e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2006


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

For the transition period from to

Commission File Number 1-32375

Comstock Homebuilding Companies, Inc.

(Exact name of registrant as specified in its charter)


Delaware		20-1164345

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


11465 Sunset Hills Road 5^th Floor Reston, Virginia 20190 (703) 883-1700 (Address including zip code, and telephone number, including area code, of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ

As of August 8, 2006, 13,396,534 shares of the Class A common stock, par value $.01 per share, and 2,733,500 shares of Class B common stock, par value $0.01, of the Registrant were outstanding.

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)


	June 30, 2006			December 31, 2005

ASSETS
Cash and cash equivalents	$	22,739		$	42,167
Restricted cash		13,157			10,800
Receivables		2,528			6,365
Note receivable		—			1,250
Due from related parties		3,381			2,899
Real estate held for development and sale		476,534			263,802
Inventory not owned — variable interest entities		50,490			89,890
Property, plant and equipment		1,814			605
Investment in real estate partnerships		(88	)		(35	)
Deferred income tax		—			2,545
Other assets		12,033			11,031

TOTAL ASSETS	$	582,588		$	431,319


LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable and accrued liabilities	$	50,810		$	59,131
Due to related parties		39			40
Obligations related to inventory not owned		48,206			83,015
Notes payable		286,525			142,994
Junior subordinated debt		30,000			—
Notes payable—related parties		663			663
Deferred income tax		8,430			—

TOTAL LIABILITIES		424,673			285,843


Commitments and contingencies (Note 14)

Minority interest		402			400


SHAREHOLDERS’ EQUITY
Class A common stock, $0.01 par value, 77,266,500 shares authorized, 14,120,222 and 11,532,442 issued and outstanding		141			115
Class B common stock, $0.01 par value, 2,733,500 shares authorized, 2,733,500 issued and outstanding		27			27
Additional paid-in capital		146,620			126,461
Treasury Stock, at cost (258,400 Class A Common Stock)		(1,865	)		—
Retained earnings		12,590			18,473

TOTAL SHAREHOLDERS’ EQUITY		157,513			145,076

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	582,588		$	431,319

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

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005

Revenues
Sale of real estate—Homes	$	50,351		$	39,599		$	86,716		$	68,064

Other revenue		346			312			576			576

Total revenue		50,697			39,911			87,292			68,640

Expenses
Cost of sales of real estate		41,295			29,658			68,456			47,249
Cost of sales of other		21			9			30			20
Impairments and write-offs		12,914			0			12,914			0
Selling, general and administrative		8,429			5,608			16,076			10,660


Operating (loss) income		(11,962	)		4,636			(10,184	)		10,711
Other (income) expense, net		(355	)		(154	)		(587	)		(190	)


(Loss) income before minority interest and equity in earnings of real estate partnerships		(11,607	)		4,790			(9,597	)		10,901
Minority interest		12			7			5			8


(Loss) income before equity in earnings of real estate partnerships		(11,619	)		4,783			(9,602	)		10,893

Equity in earnings of real estate partnerships		(26	)		4			(53	)		34


Total pre tax (loss) income		(11,645	)		4,787			(9,655	)		10,927
Income tax (benefit) provision		(4,522	)		1,721			(3,771	)		4,052


Net (loss) income	$	(7,123	)	$	3,066		$	(5,884	)	$	6,875


Basic earnings per share	$	(0.47	)	$	0.26		$	(0.41	)	$	0.59


Basic weighted average shares outstanding		15,034			11,831			14,511			11,727


Diluted earnings per share	$	(0.47	)	$	0.26		$	(0.41	)	$	0.58


Diluted weighted average shares outstanding		15,034			11,993			14,511			11,882

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

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share data)


	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net (loss) income	$	(5,884	)	$	6,875
Adjustment to reconcile net (loss) income to net cash used in operating activities
Amortization and depreciation		259			81
Write-down of land, deposits and pre-acquisition costs		12,914			—
Loss on disposal of assets		—			9
Minority interest		5			8
Equity in losses (earnings) of real estate partnerships		53			(34	)
Amortization of stock compensation		1,546			1,086
Deferred income taxes		(4,769	)		(328	)
Changes in operating assets and liabilities:
Restricted Cash		(2,357	)		(5,836	)
Receivables		5,620			(5,073	)
Due from related parties		(482	)		(203	)
Real estate held for development and sale		(108,416	)		(109,493	)
Other assets		4,457			3,249
Accounts payable and accrued liabilities		(21,581	)		9,120
Income tax payable		—			863
Due to related parties		(1	)		(71	)

Net cash used in operating activities		(118,636	)		(99,747	)

Cash flows from investing activities:
Purchase of property, plant, and equipment		(1,236	)		(121	)
Distributions of capital from investments in real estate partnerships		—			60
Business acquisitions, net of cash acquired		(15,491	)		—

Net cash used in investing activities		(16,727	)		(61	)

Cash flows from financing activities:
Proceeds from notes payable		160,798			116,276
Proceeds from junior subordinated debt		30,000			—
Proceeds from related party notes payable		—			444
Payments on notes payable		(91,635	)		(50,156	)
Payments on related party notes payable		—			(8,125	)
Contribution from minority shareholders		—			79
Distributions paid to minority shareholders		(3	)		(2,409	)
Distributions paid to shareholders		—			(6,309	)
Proceeds from shares issued under employee stock purchase plan		78			36
Purchase of treasury stock		(1,864	)		—
Net proceeds from equity offerings		18,561			52,810

Net cash provided by financing activities		115,935			102,646

Net (decrease) increase in cash and cash equivalents		(19,428	)		2,838
Cash and cash equivalents, beginning of period		42,167			67,559

Cash and cash equivalents, end of period	$	22,739		$	70,397

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

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

Comstock Homebuilding Companies, Inc. (the “Company”) was incorporated on May 24, 2004 as a Delaware corporation.

