expense for fiscal years 2008, 2007 and 2006 was $254,000, $76,000
and $99,000, respectively.




F9
 Table of Contents




Goodwill
and Intangibles:




Goodwill
represents the excess of the cost of companies acquired over the fair value of
their net assets at the dates of acquisition.




The
Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (SFAS
142).  SFAS 142 requires that: (1) goodwill and indefinite lived
intangible assets not be amortized, (2) goodwill is to be tested for impairment
at least annually at the reporting unit level, (3) the amortization period of
intangible assets with finite lives is to be no longer limited to forty years,
and (4) intangible assets deemed to have an indefinite life are to be tested for
impairment at least annually by comparing the fair value of these assets with
their recorded amounts.




Goodwill
impairment is tested during the last quarter of each calendar year. The first
step compares the book value of the Company’s stock to the fair market value of
those shares as reported by Nasdaq. If the fair market value of the stock is
greater than the calculated book value of the stock, goodwill is deemed not to
be impaired and no further testing is required. If the fair market value is less
than the calculated book value, additional steps of determining fair value of
additional assets must be taken to determine impairment. Testing step one in
2008 indicated the fair market value of the Company’s stock was in excess of its
book value and no further testing was required; based on the results of such
test for impairment, the Company concluded that no impairment of goodwill
existed as of December 31, 2008.




Intangible
assets that have finite lives continue to be subject to amortization. In
addition, the Company must evaluate the remaining useful life in each reporting
period to determine whether events and circumstances warrant a revision of the
remaining period of amortization. If the estimate of an intangible asset’s
remaining life is changed, the remaining carrying amount of such asset is
amortized prospectively over that revised remaining useful life.




Evaluating
Impairment of Long-Lived Assets:




When events or changes in
circumstances indicate that long-lived assets other than goodwill may be
impaired, an evaluation is performed.  The estimated undiscounted cash
flow associated with the asset is compared to the asset's carrying amount to
determine if a write-down to fair value is required.




Federal
and State Income Taxes:




We
determine deferred income tax assets and liabilities using the balance sheet
method, as clarified by FIN 48. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary differences
between the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. FIN 48 requires that we recognize
the financial statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the position
following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of being realized upon
ultimate settlement with the relevant tax authority (see Note 6).




Stock-Based
Compensation:




The
Company has five stock-based incentive plans which are administered by the
Compensation Committee of the Board of Directors. Prior to August 2006, the
Company used the closing price of its common stock on the trading day
immediately preceding the date the option was approved as the grant date market
value. Since July 2006, the Company’s policy has been to use the closing price
of the common stock on the date of the meeting at which a stock option award is
approved for the option’s per-share exercise price.  The term of the
grants under the plans do not exceed 10 years. Stock options generally vest
over a three to five year period and the fair value of the stock option is
recognized on a straight-line basis over the vesting period of the option. Refer
to Note 8 for further information regarding the stock-based incentive
plans.




F10
 Table of Contents




Net
Income Per Share:




Basic net
income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the
period.  Diluted net income per common share is the same as basic net
income per share but assumes the exercise of any convertible subordinated debt
securities and includes dilutive stock options and warrants using the treasury
stock method.  The following table reconciles the numerators and
denominators of the basic and diluted per common share computations for net
income for 2008, 2007 and 2006 (in thousands, except per share
data):




2008
            
            
            2007
            
            
            2006Numerator:Net
      income
            
            $
            18,066
            
            
            $
            14,444
            
            
            $
            13,320Denominator:Weighted
      average common sharesoutstanding
      — basic
            
            
            13,120
            
            
            
            11,044
            
            
            
            10,583Shares
      for dilutive stock options and warrants
            
            
            582
            
            
            
            792
            
            
            
            1,131Weighted
      average common shares outstanding andassumed
      conversions — diluted
            
            
            13,702
            
            
            
            11,836
            
            
            
            11,714Basic
      net income per share
            
            $
            1.38
            
            
            $
            1.31
            
            
            $
            1.25Diluted
      net income per share
            
            $
            1.32
            
            
            $
            1.22
            
            
            $
            1.14




For the
years ended December 31, 2008, 2007 and 2006, there were 96,007, 79,700 and
81,500 options, respectively, considered antidilutive as the option exercise
price exceeded the average share market price.




Interest
Costs




Approximately
$107,000, $53,000 and $14,000 of interest related to the construction of
maintenance facilities and an office building were capitalized as part of
construction costs during 2008, 2007 and 2006, respectively, in accordance with
SFAS No.34 “Capitalization of Interest Cost”.




Recent
Accounting Pronouncements:




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




F11
 Table of Contents




In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, "Fair Value Measurements" (SFAS 157) which establishes a framework for
measuring fair value and requires expanded disclosure about the information used
to measure fair value.  The statement applies whenever other
statements require or permit assets or liabilities to be measured at fair value,
and does not expand the use of fair value accounting in any new
circumstances.  In February 2008, the FASB delayed the effective date
by which companies must adopt the provisions of SFAS 157 for nonfinancial assets
and liabilities, except for items that are recognized or disclosed in the
financial statements on a recurring basis (at least annually).  The
new effective date of SFAS 157 deferred implementation to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal
years.  The adoption of this standard is not anticipated to have a
material impact on our financial position, results of operations, or cash
flows.




In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment to FASB
Statement No. 115" ("SFAS No. 159").  This statement allows a company
to irrevocably elect fair value as a measurement attribute for certain financial
assets and financial liabilities with changes in fair value recognized in the
results of operations.  SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007.  Adoption of this FASB did not have a
material impact on the Company's results of operations and financial
position.




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




Reclassifications




Certain immaterial balances
included in the prior year balance sheet have been reclassified to conform to
current year presentation.




2.  Discontinued
operations




In 2005
management identified one of the Company’s subsidiaries, Steel City Products,
LLC,                          (“SCPL”)
as held for sale and accordingly, reclassified its consolidated financial
statements for all periods to separately present SCPL as discontinued
operations.