Our common stock is traded on the NASDAQ National Market under the symbol “CHCI”. We have no public trading history prior to December 17, 2004.

The consolidated financial statements and notes of the Company as of June 30, 2006 and for the three and six months ended June 30, 2006 and 2005 have been prepared by management without audit, pursuant to rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the December 31, 2005 audited financial statements contained in the Company’s Annual Report on Form 10-K for the year then ended. In the opinion of management, all normal, recurring adjustments necessary for the fair presentation of such financial information have been included. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.

The Company historically has experienced and expects to continue to experience variability in quarterly results. The consolidated statement of operations for the three and six months ended June 30, 2006 is not necessarily indicative of the results to be expected for the full year.

We engage in the business of residential land development, production home building, high-rise condominium development, condominium conversion and land sales in the greater Washington, D.C., Raleigh, North Carolina, Charlotte, North Carolina, Myrtle Beach, South Carolina and Atlanta, Georgia markets. Our business was founded in 1985 by Christopher Clemente, our Chairman and Chief Executive Officer, as a residential land developer and home builder focused on land development and semi-custom homebuilding in the northern Virginia suburbs of Washington, D.C. In 1992, we repositioned ourselves as a finished-lot-option production home builder focused on moderately priced homes in areas where we could more readily purchase finished building lots through option contracts. In 1997, we entered the Raleigh, North Carolina market. In the late 1990s we began entitling and developing land once again and in the early 2000s we became active in development and construction of mixed-use and urban in-fill projects in the greater Washington, DC area. In all of our markets we focus on middle-market products for first time, early move-up and first move-down home buyers. In January 2006, we completed the acquisition of Parker Chandler Homes, Inc. and expanded into the Atlanta, Georgia, Charlotte, North Carolina and Myrtle Beach, South Carolina area. In May 2006, we completed the acquisition of Capitol Homes, Inc. which expanded our existing presence in Raleigh, North Carolina.

For purposes of identification and description, we are referred to as the “Predecessor” for the period prior to the IPO in December 2004, the Company for the period subsequent to the IPO, and “we,” “us,” and “our” for both periods.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, “An Interpretation of FASB Statement No. 109,” (“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 reflects the benefit recognition approach, where a tax benefit is recognized when it is “more likely than not” to be sustained based on the technical merits of the position.

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of FIN 48 on its consolidated financial statements.

On June 29, 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-05”). The scope of EITF 04-05 is limited to limited partnerships or similar entities (such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership) that are not variable interest entities under FIN 46 and provides a new framework for addressing when a general partner in a limited partnership, or managing member in the case of a limited liability company, controls the entity. Under EITF 04-05, we may be required to consolidate certain investments, that are not variable interest entities, in which we hold a general partner or managing member interest. EITF 04-05 is effective after June 29, 2005 for new entities formed after such date and for existing entities for which the agreements are subsequently modified and is effective for our fiscal year beginning January 1, 2006 for all other entities. The adoption of EITF 04-05 did not have any impact on our financial statements.

3. REAL ESTATE HELD FOR DEVELOPMENT AND SALE

Real estate held for development and sale includes land, land development costs, interest and other construction costs and is stated at cost or, when circumstances or events indicate that the real estate held for development or sale is impaired, at estimated fair value.

Land, land development and indirect land development costs are accumulated by specific project and allocated to various lots or housing units within that project using specific identification and allocation based upon the relative sales value, unit or area methods. Direct construction costs are assigned to housing units based on specific identification. Construction costs primarily include direct construction costs and capitalized field overhead. Other costs are comprised of prepaid local government fees and capitalized interest and real estate taxes. Selling costs are expensed as incurred.

Estimated fair value is based on comparable sales of real estate in the normal course of business under existing and anticipated market conditions. The evaluation takes into consideration the current status of the property, various restrictions, carrying costs, costs of disposition and any other circumstances, which may affect fair value including management’s plans for the property. Due to the large acreage of certain land holdings, disposition in the normal course of business is expected to extend over a number of years. A write-down to estimated fair value is recorded when the carrying value of the property exceeds its estimated fair value. These evaluations are made on a property-by-property basis. The Company assesses the impairment of real estate assets whenever events or changes in circumstances indicate that the net book value may not be recoverable.

During the second quarter of 2006, the Company experienced continued significant slowdown in demand for homes at several of its projects. This slowdown in demand resulted in lower overall sales volume, reduction in selling prices, increases in concessions being offered to customers and extensions of estimated project completion dates. As a result, the Company evaluated each of its projects to determine if recorded carrying amounts were recoverable. This evaluation resulted in an aggregate impairment charge of $9,500 at seven projects throughout the Company’s markets. The impairment charge was calculated using a discounted cash flow analysis model, which is dependent on several subjective factors, including the selection of an appropriate discount rate, estimated average selling prices and estimated sales and absorption rates. The estimates used by the Company are based on the best available information available at the time the estimates are made. Adverse changes to these estimates in future periods could result in additional material impairment amounts to be recorded.

In addition to the impairment charges, as a result of current market conditions, the Company wrote-off approximately $3.4 million related to deposits on option contacts, value assigned to option contracts and related feasibility costs.

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

Real estate held for development and sale consists of the following:


	June 30,		December 31,
	2006		2005
Land and land development costs	$	250,436	$	119,530
Cost of construction (including capitalized interest and real estate taxes)		226,098		144,272

	$	476,534	$	263,802

4. CONSOLIDATION OF VARIABLE INTEREST ENTITIES

The Company typically acquires land for development at market prices from various entities under fixed price purchase agreements. The purchase agreements require deposits that may be forfeited if the Company fails to perform under the agreements. The deposits required under the purchase agreements are in the form of cash or letters of credit in varying amounts. The Company may, at its option, choose for any reason and at any time not to perform under these purchase agreements by delivering notice of its intent not to acquire the land under contract. The Company’s sole legal obligation and economic loss for failure to perform under these purchase agreements is typically limited to the amount of the deposit pursuant to the liquidated damages provision contained within the purchase agreement. As a result, none of the creditors of any of the entities with which the Company enters into forward fixed price purchase agreements have recourse to the general credit of the Company. The Company also does not share in an allocation of either the profit earned or loss incurred by any of these entities with which the Company enters fixed price purchase agreements.