On
October 27, 2006, the Company sold the operations of SCPL to an industry related
buyer.  The Company received proceeds from the sale of $5.4
million,  The Company reported a pre-tax gain of $249,000 on the sale,
equal to $121,000 after taxes.  Summarized financial information for
discontinued operations through the date of the sale on October 27, 2006 is
presented below (in thousands):





2006Net
      sales
            
            $
            17,661Income
      before income taxes
            
            
            741Income
      taxes
            
            
            180Gain
      on disposal, net of tax of $128
            
            
            121Net
      income from discontinued operations
            
            $
            682




F12
 Table of Contents




3.  Property
and Equipment




Property
and equipment are summarized as follows (in thousands):




December
      31, 2008
            
            
            December
      31, 2007Construction
      equipment
            
            $
            96,002
            
            
            $
            83,739Transportation
      equipment
            
            
            12,358
            
            
            
            9,279Buildings
            
            
            3,926
            
            
            
            1,573Office
      equipment
            
            
            547
            
            
            
            602Construction
      in progress
            
            
            792
            
            
            
            856Land
            
            
            2,916
            
            
            
            2,718Water
      rights
            
            
            200
            
            
            
            200116,741
            
            
            
            98,967Less
      accumulated depreciation
            
            
            (38,748
            )
            
            
            (26,578
            )$
            77,993
            
            
            $
            72,389




At December 31, 2008 construction in progress consisted of expenditures for new
maintenance shop facilities at various locations in Texas.




4.  Line
of Credit and Long-Term Debt




Long-term
debt consists of the following (in thousands):




December
      31, 2008
            
            
            December
      31, 2007Credit
      Facility, due October 2012
            
            $
            55,000
            
            
            $
            65,000Mortgages
      due monthly through June 2016
            
            
            556
            
            
            
            65455,556
            
            
            
            65,654Less
      current maturities of long-term debt
            
            
            (73
            )
            
            
            (98
            )$
            55,483
            
            
            $
            65,556




Line
of Credit Facilities





On October 31, 2007, the Company and its subsidiaries entered into a new
credit facility (“Credit Facility”) with Comerica Bank, which replaced a prior
Revolver and will mature on October 31, 2012. The Credit Facility allows
for borrowing of up to $75.0 million and is secured by all assets of the
Company, other than proceeds and other rights under our construction contracts,
which are pledged to our bond surety. The Credit Facility requires the payment
of a quarterly commitment fee of 0.25% per annum of the unused portion of the
Credit Facility. Borrowings under the Credit Facility were used to finance the
RHB acquisition, repay indebtedness outstanding under the Revolver, and finance
working capital. At December 31, 2008, the aggregate borrowings outstanding
under the Credit Facility were $55.0 million, and the aggregate amount of
letters of credit outstanding under the Credit Facility was $1.8 million,
which reduces availability under the Credit Facility.  Availability
under the Credit Facility was, therefore, $18.2 million at December 31,
2008.




At our
election, the loans under the Credit Facility bear interest at either a
LIBOR-based interest rate or a prime-based interest rate.  The unpaid
principal balance of each prime-based loan will bear interest at a variable rate
equal to Comerica’s prime rate plus an amount ranging from 0% to 0.50% depending
on the pricing leverage ratio that we achieve.  The “pricing leverage
ratio” is determined by the ratio of our average total debt, less cash and cash
equivalents, to the EBITDA that we achieve on a rolling four-quarter basis. The
pricing leverage ratio is measured quarterly.  If we achieve a pricing
leverage ratio of (a) less than 1.00 to 1.00; (b) equal to or greater
than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than or equal
to 1.75 to 1.00, then the applicable prime margins will be 0.0%, 0.25% or 0.50%,
respectively.  The interest rate on funds borrowed under this Credit
Facility was 3.5% at December 31, 2008, and during the year ended December 31,
2008 ranged from 3.50% to 7.50%.




F13
 Table of Contents




The
unpaid principal balance of each LIBOR-based loan bears interest at a variable
rate equal to LIBOR plus an amount ranging from 1.25% to 2.25% depending on the
pricing leverage ratio that we achieve.  If we achieve a pricing
leverage ratio of (a) less than 1.00 to 1.00; (b) equal to or greater
than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than or equal
to 1.75 to 1.00, then the applicable LIBOR margins will be 1.25%, 1.75% or
2.25%, respectively. Interest on LIBOR-based loans is payable at the end of the
relevant LIBOR interest period, which must be one, two, three or six
months.




The
Credit Facility is subject to our compliance with certain covenants, including
financial covenants relating to fixed charges, leverage, tangible net worth,
asset coverage and consolidated net losses. The Credit Facility contains
restrictions on the Company’s ability to:




·
            Make
      distributions and dividends;


·
            Incur
      liens and encumbrances;


·
            Incur
      further indebtedness;


·
            Guarantee
      obligations;


·
            Dispose
      of a material portion of assets or merge with a third
    party;


·
            Make
      acquisitions;


·
            Incur
      negative income for two consecutive
quarters.




The Company was in compliance with all covenants under the Credit Facility as of
December 31, 2008.




In December 2007, Comerica syndicated the Credit Facility with three other
financial institutions under the same terms discussed above.




Management
believes that the Credit Facility will provide adequate funding for the
Company’s working capital, debt service and capital expenditure requirements,
including seasonal fluctuations at least through December 31, 2009.




The prior Revolver required the payment of a quarterly commitment fee of 0.25%
per annum of the unused portion of the line of credit.  Borrowing
interest rates were based on the bank's prime rate or on a Eurodollar rate at
the option of the Company.  The interest rate on funds borrowed under
this revolver during the year ended December 31, 2006 ranged from 7.25% to 8.25%
and during 2007 ranged from 7.75% to 8.25%.




Mortgage




In 2001
TSC completed the construction of a headquarters building and financed it
principally through a mortgage of $1.1 million on the land and facilities, at a
floating interest rate, which at December 31, 2008 was 3.5% per annum, repayable
over 15 years. The aggregate outstanding balance on these two mortgages
aggregated $556,000 at December 31, 2008.




Maturity
of Debt




The
Company's long-term obligations mature in future years as follows (in
thousands):




Fiscal
      Year2009
            
            $
            732010
            
            
            732011
            
            
            732012
            
            
            55,0732013
            
            
            73Thereafter
            
            
            191$
            55,556




F14
 Table of Contents




5.  Financial
Instruments




SFAS No.
107, “Disclosure about Fair
Value of Financial Instruments” defines the fair value of financial
instruments as the amount at which the instrument could be exchanged in a
current transaction between willing parties.




The
Company’s financial instruments are cash and cash equivalents, short-term
investments, contracts receivable, accounts payable, mortgages payable and
long-term debt.  The recorded values of cash and cash equivalents,
short-term investments, contracts receivable and accounts payable approximate
their fair values based on their short-term nature.  The recorded
value of long-term debt approximates its fair value, as interest approximates
market rates.




TSC had
one mortgage outstanding at December 31, 2008, and two mortgages outstanding at
December 31, 2007.  The mortgage outstanding at December 31, 2008 was
accruing interest at 3.50% at that date and contained pre-payment penalties. To
determine the fair value of the mortgage, the amount of future cash flows was
discounted using the Company’s borrowing rate on its Credit
Facility.  At December 31, 2008 and December 31, 2007, the carrying
value of the mortgages was $556,000 and $654,000, respectively, and the fair
value of the mortgages was approximately $488,000 and $641,000,
respectively.




The Company does not have any off-balance sheet financial
instruments.




6.   Income
Taxes and Deferred Tax Asset/Liability




During
the year ended December 31, 2007, Sterling utilized its book net operating tax
loss carry-forwards ("NOL") of approximately $9.8 million to offset a portion of
the taxable income of the Company and its subsidiaries for federal income tax
return purposes.




The
Company also had available carry-forwards resulting from the exercise of
non-qualified stock options.  The Company could not recognize the tax
benefit of these carry-forwards as deferred tax assets until its existing NOL's
were fully utilized, and therefore, the deferred tax asset related to NOL
carry-forwards differed from the amount available on its federal tax
returns.  The Company utilized approximately $3.5 million and $4.2
million of these excess compensation carry-forwards from the exercise of stock
options to offset taxable income in 2008 and 2007, respectively.  The
utilization of these excess compensation benefits for tax purposes reduced taxes
payable and increased additional paid-in capital for financial statement
purposes by $1.2 million and $1.5 million in 2008 and 2007,
respectively.




Current income tax expense represents federal tax payable for 2008 and Texas
franchise tax.




Deferred tax assets and liabilities of continuing operations consist of the
following (in thousands):




December 31, 2008
            
            
            December 31, 2007Current
            
            
            Long Term
            
            
            Current
            
            
            Long TermAssets
      related to:Accrued
      compensation
            
            
            1,169
            
            
            
            --
            
            
            
            1,054
            
            
            
            487AMT
      carry forward
            
            
            --
            
            
            
            1,770
            
            
            
            --
            
            
            
            2,446Other
            
            
            34
            
            
            
            128
            
            
            
            37
            
            
            
            --Liabilities
      related to:Amortization
      of goodwill
            
            
            --
            
            
            
            (1,209
            )Depreciation
      of property and equipment
            
            
            --
            
            
            
            (11,806
            )
            
            
            --
            
            
            
            (6,031
            )Other
            
            
            --
            
            
            
            --
            
            
            
            (3
            )
            
            
            --Net
      asset/liability
            
            $
            1,203
            
            
            $
            (11,117
            )
            
            $
            1,088
            
            
            $
            (3,098
            )




F15
 Table of Contents




The income tax provision differs from the amount using the statutory federal
income tax rate of 35% in 2008 and 2007 and 34% in 2006 applied to income from
continuing operations, for the following reasons (in thousands):




Fiscal Year EndedDecember
      31,
              2008
            
            
            December
      31,
              2007
            
            
            December
      31,
              2006Tax
      expense at the U.S. federal statutory rate
            
            $
            10,149
            
            
            $
            7,838
            
            
            $
            6,721Texas
      franchise tax expense, net of refunds and federalbenefits
            
            
            195
            
            
            
            106
            
            
            
            --Taxes
      on subsidiary's earnings allocated to minority interest
            
            
            (319
            )
            
            
            --
            
            
            
            --Non-taxable
      interest income
            
            
            (35
            )
            
            
            (295
            )
            
            
            --Permanent
      differences
            
            
            35
            
            
            
            241
            
            
            
            153Income
      tax expense
            
            $
            10,025
            
            
            $
            7,890
            
            
            $
            6,874Income
      tax on discontinued operations including taxeson the gain on sale in
      2006
            
            
            --
            
            
            
            --
            
            
            
            308Income
      tax on continuing operations
            
            $
            10,025
            
            
            $
            7,890
            
            
            $
            6,566




The
decrease in the effective income tax rate to 34.6% in 2008 from 35.2% in 2007 is
due to the increase in the portion of earnings of a subsidiary taxed to the
minority interest owner partially offset by a full year of the revised Texas
franchise tax which became effective July 1, 2007.  The increase in
the effective income tax rate to 35.2% in 2007 from 34.2% in 2006 is the result
of the Texas franchise tax and an increase in the statutory tax
rate.


The
Company and its subsidiaries file income tax returns in the United States
federal jurisdiction and in various states. With few exceptions, the Company is
no longer subject to federal tax examinations for years prior to 2002 and state
income tax examinations for years prior to 2005. The Company’s policy is to
recognize interest related to any underpayment of taxes as interest expense, and
penalties as administrative expenses. No interest or penalties have been accrued
at December 31, 2008.


The
Company adopted FIN 48, "Accounting for Uncertainty in Income Taxes" on
January 1, 2007; however the adoption did not result in an adjustment to
retained earnings. In its 2005 tax return, the Company used NOL’s that would
have expired during that year instead of deducting compensation expense that
originated in 2005 as the result of stock option exercises. Therefore, that
compensation deduction was lost. Whether the Company can choose not to take
deductions for compensation expense in the tax return and to instead use
otherwise expiring NOLs is considered by management to be an uncertain tax
position. In the event that the IRS examines the 2005 tax return and determines
that the compensation expense is a required deduction in the tax return, then
the Company would deduct the compensation expense instead of the NOL used in the
period; however there would be no cash impact on tax paid due to the increased
compensation deduction. In addition, there would be no interest or penalties due
as a result of the change. As a result of the Company’s detailed FIN 48
analysis, management has determined that it is more likely than not this
position will be sustained upon examination, and this uncertain tax position was
determined to have a measurement of $0.


The
Company does not believe that its uncertain tax position will significantly
change due to the settlement and expiration of statutes of limitations prior to
December 31, 2009.




F16
 Table of Contents




7.  Costs
and Estimated Earnings and Billings on Uncompleted Contracts




Costs and
estimated earnings and billings on uncompleted contracts at December 31, 2008
and 2007 are as follows (in thousands):




Fiscal
      Year Ended
              December 31,2008
            
            
            Fiscal
      Year Ended
              December 31,2007Costs
      incurred and estimated earnings on uncompleted contracts
            
            $
            584,997
            
            
            $
            329,559Billings
      on uncompleted contracts
            
            
            (600,616
            )
            
            
            (351,161
            )$
            (15,619
            )
            
            $
            (21,602
            )




Included in accompanying balance sheets under the following
captions:




Fiscal
      Year Ended
              December 31,2008
            
            
            Fiscal
      Year Ended
              December 31,2007Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
            
            $
            7,508
            
            
            $
            3,747Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
            
            
            (23,127
            )
            
            
            (25,349
            )$
            (15,619
            )
            
            $
            (21,602
            )




8.  Stock
Options and Warrants




Stock
Options and Grants


In July
2001, the Board of Directors adopted and in October 2001 shareholders approved
the 2001 Stock Incentive Plan (the “2001 Plan”). The 2001 Plan initially
provided for the issuance of stock awards for up to 500,000 shares of the
Company's common stock.  In March 2006, the number of shares available
for issuance under the 2001 Plan was increased to one million
shares.  In November 2007, the number of shares available for issuance
under the 2001 Plan was reduced by the board of directors from one million
shares to 662,626 shares and subsequently in May 2008 was returned to one
million shares.  The plan is administered by the Compensation
Committee of the Board of Directors. In general, the plan provides for all
grants to be issued with a per-share exercise price equal to the fair market
value of a share of common stock on the date of grant. The original terms of the
grants typically do not exceed 10 years. Stock options generally vest over
a three to five year period.