The Company has concluded that whenever it options land or lots from an entity and pays a significant non-refundable deposit as described above, a variable interest entity is created under the provisions of FIN 46-R, Consolidation of Variable Interest Entities. This is because the Company has been deemed to have provided subordinated financial support, which refers to variable interest that will absorb some or all of an entity’s expected theoretical losses if losses occur. The Company, therefore, examines the entities with which the Company enters into fixed price purchase agreements for possible consolidation by the Company under FIN 46-R. This requires the Company to compute expected losses and expected residual returns based on the probability of future cash flows as outlined in FIN 46-R. This calculation requires substantial management judgments and estimates. In addition, because the Company does not have any contractual or ownership interests in the entities with which it contracts to buy the land, the Company does not have the ability to compel these development entities to provide financial or other data to assist the Company in the performance of the primary beneficiary evaluation.

The Company has evaluated all of its fixed price purchase agreements and has determined that it is the primary beneficiary of some of those entities. As a result, at December 31, 2005, the Company has consolidated five entities in the accompanying consolidated balance sheets. The effect of the consolidation at December 31, 2005 was the inclusion of $89,890 in “Inventory not owned—variable interest entities” with a corresponding inclusion of $83,015 (net of land deposits paid of $6,875) to “Obligations related to inventory not owned.” At June 30, 2006, the Company consolidated seven entities in the accompanying consolidated balance sheet. The effect of the consolidation at June 30, 2006 was the inclusion of $50,490 in “Inventory not owned—variable interest entities” with a corresponding inclusion of $48,206 (net of land deposits paid of $2,284) to “Obligations related to inventory not owned.” Creditors, if any, of these variable interest entities have no recourse against the Company.

5. WARRANTY RESERVE

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

Warranty reserves for houses sold are established to cover potential costs for materials and labor with regard to warranty-type claims expected to arise during the one-year warranty period provided by the Company or within the five-year statutorily mandated structural warranty period. Because the Company subcontracts its homebuilding work, subcontractors are required to provide the Company with an indemnity and a certificate of insurance prior to receiving payments for their work. Claims relating to workmanship and materials are generally the primary responsibility of the subcontractors and product manufacturers. The warranty reserve is established at the time of closing, and is calculated based upon historical warranty cost experience and current business factors. Variables used in the calculation of the reserve, as well as the adequacy of the reserve based on the number of homes still under warranty, are reviewed on a periodic basis. Warranty claims are directly charged to the reserve as they arise. The following table is a summary of warranty reserve activity, which is included in accounts payable and accrued liabilities for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Balance at beginning of period	$	1,310		$	954		$	1,206		$	916
Additions		514			153			814			309
Releases and/or charges incurred		(267	)		(162	)		(463	)		(280	)

Balance at end of period	$	1,557		$	945		$	1,557		$	945

6. CAPITALIZED INTEREST AND REAL ESTATE TAXES

Interest and real estate taxes incurred relating to the development of lots and parcels are capitalized to real estate held for development and sale during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest and real estate taxes capitalized to real estate held for development and sale are expensed as a component of cost of sales as related units are sold.

The following table is a summary of interest incurred and capitalized:


	Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005
Total interest incurred	$	6,844		$	3,254		$	11,612		$	5,767

Beginning interest capitalized		15,562		$	5,987			11,590		$	4,524
Plus: Interest incurred on notes payable		6,824			2,993			11,572			5,096
Plus: Interest incurred on related party notes payable		20			188			40			269

Less: Interest expensed as a component of cost of sales		(1,567	)		(1,159	)		(2,363	)		(1,880	)

Ending interest capitalized	$	20,839		$	8,009		$	20,839		$	8,009

7. EARNINGS PER SHARE

The following weighted average shares and share equivalents, using the treasury stock method, are used to calculate basic and diluted earnings per share for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended June 30,					Six Months Ended June 30,
	2006			2005		2006			2005
Basic earnings per share
Net (loss) income	$	(7,123	)	$	3,066	$	(5,884	)	$	6,875

Basic weighted-average shares outstanding		15,034			11,831		14,511			11,727

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)


	Three Months Ended June 30,					Six Months Ended June 30,
	2006			2005		2006			2005
Per share amounts	$	(0.47	)	$	0.26	$	(0.41	)	$	0.59

Dilutive earnings per share
Net income	$	(7,123	)	$	3,066	$	(5,884	)	$	6,875

Basic weighted-average shares outstanding		15,034			11,831		14,511			11,727
Stock options and restricted stock grants		—			162		—			155

Dilutive weighted-average shares outstanding		15,034			11,993		14,511			11,882

Per share amounts	$	(0.47	)	$	0.26	$	(0.41	)	$	0.58

During the three and six months ended June 30, 2006, 92,279 and 92,209 shares where excluded from the diluted shares outstanding because inclusion would be anti-dilutive.

Comprehensive income

For the three and six months ended June 30, 2006 and 2005, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying combined consolidated financial statements.

8. INVESTMENT IN REAL ESTATE PARTNERSHIPS

Prior to the Company’s acquisition of Comstock Service in December of 2004, Comstock Service in 2001 had invested $41 in North Shore Investors, LLC (“North Shore”) for a 50% ownership interest. North Shore was formed to acquire and develop residential lots and construct single family and townhouse units. In 2002, as a result of recognizing its share of net losses incurred by North Shore, Comstock Service reduced its investment in North Shore, to $0. The Company, as part of the acquisition of Comstock Service, recorded this investment in North Shore at $0.

On June 28, 2005 the Company received a capital call from North Shore in the amount of $719 so that North Shore may comply with certain debt repayments. Because the Company may be obligated to provide future financial support to cover certain debt repayments, the Company, is recording its share of losses incurred by North Shore in the accompanying financial statements in the amount of $(26), for the three months ended June 30, 2006 and 2005, respectively. The Company’s share of losses were $(53) and $(26) for the six months ended June 30, 2006 and 2005, respectively.

During the third quarter of 2005, the Company, as manager of an affiliated entity, exercised its option rights to purchase the project acquisition, development and construction loan made for the benefit of North Shore. The Company finalized the purchase of the loans on or about September 8, 2005 and issued a notice of default under the acquisition and development loan at maturity on September 30, 2005. The Company then filed suit for collection of the loans against one of the individual guarantors under the loan on or about October 21, 2005 and initiated foreclosure proceedings on or about November 18, 2005. On or about December 22, 2005, the individual guarantor subject to the earlier suit filed a countersuit against two of the officers of the Company who were also individual guarantors under the acquisition and development loan. The Company has agreed to indemnify these officers. The Company, as manager of an affiliated entity, set and held a foreclosure sale on March 24, 2006 in which it was the highest bidder. However, transfer of title to the property has been delayed pending judicial resolution of a suit filed on March 24, 2006 by the non-affiliated 50% owner of North Shore. On June 30, 2006, the Company, on its own behalf and on behalf of affiliates, filed an additional lawsuit expanding the number of party defendants, demanding equitable relief and demanding $33,000 in damages. As of June 30, 2006, the Company carried the following amounts in its financial statements related to North Shore:


Investment in real estate partnerships	$	(88	)
Development and construction loan receivable	$	3,235

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

The Company has evaluated the carrying value of its investment in and receivables from North Shore. At this time the Company does not believe an impairment reserve is warranted. However, it is possible this may change in future periods. In addition, based on results of negotiations, the Company may, in the future be required to consolidate the North Shore entity.

9. ACQUISITIONS

On January 19, 2006, the Company acquired all of the issued and outstanding capital stock of Parker Chandler Homes, Inc., a homebuilder in the Atlanta, Georgia metropolitan market, for a cash purchase price of $10,400 (including transaction costs) and the assumption of $63,800 in liabilities. The results of Parker Chandler Homes are included in the accompanying financial statements from the period January 19, 2006 to June 30, 2006. The Company accounted for this transaction in accordance with SFAS No. 141. “Business Combinations” Approximately $700 of the purchase price was allocated to intangibles with a weighted average life of 4.6 years. The intangibles are related to the Parker Chandler trade name, employment and non-compete agreements entered into with certain selling shareholders. The remainder of the purchase price was allocated to real estate held for development and sale and land option agreements. There was no goodwill recorded.

On May 5, 2006, the Company acquired all of the issued and outstanding capital stock of Capitol Homes, Inc., a homebuilder in North Carolina, for a cash purchase price of $7,500 (including transaction costs) and the assumption of $20,600 in liabilities. The results of Capitol Homes are included in the accompanying financial statements from the period May 5, 2006 to June 30, 2006. The Company accounted for this transaction in accordance with SFAS No. 141. “Business Combinations” Approximately $251 of the purchase price was allocated to intangibles with a weighted average life of 2.7 years. The intangibles are related to the Capitol Homes trade name, employment and non-compete agreements entered into with certain selling shareholders. The remainder of the purchase price was allocated to real estate held for development for sale and land option agreements. There was no goodwill recorded in connection with the initial purchase accounting. However, the Company may be obligated to pay an earn-out in the amount of $2,500 if certain profit margins are achieved over the course of a 3 year period. In the event, an earn-out amount becomes payable, it will be recorded as goodwill.

10. DEBT

On May 4, 2006, the Company closed on a privately placed 30-year, $30 million junior subordinated unsecured note offering with a five year fixed rate of 9.72% and a floating rate of Libor + 4.2% thereafter. Interest payments are due quarterly with principal due at the end of the 30 year term. The Company is required to maintain certain covenants which include the maintenance of minimum tangible net worth in the amount of $120,000, a leverage ratio not to exceed 3:1 and a fixed charge ratio not to be less than 2:1.

On May 26, 2006, the Company became a borrower pursuant to the Borrowing Base Revolving Credit Agreement between the Company and Wachovia Bank. Pursuant to the Borrowing Base Revolving Facility, the lender agreed to advance up to a maximum of $40 million at any given time under a senior secured revolving credit facility bearing interest equal to the 30 day LIBOR rate + 2.75%. The loan is secured by certain projects of the Company in North Carolina. As of June 30, 2006, the Company had drawn $11,600 under this facility. The Company is required to maintain certain covenants which include the maintenance of minimum tangible net worth in the amount of $125,000 increasing each year by 25% of income before taxes, EBITDA to debt service ratio equal to or greater than 2.5:1, a senior liabilities to tangible net worth ratio which is less than or equal to 2.5:1 and certain restrictions on the number of speculative homes the Company may have at any given time.

11. INCOME TAX

Income taxes are accounted for under the asset and liability method in accordance with SFAS 109 “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company’s deferred tax assets and liabilities at June 30, 2006 and December 31, 2005 were as follows:


	June 30, 2006			December 31, 2005
Deferred tax assets:
Inventory (1)	$	—		$	2,245
Warranty		583			417
Deferred rent		40			27
Accrued expenses		64			73
Stock based compensation		1,363			790

		2,050			3,552

Less—valuation allowance		(569	)		(840	)

Net deferred tax assets		1,481			2,712

Deferred tax liabilities:
Inventory (1)	$	(9,756	)	$	—
Investment in affiliates		(8	)		(8	)
Depreciation and amortization		(147	)		(159	)

Net deferred tax liabilities		(9,911	)		(167	)
Net deferred tax (liabilities) assets	$	(8,430	)	$	2,545


(1)		The increase in net deferred tax liabilities of $12,000 is related to deferred tax liabilities established as a result of the purchase accounting related to acquisition of Parker Chandler Homes, Inc., and Capitol Homes, Inc. in the amount of $15,000. This amount was offset by a deferred tax asset in the amount of $3,000 related to impairment charges recorded during the three months ended June 30, 2006

12. RESTRICTED STOCK, STOCK OPTIONS, AND OTHER STOCK PLANS

Effective January 1, 2004, the Company adopted the fair value recognition provisions of SFAS No. 123(R). Prior to December 14, 2004 the Company did not sponsor any stock based plans. Accordingly, no stock based compensation was included for the year ended December 2003.