The Company's and its subsidiaries' directors, officers, employees, consultants
and advisors are eligible to be granted awards under the 2001 plan.




F17
 Table of Contents




At
December 31, 2008 there were 397,690 shares of common stock available under the
2001 Plan for issuance pursuant to future stock option and share
grants.  No options are outstanding and no shares are or will be
available for grant under the Company’s other option plans, all of which have
been terminated.




The 2001 plan provides for restricted stock grants and in May 2008 and May 2007,
pursuant to non-employee director compensation
arrangements.  Non-employee directors of the Company were awarded
restricted stock with one-year vesting as follows:




2008
    Awards
            
            
            2007
    AwardsShares
      awarded to each non-employee directors
            
            
            2,564
            
            
            
            1,598Total
      shares awarded
            
            
            17,948
            
            
            
            9,588Grant-date
      market price per share of awarded shares
            
            $
            19.50
            
            
            $
            21.90Total
      compensation cost
            
            $
            350,000
            
            
            $
            210,000Compensation
      cost recognized in 2008
            
            $
            221,000
            
            
            $
            140,000




In March
2008, five employees were granted an aggregate of 5,672 shares of restricted
stock with a market value $18.16 per share resulting in compensation expense of
$103,000 to be recognized ratably over the five-year restriction
period.




The
following tables summarize the stock option activity under the 2001 Plan and
previously active plans:




2001 Plan
            
            
            1994 Non-Employee
              Director Plan
            
            
            1991 PlanShares
            
            
            Weighted
              Average
              Exercise Price
            
            
            Shares
            
            
            Weighted
              Average
              Exercise Price
            
            
            Shares
            
            
            Weighted
              Average
              Exercise PriceOutstanding
      at December 31, 2005:
            
            
            457,160
            
            
            $
            4.66
            
            
            
            31,166
            
            
            $
            1.58
            
            
            
            84,420
            
            
            $
            2.75Granted
            
            
            81,500
            
            
            $
            16.36
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Exercised
            
            
            (64,057
            )
            
            $
            2.46
            
            
            
            (18,000
            )
            
            $
            2.05
            
            
            
            (55,996
            )
            
            $
            2.75Expired/forfeited
            
            
            (4,400
            )
            
            $
            7.83
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Outstanding
      at December 31,  2006:
            
            
            470,203
            
            
            $
            8.35
            
            
            
            13,166
            
            
            $
            0.94
            
            
            
            28,424
            
            
            $
            2.75Granted
            
            
            16,507
            
            
            $
            19.43
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Exercised
            
            
            (24,110
            )
            
            $
            3.39
            
            
            
            (3,000
            )
            
            $
            1.00
            
            
            
            (28,424
            )
            
            $
            2.75Expired/forfeited
            
            
            (5,460
            )
            
            $
            13.48
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Outstanding
      at December 31, 2007:
            
            
            457,140
            
            
            $
            9.06
            
            
            
            10,166
            
            
            $
            0.93
            
            
            
            --
            
            
            
            --Exercised
            
            
            (45,940
            )
            
            $
            2.81
            
            
            
            (10,166
            )
            
            $
            0.93
            
            
            
            --
            
            
            
            --Expired/forfeited
            
            
            (200
            )
            
            $
            25.21
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Outstanding
      at December 31, 2008:
            
            
            411,000
            
            
            $
            9.75
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --




F18
 Table of Contents




1994 Omnibus Plan
            
            
            1998 PlanShares
            
            
            WeightedAverage
              ExercisePrice
            
            
            Shares
            
            
            WeightedAverage
              ExercisePriceOutstanding
      at December 31, 2005:
            
            
            424,196
            
            
            $
            1.40
            
            
            
            229,125
            
            
            $
            0.58Exercised
            
            
            (166,016
            )
            
            $
            1.08
            
            
            
            (225,875
            )
            
            $
            0.57Outstanding
      at December 31, 2006:
            
            
            258,180
            
            
            $
            1.60
            
            
            
            3,250
            
            
            $
            1.00Exercised
            
            
            (181,990
            )
            
            $
            1.91
            
            
            
            (3,250
            )
            
            $
            1.00Outstanding
      at December 31, 2007:
            
            
            76,190
            
            
            $
            0.88
            
            
            
            --
            
            
            
            --Exercised
            
            
            (76,190
            )
            
            $
            0.88
            
            
            
            --
            
            
            
            --Outstanding
      at December 31, 2008:
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --




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




Options Outstanding
            
            
            Options ExercisableRange
      of Exercise
              Price
      Per Share
            
            
            Number
      of Shares
            
            
            Weighted Average
              Remaining Contractual Life
              (years)
            
            
            Weighted
      Average Exercise Pricer Per Share
            
            
            Number
      of Shares
            
            
            Weighted
      Average Exercise Pricer Per Share$0.94
      - $1.50
            
            
            
            31,700
            
            
            
            2.56
            
            
            $
            1.50
            
            
            
            31,700
            
            
            $
            1.50$1.73
      - $2.00
            
            
            
            31,800
            
            
            
            3.56
            
            
            $
            1.73
            
            
            
            31,800
            
            
            $
            1.73$2.75
      - $3.38
            
            
            
            148,193
            
            
            
            3.66
            
            
            $
            3.09
            
            
            
            135,533
            
            
            $
            3.09$6.87
            
            
            
            15,000
            
            
            
            6.38
            
            
            $
            6.87
            
            
            
            15,000
            
            
            $
            6.87$9.69
            
            
            
            62,800
            
            
            
            1.55
            
            
            $
            9.69
            
            
            
            62,800
            
            
            $
            9.69$16.78
            
            
            
            25,500
            
            
            
            1.70
            
            
            $
            16.78
            
            
            
            15,100
            
            
            $
            16.78$18.99
            
            
            
            13,707
            
            
            
            8.61
            
            
            $
            18.99
            
            
            
            4,569
            
            
            $
            18.99$21.60
            
            
            
            2,800
            
            
            
            3.55
            
            
            $
            21.60
            
            
            
            2,800
            
            
            $
            21.60$24.96
            
            
            
            62,800
            
            
            
            2.55
            
            
            $
            24.96
            
            
            