On December 14, 2004 the Company adopted the 2004 Long-Term Compensation Plan (the “Plan”). The Plan provides for the issuance of stock options, stock appreciation rights, or SARs, restricted stock, deferred stock, dividend equivalents, bonus stock and awards in lieu of cash compensation, other stock-based awards and performance awards. Any shares issued under the Plan typically vest over service periods that range from one to five years. Stock options issued under the Plan expire ten years from the date they are granted.

The Plan provided for an initial authorization of 1,550 shares of Class A common stock for issuance thereunder, plus an additional annual authorization effective January 1, 2006 equal to the lesser of (i) 3% of the Class A common Stock outstanding on the date of determination, (ii) 500,000 shares or (iii) such lesser amount as may be determined by the Company’s Board of Directors.

COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)

The following equity awards were outstanding at June 30, 2006:


Stock options			213,993
Restricted stock grants			947,860

Total outstanding equity awards			1,161,853

On June 30, 2006 the following amounts were available for issuance under the plan:


Shares available for issuance at January 1, 2006	1,050,231

Adjustments:
Additional shares added to plan	337,757
Restricted stock grants — Issued	(690,160	)
Shares issued under employee stock purchase plan	(7,512	)
Restricted stock grants — Forfeitures	16,191

Shares available for issuance at June 30, 2006	706,507

At June 30, 2006 the Company had 213,993 options outstanding with a weighted average exercise price of $19.94. There was no stock option activity for the six months ended June 30, 2006 and there were no options which were fully vested as of June 30, 2006.

A summary of the Company’s restricted share activity is presented below:


				Weighted
				average
				fair value
				at date
	Shares			of grant


Restricted shares outstanding at December 31, 2005		273,891		$	16.46
Granted		690,160			11.84
Vested		—			—
Forfeited		(16,191	)		15.43

Restricted shares outstanding at June 30, 2006		947,860		$	13.11

As of June 30, 2006, there was $9,178 of total unrecognized compensation cost related to nonvested restricted stock issuances granted under the Plan. Of this cost, $6,178 is expected to be recognized over a weighted-average period of 3.75 years and $3,000 may vest over a 1.5 year period if certain performance and service conditions are met.

Total compensation expense for share based payment arrangements for the three months ended June 30, 2006 and 2005 was $1,006 and $561 respectively, of which $91 and $129 was capitalized to real estate held for development and sale. Total compensation expense for share based payment arrangements for the six months ended June 30, 2006 and 2005 was $1,542 and $1,097, respectively, of which $162 and $213 was capitalized to real estate held for development and sale.

The total deferred tax benefit related to stock compensation, recorded on the balance sheet as of June 30, 2006 and December 31, 2005 amounted to $1,363 and $790, respectively.

In accordance with SFAS 123(R), the Company is required to establish a deferred tax asset related to stock awards based on the fair value of the award at date of grant. At the time the award is vested, the realized tax benefit as a result of the fair value on date on grant will most likely be different as compared to the amount recorded on the financial statements, which will result excess tax benefits or unrealized tax benefits. SFAS 123(R) requires that excess tax benefits be recognized as an addition to capital surplus and that unrealized tax benefits be recognized as income tax expense unless there are excess tax benefits from previous equity awards to which it can be offset. Because the Company had no issuances of stock awards prior to adoption to SFAS 123(R), the Company does not have any eligible excess tax benefits that are available to offset future tax shortfalls.

The Company has approximately 143,764 stock grants which are expected to vest at December 31, 2006 with an average fair value at date of issuance of $16.08 per share. Based on the closing stock price of $5.67 at July 31,

In April 2002 and January 2004, the Predecessor entered into lease agreements for approximately 7.7 and 8.8 square feet, respectively, for its corporate headquarters at 11465 Sunset Hills Road, Reston, Virginia from Comstock Partners, L.C., an affiliate of our Predecessor in which executive officers of the Company Christopher Clemente, Gregory Benson, and others are principals. Christopher Clemente owns a 45% interest, Gregory Benson owns a 5% interest, an entity which is owned or controlled by Christopher Clemente’s father-in-law, Dwight Schar, owns a 45% interest, and an unrelated third party owns a 5% interest in Comstock Partners. For nine months ended September 30, 2004, total payments made under this lease agreement were $231. On September 30, 2004, the lease agreements were canceled and replaced with new leases for a total of 20.6 square feet with Comstock Asset Management, L.C., an entity wholly owned by Christopher Clemente. Total payments made under this lease agreement were $142 as of December 31, 2004. On August 1, 2005, the lease agreement was amended for an additional 8.4 square feet. For three months ended June 30, 2006 and 2005 total payments made under this lease agreement were $188 and $142, respectively. During six months ended June 30, 2006 and 2005 total payments were $373 and $277, respectively.

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

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated interim financial statements and the notes thereto appearing elsewhere in the this report and our audited consolidated and combined financial statements and the notes thereto for the year ended December 31, 2005, appearing in our Annual Report on Form 10-K for the year then ended (the “2005 Form 10-K”).