            62,800
            
            
            $
            24.96$25.21
            
            
            
            16,700
            
            
            
            2.69
            
            
            $
            25.21
            
            
            
            6,920
            
            
            $
            25.21411,000
            
            
            
            3.18
            
            
            $
            9.75
            
            
            
            369,022
            
            
            $
            9.15






Number of Shares
            
            
            Aggregate intrinsic valueTotal
      outstanding in-the-money options at 12/31/08
            
            
            314,993
            
            
            $
            4,137,416Total
      vested in-the-money options at 12/31/08
            
            
            291,933
            
            
            $
            3,923,872Total
      options exercised during 2008
            
            
            132,296
            
            
            $
            2,184,482




For
unexercised options, aggregate intrinsic value represents the total pretax
intrinsic value (the difference between the Company’s closing stock price on
December 31, 2008 ($18.53) and the exercise price, multiplied by the number of
in-the-money option shares) that would have been received by the option holders
had all option holders exercised their options on December 31,
2008.  For options exercised during 2008, aggregate intrinsic value
represents the total pretax intrinsic value based on the Company’s closing stock
price on the day of exercise.




F19
 Table of Contents




Compensation
expense for options granted during 2007 and 2006 were calculated using the
Black-Scholes option pricing model using the following assumptions in each year
(no options were granted during 2008):




Fiscal 2007
            Fiscal 2006Average
      Risk free interest rate
            4.7%
            4.9%Average
      Expected volatility
            70.7%
            76.3%Average
      Expected life of option
            3.0
      years
            5.0
      yearsExpected
      dividends
            None
            None




The
risk-free interest rate is based upon interest rates that match the contractual
terms of the stock option grants.  The expected volatility is based on
historical observation and recent price fluctuations.  The expected
life is based on evaluations of historical and expected future employee exercise
behavior, which is not less than the vesting period of the
options.  The Company does not currently pay dividends.  The
weighted average fair value of stock options granted in 2007 and 2006 was $12.20
and$16.36, respectively.




Pre-tax
deferred compensation expense for stock options and restricted stock grants was
$517,000 ($336,000 after tax effects of 35.0%), $1,110,000 ($722,000 after tax
effects of 35.0%), and $1,108,000 ($729,000 after tax effects of 34.2%), in
2008, 2007 and 2006, respectively.  Proceeds received by the Company
from the exercise of options in 2008, 2007 and 2006 were $205,000, $513,000 and
$657,000, respectively.  At December 31, 2008, total unrecognized
stock-based compensation expense related to unvested stock options was
approximately $336,000, which is expected to be recognized over a weighted
average period of approximately 2.0 years.




Warrants




Warrants
attached to zero coupon notes were issued to certain members of TSC management
and to certain stockholders in 2001. These ten-year warrants to purchase shares
of the Company's common stock at $1.50 per share became exercisable 54 months
from the July 2001 issue date, except that one warrant covering 322,661 shares
by amendment became exercisable forty-two months from the issue
date.  The following table shows the warrant shares outstanding and
the proceeds that have been received by the Company from
exercises.




Shares
            
            
            Company’s
      Proceeds of Exercise
            
            
            Year-End
      Warrant Share BalanceWarrants
      outstanding on vest date
            
            
            850,000
            
            
            
            --
            
            
            
            850,000Warrants
      exercised in 2005
            
            
            322,661
            
            
            $
            483,991
            
            
            
            527,339Warrants
      exercised in 2006
            
            
            171,073
            
            
            $
            256,610
            
            
            
            356,266Warrants
      exercised in 2007
            
            
            --
            
            
            
            --
            
            
            
            356,266Warrants
      exercised in 2008
            
            
            22,220
            
            
            $
            33,330
            
            
            
            334,046




9.  Employee
Benefit Plan




The
Company and its subsidiaries maintain a defined contribution profit-sharing plan
covering substantially all non-union persons employed by the Company and its
subsidiaries, whereby employees may contribute a percentage of compensation,
limited to maximum allowed amounts under the Internal Revenue Code. The Plan
provides for discretionary employer contributions, the level of which, if any,
may vary by subsidiary and is determined annually by each company's board of
directors. The Company made aggregate matching contributions of $322,000,
$353,000 and $325,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.




F20
 Table of Contents




10.  Operating
Leases




The
Company leases office space in the Dallas and San Antonio areas of Texas and
Reno, Nevada.




In 2006
and 2007, the Company entered into several long-term operating leases for
equipment with lease terms of approximately three to five
years.  Certain of these leases allow the Company to purchase the
equipment on or before the end of the lease term.  If the Company does
not purchase the equipment, it is returned to the lessor.  Two leases
obligate the Company to pay a guaranteed residual not to exceed 20% of the
original equipment cost.  The Company is accruing the liability for
both leases, which is not expected to exceed $330,000 in the
aggregate.




Minimum
annual rentals for all operating leases having initial non-cancelable lease
terms in excess of one year are as follows (in thousands):




Fiscal Year2009
            
            $
            7212010
            
            
            7212011
            
            
            6342012
            
            
            702013
            
            
            --Thereafter
            
            
            --Total
      future minimum rental payments
            
            $
            2,146




Total
rent expense for all operating leases amounted to approximately $767,000,
$1,068,000 and $995,000 in fiscal years 2008, 2007 and 2006,
respectively.




11.  Customers




The
following table shows contract revenues generated from the Company’s customers
that accounted for more than 10% of revenues (dollars in
thousands):




December
      31,
              2008
            
            
            December 31,
              2007
            
            
            December 31,
              2006Contract
              Revenues
            
            
            %
      of
              Revenues
            
            
            Contract
              Revenues
            
            
            % of
              Revenues
            
            
            Contract
              Revenues
            
            
            % of
              RevenuesTexas
      Department ofTransportation
      ("TXDOT")
            
            $
            162,041
            
            
            
            39.2
            %
            
            $
            201,073
            
            
            
            65.7
            %
            
            $
            166,333
            
            
            
            67.1
            %Nevada
      Department ofTransportation ("NDOT")
            
            $
            88,159
            
            
            
            21.3
            %
            
            
            *
            
            
            
            *
            
            
            
            N/A
            
            
            
            N/ACity
      of Houston ("COH")
            
            
            *
            
            
            
            *
            
            
            
            *
            
            
            
            *
            
            
            $
            29,848
            
            
            
            12.1
            %Harris
      County
            
            
            *
            
            
            
            *
            
            
            
            *
            
            
            
            *
            
            
            
            *
            
            
            
            *




*
represents less than 10% of revenues




At
December 31, 2008, TXDOT ($22.1 million), City of Houston ($10.2 million) and
City of San Antonio ($7.5 million) owed balances greater than 10% of contracts
receivable.