This report includes forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” “will,” “should,” “seeks” or other similar expressions. Forward-looking statements are based largely on our expectations and involve inherent risks and uncertainties, many of which are beyond our control. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. Some factors which may affect the accuracy of the forward-looking statements apply generally to the real estate industry, while other factors apply directly to us. Any number of important factors which could cause actual results to differ materially from those in the forward-looking statements include, without limitation: general economic and market conditions, including interest rate levels; our ability to service our substantial debt; inherent risks in investment in real estate; our ability to compete in the Washington, D.C., Raleigh, North Carolina and Atlanta, Georgia real estate and home building markets; regulatory actions; fluctuations in operating results; our anticipated growth strategies; shortages and increased costs of labor or building materials; the availability and cost of land in desirable areas; natural disasters; our ability to raise debt and equity capital and grow our operations on a profitable basis; and our continuing relationships with affiliates. Additional information concerning these and other important risk and uncertainties can be found under the heading “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2005. Our actual results could differ materially from these projected or suggested by the forward-looking statements.

Overview

We engage in the business of residential land development, production home building, high-rise condominium development, condominium conversion and land sales in the greater Washington, D.C., Raleigh, North Carolina, Charlotte, North Carolina, Myrtle Beach, South Carolina and Atlanta, Georgia markets. Our business was founded in 1985 by Christopher Clemente, our Chairman and Chief Executive Officer, as a residential land developer and home builder focused on land development and semi-custom homebuilding in the northern Virginia suburbs of Washington, D.C. In 1992, we repositioned ourselves as a finished-lot-option production home builder focused on moderately priced homes in areas where we could more readily purchase finished building lots through option contracts. In 1997, we entered the Raleigh, North Carolina market. In the late 1990s we began entitling and developing land once again and in the early 2000s we became active in development and construction of mixed-use and urban in-fill projects in the greater Washington, DC area. In all of our markets we focus on middle-market products for first time, early move-up and first move-down home buyers. In January 2006, we completed the acquisition of Parker Chandler Homes, Inc. and expanded into the Atlanta, Georgia area. In May 2006, we completed the acquisition of Capitol Homes, Inc. which expanded our existing presence in Raleigh, North Carolina.

The following tables summarize certain information related to new orders, settlements, and backlog for the three and six month period ended June 30, 2006 and 2005:


	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005

New orders		199		160		379		406

New order revenues	$	55,992	$	59,134	$	115,211	$	162,417

Average new order price	$	281	$	370	$	304	$	400

Settlements		165		123		277		201
Settlement revenue	$	50,351	$	39,599	$	86,716	$	68,064

Average settlement price	$	305	$	322	$	313	$	339

Backlog units		575		666		575		666
Backlog	$	218,393	$	268,579	$	218,393	$	268,579

Average backlog price	$	380	$	403	$	380	$	403

At June 30, 2006, we either owned or controlled under option agreements or non-binding letters of intent over 6,005 building lots including non-consolidating joint ventures in which we are the manager. We currently have communities under development in multiple counties throughout the markets we serve. The following chart summarizes certain information for our current and planned communities as of June 30, 2006:


	As of June 30, 2006
										Lots under
		Estimated						Lots		Option		Average New
		Units at		Units				Owned		Agreement		Order Revenue
Project	State	Completion		Settled		Backlog(2)		Unsold		Unsold		to Date


Status: Active (1)
Allen Creek	GA		26		11		6		9		—	$	211,183
Arcanum	GA		34		3		6		25		—	$	401,254
Brentwood Estates	GA		32		8		5		3		16	$	134,813
Falling Water	GA		23		2		6		15		—	$	422,581
Gates of Luberon	GA		32		1		1		30		—	$	392,000
Glenn Ivey	GA		104		—		8		33		63	$	230,806
Highland Station	GA		105		1		27		77		—	$	287,030
Maristone	GA		40		—		—		40		—	$	—
Senators Ridge	GA		88		8		7		45		28	$	247,662
Traditions	GA		21		—		—		21		—	$	—

Sub-Total / Weighted Average (3):			505		34		66		298		107	$	267,168

Emerald Farm	MD		84		74		—		10		—	$	455,443

Sub-Total/Weighted Average:			84		74		—		10		—	$	455,443

Allyn’s Landing	NC		117		24		10		83		—	$	221,043
Brookefield Station	NC		130		—		—		—		130	$	—
Carpenter Pointe	NC		5		—		—		5		—	$	—
Deerfield	NC		1		—		—		1		—	$	—
Haddon Hall	NC		90		—		—		90		—	$	—
Kelton at Preston	NC		56		33		2		21		—	$	308,003
North Farms	NC		138		11		9		4		114	$	179,145
Pine Hollow	NC		10		—		—		6		4	$	—
Providence-SF	NC		148		—		—		34		114	$	—
Riverbrooke	NC		66		11		6		49		—	$	171,256
Strathaven	NC		6		—		1		4		1	$	376,995
Wakefield Plantation	NC		77		35		6		36		—	$	497,284
Wheatleigh Preserve	NC		28		—		10		18		—	$	289,018

Sub-Total / Weighted Average:			872		114		44		351		363	$	306,618

Carolina Waterway	SC		15		—		—		15		—	$	—

Sub-Total / Weighted Average:			15		—		—		15		—	$	—

Barrington Park	VA		148		—		12		136		—	$	310,200
Beacon Park at Belmont Bay 8&9	VA		600		—		—		112		488	$	—
Blooms Mill Carriage	VA		91		90		—		1		—	$	453,794
Carter Lake	VA		258		—		—		258		—	$	—
Commons at Bellemeade	VA		316		49		4		263		—	$	218,039
Commons on Potomac Sq	VA		192		22		8		162		—	$	255,593
Commons on Williams Sq	VA		180		88		3		89		—	$	352,584
Countryside	VA		102		64		2		36		—	$	287,308
Penderbrook	VA		424		223		5		196		—	$	254,371
River Club at Belmont Bay 5	VA		84		76		1		7		—	$	455,533
The Eclipse on Center Park	VA		465		—		413		52		—	$	409,361
Woodlands at Round Hill	VA		46		23		2		21		—	$	752,399

Sub-Total / Weighted Average:			2,906		635		450		1,333		488	$	364,778


Total Active			4,382		857		560		2,007		958	$	356,139


Status: Development
East Capitol	DC		130		—		—		130		—		n/a

Sub-Total:			130		—		—		130		—

Cedars Road	GA		109		—		—		—		109		n/a
Highland Avenue	GA		30		—		—		30		—		n/a
James Road	GA		49		—		—		49		—		n/a
Kelly Mill Road	GA		28		—		—		—		28		n/a
McGinnis Ferry SF	GA		48		—		—		—		48		n/a
Post Road	GA		59		—		—		59		—		n/a
Post Road II	GA		54		—		—		—		54		n/a
Settingdown Circle	GA		172		—		—		172		—		n/a
Shiloh Road	GA		61		—		—		61		—		n/a
Tribble Lakes	GA		200		—		—		200		—		n/a
Wyngate	GA		28		—		—		—		28		n/a

Sub-Total:			838		—		—		571		267

Boyce Road	NC		33		—		—		—		33		n/a
Cleveland Springs	NC		88		—		—		—		88		n/a
Holland Road	NC		81		—		—		81		—		n/a
Lakeshore Hills	NC		34		—		—		—		34		n/a
Massey Preserve	NC		297		—		—		185		112		n/a
Providence-TH	NC		80		—		—		—		80		n/a
Stowe Road	NC		110		—		—		—		110		n/a

Sub-Total:			723		—		—		266		457

Aldie Singles	VA		15		—		—		—		15		n/a
Blake Crossing	VA		130		—		—		130		—		n/a
Brandy Station	VA		350		—		—		—		350		n/a
Loudoun Station Condominiums	VA		484		—		—		—		484		n/a
Station View	VA		47		—		—		47		—		n/a

Sub-Total:			1,026		—		—		177		849


Total Development			2,717		—		—		1,144		1,573		n/a



Total Active & Development			7,099		857		560		3,151		2,531	$	356,139	(4)


Status: Joint Venture
North Shore Condominiums	NC		196		—		7		189		—	$	286,361
North Shore Townhomes	NC		163		33		7		123		—	$	239,107


Total Joint Venture			359		33		14		312		—


(1)		“Active” communities are open for sales. “Development” communities are in the development process and have not yet opened for sales. “Completed” communities have settled all units during the three months ended June 30, 2006.

(2)		“Backlog” means we have an executed order with a buyer, inclusive of lot sales, but the settlement has not yet taken place.

(3)		“Weighted Average” means the weighted average new order sale price

Results of Operations

Three and six months ended June 30, 2006 compared to three and six months ended June 30, 2005

Orders and Backlog

New orders for the three months ended June 30, 2006 decreased $3.1 million, or 5.2%, to $56.0 million on 199 homes, as compared to $59.1 million on 160 homes for the three months ended June 30, 2005. For the six months ended June 30, 2006, new orders decreased $47.2 million, or 29.1% to $115.2 million on 379 homes, as compared to $162.4 million on 406 homes for the six months ended June 30, 2005. This represents a 6.7% decrease in new home orders during the six months ended June 30, 2006, as compared to the six months ended June 30, 2005. The decrease in new orders is attributable to weaker market conditions in which we are experiencing reduced demand, the offering of increased price reductions and a general shift in product mix from higher priced single family and town homes to lower priced condominiums, single family, and town homes. The reduction also results from the Company’s reduced inventory for sale at its Eclipse at Center Park (Potomac Yard) project during the six months ended June 30, 2006, as compared to the six months ended June 30, 2005. The Company’s average sales price per new order for the three months ended June 30, 2006 decreased by $89,000 to $281,000, as compared to $370,000 for the same period in 2005. The average sales price per new order for the six months ended June 30, 2006 decreased $96,000 to $304,000, as compared to $400,000 for the six months ended June 30, 2005. Although total new order sales prices decreased for the three months ended June 30, 2005, total new order units increased as a result of the Company’s recent acquisition of Parker Chandler Homes, Inc. and Capitol Homes, Inc.. Combined, the two acquisitions contributed 80 units in new orders, or $18.0 million for the three months ended June 30, 2006. For the six months ended June 30, 2006, the acquisitions contributed 148 units in new orders, or $36.5 million.

Our backlog at June 30, 2006 decreased $50.2 million, or 18.7%, to $218.4 million on 575 homes, as compared to our backlog at June 30, 2005 of $268.6 million on 666 homes. The decrease in backlog is primarily due to weaker market conditions and the shift in product mix from higher priced single family and town homes to lower priced condominiums (including condominium conversions), single family, and town homes. Our backlog at June 30, 2006 includes 413 units totaling $169.1 million at our Potomac Yard project.

Revenues

The number of homes delivered for the three months ended June 30, 2006 increased by 34.1% to 165 from 123 homes for the three months ended June 30, 2005. The number of homes delivered for the six months ended June 30, 2006, increased by 37.8% to 277 from 201 homes for the six months ended June 30, 2005.

Average revenue per home delivered decreased by approximately $17,000 to $305,000 for the three months ended June 30, 2006, as compared to $322,000 for the three months ended June 30, 2005. Average revenue per home delivered decreased by approximately $26,000 to $313,000 for the six months ended June 30, 2006, as compared to $339,000 for the six months ended June 30, 2005. The decrease in average revenue per home is due a shift in product mix from higher priced single family and town homes to lower priced condominiums (including condominium conversions), single family, and town homes. The reduction in average revenue per home is also attributable to a reduced geographic concentration within the Washington, DC metropolitan area.