F21
 Table of Contents




12.  Equity
Offerings




In
December 2007, the Company completed a public offering of 1.84 million shares of
its common stock at $20.00 per share. The Company received proceeds, net of
underwriting discounts and commissions, of approximately $35.0 million ($19.00
per share) and paid approximately $0.5 million in related offering
expenses.  From the proceeds of the offering, the Company repaid the
portion of its Credit Facility that was used in its acquisition of its interest
in RHB. The remainder of the offering proceeds was used for working capital
purposes.




In
January 2006, the Company completed a public offering of approximately 2.0
million shares of its common stock at $15.00 per share. The Company received
proceeds, net of underwriting commissions, of approximately $28.0 million
($13.95 per share) and paid approximately $907,000 in related offering
expenses.  In addition, the Company received approximately $484,000 in
December 2005 from the exercise of warrants and options to purchase 321,758
shares of Common Stock, which were subsequently sold in 2006 by the option and
warrant holders in the offering.  From the proceeds of the offering,
the Company repaid all its outstanding related party promissory notes to
officers, directors and former directors as follows:




Name
            
            Principal
            
            
            Interest
            
            
            TotalPaymentPatrick
      T. Manning
            
            $
            318,592
            
            
            $
            2,867
            
            
            $
            321,459James
      D. Manning
            
            $
            1,855,349
            
            
            $
            16,698
            
            
            $
            1,872,047Joseph
      P. Harper, Sr.
            
            $
            2,637,422
            
            
            $
            23,737
            
            
            $
            2,661,159Maarten
      D. Hemsley
            
            $
            181,205
            
            
            $
            1,631
            
            
            $
            182,836Robert
      M. Davies
            
            $
            452,909
            
            
            $
            4,076
            
            
            $
            456,985




During
2006, the Company utilized a portion of the offering proceeds to purchase
additional construction equipment and to repay borrowed funds.




13.  Minority
interest in RHB:




On October 31, 2007, the Company purchased a 91.67% interest in Road and
Highway Builders, LLC (“RHB”), a Nevada limited liability company, and all of
the outstanding capital stock of Road and Highway Builders, Inc (“RHB Inc”),
then an inactive Nevada corporation.  These entities were affiliated
through common ownership and have been included in the Company's consolidated
results since the date of acquisition.




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




The Company paid an aggregate purchase price for its interest in RHB of
$53.0 million, consisting of $48.9 million in cash, 40,702 unregistered
shares of the Company’s common stock, which were valued at $1.0 million based on
the quoted market value of the Company’s stock on the purchase date, and $3.1
million in assumption of accounts payable to RHB by one of the
sellers.  Additionally, the Company incurred $1.1 million of direct
costs related to the acquisition.  We acquired RHB for a number of
reasons, including those listed below:




a)
              Expansion
      into growing western U.S. infrastructure construction
    markets;


b)
              Strong
      management team with a shared corporate
culture;


c)
              Expansion
      of our service lines into aggregates and asphalt paving
      materials;


d)
              Opportunities
      to extend our municipal and structural capabilities into Nevada;
      and


e)
              RHB’s
      strong financial results and expected immediate accretion to our earnings
      and earnings per share.
  F22
 Table of Contents
  Ten percent of the cash purchase price was placed in escrow for eighteen months
as security for any breach of representations and warranties made by the
sellers.




The minority interest owner of RHB (who remains with RHB as Chief Executive
Officer) has the right to require the Company to buy his remaining 8.33%
minority interest in RHB and, concurrently, the Company has the right to require
that owner to sell his 8.33% interest to the Company, beginning in 2011. The
purchase price in each case is 8.33% of the product of six times the simple
average of RHB’s income before interest, taxes, depreciation and amortization
for the calendar years 2008, 2009 and 2010.  The minority interest was
recorded at its estimated fair value of $6.3 million at the date of acquisition
and the difference of $5.4 million between the minority owner’s interest in the
historical basis of RHB and the estimated fair value of that interest was
recorded as a liability to the minority interest and a reduction in addition
paid-in capital.




Any changes to the estimated fair value of the minority interest will be
recorded as a corresponding change in additional
paid-in-capital.  Additionally, interest will be accredited to the
minority interest liability based on the discount rate used to calculate the
fair value of the acquisition.




Based on RHB's operating results for 2008 and management's current estimates of
such results for 2009 and 2010, the Company has revised its estimate of the fair
value of the minority interest at December 31, 2008 and recorded a reduction in
the related liability and increased paid-in-capital by $607,000 at that
date.  This change in fair value estimate also resulted in a reduction
in interest accreted in the first three quarters of 2008 on the liability by
$228,000, which is reflected as a reduction in fourth quarter interest
expense.




The purchase agreement restricts the sellers from competing against the business
of RHB and from soliciting its employees for a period of four years after the
closing of the purchase.




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




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


The goodwill is deductible for tax purposes over 15 years. The purchase price
allocation has been finalized and there were no separately identifiable assets,
other than goodwill.  Other than the adjustment to the minority
interest liability and additional paid-in-capital discussed above, no material
adjustments were made to the initial allocation of the purchase
price.




The operations of RHB are included in the accompanying consolidated statements
of operations and cash flows for the two months ended December 31, 2007 and the
year of 2008. Supplemental information on an unaudited pro forma combined basis,
as if the RHB acquisition had been consummated at the beginning of 2006, is as
follow (in thousands, except per share amounts):




(Unaudited)2007
            
            
            2006Revenues
            
            $
            377,740
            
            
            $
            286,511Net
      income from continuing operations
            
            $
            26,881
            
            
            $
            14,959Diluted
      net income per share from continuing operations
            
            $
            2.26
            
            
            $
            1.27


F23
 Table of Contents
  For the ten months ended October 31, 2007, RHB had unaudited revenues of
approximately $72 million and unaudited income before taxes of
approximately $21 million. The profitability of RHB for the ten month
period was higher than what was expected to continue due to some unusually high
margin contracts and may not be indicative of future results of
operations.


14.  Commitments
and Contingencies




Employment
Agreements




Patrick
T. Manning, Joseph P. Harper, Sr., James H. Allen, Jr. and certain other
officers of the Company and its subsidiaries have employment agreements which
provide for payments of annual salary, deferred salary, incentive bonuses and
certain benefits if their employment is terminated without cause.




Self-Insurance




The
Company is self-insured for employee health claims. Its policy is to accrue the
estimated liability for known claims and for estimated claims that have been
incurred but not reported as of each reporting date. The Company has obtained
reinsurance coverage for the policy period as follows:




•
      Specific excess reinsurance coverage for medical and prescription drug
      claims in excess of $60,000 for each insured person with a maximum
      lifetime reimbursable of
$2,000,000.




•
      Aggregate reinsurance coverage for medical and prescription drug claims
      within a plan year with a maximum of approximately $1.1 million which is
      the estimated maximum claims and fixed cost based on the number of
      employees.




For the
twelve months ended December 31, 2008, 2007 and 2006, the Company incurred $1.5
million, $1.6 million and $1.2 million, respectively, in expenses related to
this plan.




The
Company is also self-insured for workers’ compensation claims up to $250,000 per
occurrence, with a maximum aggregate liability of $2.7 million per
year.  Its policy is to accrue the estimated liability for known
claims and for estimated claims that have been incurred but not reported as of
each reporting date.  At December 31, 2008 and 2007, the Company had
recorded an estimated liability of $1,092,000 and $1,067,000, respectively,
which it believes is adequate based on its claims history and an actuarial
study.  The Company has a safety and training program in place to help
prevent accidents and injuries and works closely with its employees and the
insurance company to monitor all claims.




The
Company obtains bonding on construction contracts through Travelers Casualty and
Surety Company of America.  As is customary in the construction
industry, the Company indemnifies Travelers for any losses incurred by it in
connection with bonds that are issued.  The Company has granted
Travelers a security interest in accounts receivable and contract rights for
that obligation.




Guarantees




The
Company typically indemnifies contract owners for claims arising during the
construction process and carries insurance coverage for such claims, which in
the past have not been material.




The
Company’s Certificate of Incorporation provides for indemnification of its
officers and directors.  The Company has a Director and Officer
insurance policy that limits its exposure.  At December 31, 2008 the
Company had not accrued a liability for this guarantee, as the likelihood of
incurring a payment obligation in connection with this guarantee is believed to
be remote.




F24
 Table of Contents




Litigation




The
Company is the subject of certain claims and lawsuits occurring in the normal
course of business. Management, after consultation with outside legal counsel,
does not believe that the outcome of these actions will have a material impact
on the financial statements of the Company.




Purchase
Commitments




To manage
the risk of changes in material prices and subcontracting costs used in
tendering bids for construction contracts, we obtain firm quotations from
suppliers and subcontractors before submitting a bid.  These
quotations do not include any quantity guarantees.  As soon as we are
advised that our bid is the lowest, we enter into firm contracts with most of
our materials suppliers and sub-contractors, thereby mitigating the risk of
future price variations affecting the contract costs.




15.  Related
Party Transactions




In July
2001, Robert Frickel was elected to the Board of Directors. He is President of
R.W. Frickel Company, P.C., an accounting firm that performs certain tax
services for the Company. Fees paid or accrued to R.W. Frickel Company for 2008,
2007 and 2006 and were approximately $39,700, $63,600 and $57,500,
respectively.




In July
2005, Patrick T. Manning married the sole beneficial owner of Paradigm Outdoor
Supply, LLC and Paradigm Outsourcing, Inc., both of which are women-owned
business enterprises.  The Paradigm companies provide materials and
services to the Company and to other contractors.  In 2008, 2007 and
2006, the Company paid approximately $0.4 million, $1.7 million and $3.3
million, respectively, to the Paradigm companies for materials and
services.




16.           Capital
Structure




Holders
of common stock are entitled to one vote for each share on all matters voted
upon by the stockholders, including the election of directors, and do not have
cumulative voting rights.  Subject to the rights of holders of any
then outstanding shares of preferred stock, common stockholders are entitled to
receive ratably any dividends that may be declared by the Board of Directors out
of funds legally available for that purpose.  Holders of common stock
are entitled to share ratably in net assets upon any dissolution or liquidation
after payment of provision for all liabilities and any preferential liquidation
rights of our preferred stock then outstanding.  Common stock shares
are not subject to any redemption provisions and are not convertible into any
other shares of capital stock.  The rights, preferences and privileges
of holders of common stock are subject to those of the holders of any shares of
preferred stock that may be issued in the future.




The Board
of Directors may authorize the issuance of one or more classes or series of
preferred stock without stockholder approval and may establish the voting
powers, designations, preferences and rights and restrictions of such
shares.  No preferred shares have been issued.




In
December 1998, the Company entered into a rights agreement with American Stock
Transfer & Trust Company, as rights agent, providing for a dividend of one
purchase right for each outstanding share of common stock for stockholders of
record on December 29, 1998.  Holders of shares of common stock issued
since that date were issued rights with their shares.  The rights
traded automatically with the shares of common stock and became exercisable only
if a takeover attempt of the Company had occurred.  The rights expired
on December 29, 2008.







F25
 Table of Contents





17.  Quarterly
Financial Information (Unaudited)




Fiscal 2008 Quarter Ended
      (unaudited)March 31
            
            
            June 30
            
            
            September 30
            
            
            December 31(*)
            
            
            Total(Dollar
      amounts in thousands, except per share data)Revenues
            
            $
            84,926
            
            
            $
            106,728
            
            
            $
            114,148
            
            
            $
            109,272
            
            
            $
            415,074Gross
      profit
            
            
            8,101
            
            
            
            11,740
            
            
            
            12,572
            
            
            
            9,559
            
            
            
            41,972Income
      before income taxes and minority interest
            
            
            4,800
            
            
            
            8,278
            
            
            
            9,591
            
            
            
            6,330
            
            
            
            28,999Net
      income
            
            $
            3,117
            
            
            $
            5,140
            
            
            $
            5,978
            
            
            $
            3,831
            
            
            $
            18,066Net
      income per share, basic:
            
            $
            0.24
            
            
            $
            0.39
            
            
            $
            0.46
            
            
            $
            0.29
            
            
            $
            1.38Net
      income per share,diluted:
            
            $
            0.23
            
            
            $
            0.37
            
            
            $
            0.44
            
            
            $
            0.28
            
            
            $
            1.32





Fiscal 2007 Quarter Ended
      (unaudited)March 31
            
            
            June 30
            
            
            September 30
            
            
            December 31
            
            
            Total(Dollar
      amounts in thousands, except per share data)Revenues
            
            $
            68,888
            
            
            $
            71,275
            
            
            $
            77,714
            
            
            $
            88,343
            
            
            $
            306,220Gross
      profit
            
            
            5,632
            
            
            
            8,046
            
            
            
            7,915
            
            
            
            12,093
            
            
            
            33,686Income
      before income taxes and minority interest
            
            
            3,806
            
            
            
            5,711
            
            
            
            5,125
            
            
            
            7,754
            
            
            
            22,396Net
      income
            
            $
            2,511
            
            
            $
            3,797
            
            
            $
            3,443
            
            
            $
            4,693
            
            
            $
            14,444Net
      income per share, basic:
            
            $
            0.23
            
            
            $
            0.35
            
            
            $
            0.31
            
            
            $
            0.42
            
            
            $
            1.31Net
      income per share,diluted:
            
            $
            0.21
            
            
            $
            0.32
            
            
            $
            0.29
            
            
            $
            0.39
            
            
            $
            1.22




*             See
Note 13 regarding reversal in the fourth quarter of $228,000 of interest expense
accreted on the minority interest liability in the first three quarters of
2008.




F26
 Table of Contents




Exhibit
Index




Number
            Exhibit
      Title2.1
            Purchase
      Agreement by and among Richard H. Buenting, Fisher Sand & Gravel Co.,
      Thomas Fisher and Sterling Construction Company, Inc. dated as of
      October 31, 2007 (incorporated by reference to Exhibit number 2.1 to
      Sterling Construction Company, Inc.'s Current Report on Form 8-K,
      Amendment No. 1 filed on November 21, 2007 (SEC File No.
      1-31993)).2.2
            Escrow
      Agreement by and among Sterling Construction Company, Inc., Fisher Sand
      & Gravel Co., Richard H. Buenting and Comerica Bank as Escrow Agent,
      dated as of October 31, 2007 (incorporated by reference to Exhibit number
      2.2 to Sterling Construction Company, Inc.'s Current Report on Form 8-K,
      Amendment No. 1 filed on November 21, 2007 (SEC File No.
      1-31993)).3.1
            Certificate
      of Incorporation of Sterling Construction Company, Inc. incorporating all
      amendments made thereto through May 8, 2008 (incorporated by reference to
      Exhibit 3.1 to Sterling Construction Company, Inc.'s Quarterly Report on
      Form 10-Q, filed on August 11, 2008 (SEC File No.
      333-129780)).3.2
            Bylaws
      of Sterling Construction Company, Inc. as amended through March 13, 2008
      (incorporated by reference to Exhibit 3.1 to Sterling Construction
      Company, Inc.'s Current Report on Form 8-K, filed on March 19, 2008 (SEC
      File No. 333-129780)).4.1
            Form
      of Common Stock Certificate of Sterling Construction Company, Inc.
      (incorporated by reference to Exhibit 4.5 to its Form 8-A, filed on
      January 11, 2006 (SEC File No. 011-31993)).10.1#
            Oakhurst
      Company, Inc. 2001 Stock Incentive Plan (incorporated by reference to
      Exhibit 10.6 to Sterling Construction Company, Inc.'s Registration
      Statement on Form S-1, filed on November 17, 2005 (SEC File No.
      333-129780)).10.2#
            Forms
      of Stock Option Agreement under the Oakhurst Company, Inc. 2001 Stock
      Incentive Plan (incorporated by reference to Exhibit 10.51 to Sterling
      Construction Company, Inc.'s Annual Report on Form 10-K for the year ended
      December 31, 2004, filed on March 29, 2005 (SEC File No.
      001-31993)).10.3#
            Summary
      of the Compensation Plan for Non Employee Directors of Sterling
      Construction Company, Inc. (incorporated by reference to Exhibit 10.1 to
      Sterling Construction Company, Inc.'s Quarterly Report on Form 10-Q, filed
      on August 11, 2008 (SEC File No. 333-129780)).10.4
            Credit
      Agreement by and among Sterling Construction Company, Inc., Texas Sterling
      Construction Co., Oakhurst Management Corporation and Comerica Bank and
      the other lenders from time to time party thereto, and Comerica Bank as
      administrative agent for the lenders, dated as of October 31, 2007
      (incorporated by reference to Exhibit 10.1 to Sterling Construction
      Company, Inc.'s Current Report on Form 8-K, Amendment No. 1 filed on
      November 21, 2007 (SEC File No. 1-31993)).10.5
            Security
      Agreement by and among Sterling Construction Company, Inc., Texas Sterling
      Construction Co., Oakhurst Management Corporation and Comerica Bank as
      administrative agent for the lenders, dated as of October 31, 2007
      (incorporated by reference to Exhibit 10.2 to Sterling Construction
      Company, Inc.'s Current Report on Form 8-K, Amendment No. 1 filed on
      November 21, 2007 (SEC File No. 1-31993)).10.6
            Joinder
      Agreement by Road and Highway Builders, LLC and Road and Highway Builders
      Inc, dated as of October 31, 2007 (incorporated by reference to Exhibit
      10.3 to Sterling Construction Company, Inc.'s Current Report on Form 8-K,
      Amendment No. 1 filed on November 21, 2007 (SEC File No.
      1-31993)).10.7#
            Employment
      Agreement dated as of July 19, 2007 between Sterling Construction Company,
      Inc. and Patrick T. Manning (incorporated by reference to Exhibit 10.1 to
      Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
      January 17, 2008 (SEC File No. 1-31993))10.8#
            Employment
      Agreement dated as of July 19, 2007 between Sterling Construction Company,
      Inc. and Joseph P. Harper, Sr. (incorporated by reference to Exhibit 10.2
      to Sterling Construction Company, Inc.'s Current Report on Form 8-K filed
      on January 17, 2008 (SEC File No. 1-31993))10.09#
            Employment
      Agreement dated as of July 16, 2007 between Sterling Construction Company,
      Inc. and James H. Allen, Jr. (incorporated by reference to Exhibit 10.3 to
      Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
      January 17, 2008 (SEC File No. 1-31993))10.10#
            Option
      Agreement dated August 7, 2007 between Sterling Construction Company, Inc.
      and James H. Allen, Jr. (incorporated by reference to Exhibit 10.4 to
      Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
      January 17, 2008 (SEC File No. 1-31993))10.11#*
            Employment
      Agreement dated as of March 17, 2006 between Sterling Construction
      Company, Inc. and Roger M. Barzun.21
            Subsidiaries
      of Sterling Construction Company, Inc.:
              Name State of
      Incorporation
              Texas
      Sterling Construction
      Co.                                       
      Delaware
              Road
      and Highway Builders,
      LLC                                      Nevada
              Road
      and Highway Builders
      Inc.                                        Nevada
              Road
      and Highway Builders of California,
      Inc.                California23.1*
            Consent
      of Grant Thornton LLP.31.1*
            Certification
      of Patrick T. Manning, Chief Executive Officer of Sterling Construction
      Company, Inc.31.2*
            Certification
      of James H. Allen, Jr., Chief Financial Officer of Sterling Construction
      Company, Inc.32.0*
            Certification
      pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
      Code (18 U.S.C. 1350) of Patrick T. Manning, Chief Executive Officer, and
      James H. Allen, Jr., Chief Financial
Officer.




#  Management
      contract or compensatory plan or arrangement.*  Filed
      herewith.




E1