Home building revenues increased by $10.8 million, or 27.3%, to $50.4 million for the three months ended June 30, 2006, as compared to $39.6 million for the three months ended June 30, 2005. Home building revenues increased by $18.6 million, or 27.3%, to $86.7 million for the six months ended June 30, 2006, as compared to $68.1 million for the six months ended June 30, 2005. The increase in deliveries and revenues for the three and six month ended June 30, 2006 is primarily attributable to increased settlements at Commons on the Potomac Square (Cascades) and Commons on Williams Square (Summerland) condominium projects, which had no settlements last year. These projects had deliveries of 43 and 54 units for the three and six months ended June 30, 2006, totaling $12.9 and $16.8 million respectively. Permitting issues the Company experienced during the six months ended June 30, 2005 also contributed to the higher revenues and deliveries during the six months ended June 30, 2006. Our recent acquisitions of Parker Chandler Homes, Inc. and Capitol Homes, Inc. attributed 35 and 56 combined deliveries for the three and six months ended June 30, 2006, with total revenues of $6.7 and $11.4 million, respectively.

Other Revenue

Other revenue for the three months ended June 30, 2006 decreased by $34,000 from the comparable period in 2005. For the six months ended June 30, 2006 and 2005 other revenue was $576,000. Other revenue for the three and six months ended June 30, 2006 and 2005 includes revenue associated with the Company’s Settlement Title Services division, revenue from a mortgage marketing alliance and management fees received from Comstock Asset Management Inc. (as discussed in Note 15 to the accompanying notes to the financial statements).

Cost of sales

Cost of sales for the three months ended June 30, 2006 increased $11.6 million, or 39.1%, to $41.3 million, or 81.9% of homebuilding revenue, as compared to $29.7 million, or 75.0% of revenue, for the three months ended June 30, 2005. For the six months ended June 30, 2006 cost of sales increased $21.3 million, or 45.1% to $68.5 million, or 79.0% of revenue, as compared to $47.2 million or 69.3% of revenue for the six months ended June 30, 2005. The 7.2 and 9.6 percentage point increases in cost of sales as a percentage of revenue for the three and six months ended June 30, 2006, respectively, is the result of several factors including pricing concessions and increases in materials and labor costs. Due to weakening market conditions, we have also extended the sales cycle of many of our projects, which in turn has increased the cost per unit by increasing the amount real estate tax, interest and capitalized overhead. In addition, during the three and six months ended June 30, 2006, we have experienced increases in cost of sales, as a percentage of revenue, as a result of purchase price allocations to the carrying value of acquired real estate from our recent acquisition of Parker Chandler Homes, Inc. and Capitol Homes, Inc. Due to the factors stated above, the Company expects cost of sales as a percentage of revenue to continue to face additional upward pressure until general market conditions improve and new inventory is acquired.

Impairments and write-offs

As discussed in Note 2 in the accompanying notes to the financial statements, the Company, for the three months ended June 30, 2006, recorded an impairment charge of $9.5 million. The impairment charge include single family, town-homes, condominiums and condominium conversion projects located in the Company’s Virginia, North Carolina and Atlanta markets. Based on current market conditions, the Company has estimated there are no other impairments warranted at this time. However, if market conditions continue to deteriorate, the Company will be required to re-evaluate the recoverability of its real estate held for development and sale and may incur additional impairment charges. The projects that would be most likely impaired if market conditions were to further deteriorate would be our condominium conversion projects. Although, it is difficult to estimate the exact amount of impairment, a 5% to 10% drop in average selling prices could lead to a future impairment charge of approximately $10 to $20 million.

In addition to the impairment charges, as a result of current market conditions, the Company wrote-off $3.4 million related to deposits on option contacts, value assigned to option contracts and related feasibility costs.

At June 30, 2006, the Company had approximately $5.5 million related to option deposits to purchase real estate of which $5.1 is not refundable. In addition the Company has approximately $2.6 million related to feasibility costs incurred on projects under option agreements or under feasibility study periods. The Company is in the process of re-negotiating certain remaining options contracts for price concessions and deferral of scheduled lot purchases. The Company could incur additional write-downs in the event the Company is not successful in renegotiating terms of existing option contracts.

Selling, general and administrative

Selling, general and administrative costs for the three months ended June 30, 2006 increased $2.8 million or 50.0% to $8.4 million, as compared to $5.6 million for the three months ended June 30, 2005. Selling, general and administrative expenses represented 16.6% of total revenue for the three months ended June 30, 2006, as compared to 14.0% for the three months ended June 30, 2005. This increase was the result of additional staffing and related costs of $552,000, media and other marketing related costs of $931,000, and the write-off of certain due diligence costs of $172,000 related to abandoned corporate transactions. In addition, our acquisition of both Parker Chandler

Homes and Capitol Homes increased our selling, general and administrative expenses by $991,000 and $254,000, respectively.

Selling, general and administrative costs for the six months ended June 30, 2006 increased $5.4 million or 50.5% to $16.1 million, as compared to $10.7 million, for the six months ended June 30, 2005. Selling, general and administrative expenses represented 18.4% of total revenue for the six months ended June 30, 2006, as compared to 15.6% for the six months ended June 30, 2005. This increase for the six months ended June 30, 2006 was the result of additional staffing and related costs of $1.0 million, media and other marketing related costs of $1.5 million, and the write-off of certain due diligence costs of $1.1 million related to abandoned corporate transactions. In addition, our acquisition of both Parker Chandler Homes and Capitol Homes increased our selling, general and administrative expenses by $1.6 million and $254,000, respectively.

Operating (loss) income

Operating income for the three months ended June 30, 2006 decreased by $16.6 million to a operating loss of ($12.0) million, as compared to $4.6 million for the three months ended June 30, 2005. Operating margin for the three months ended June 30, 2006, was (23.7%), as compared to 11.5% for the three months ended June 30, 2005. Operating income for the six months ended June 30, 2006 decreased by $20.9 million to an operating loss of ($10.2) million, as compared to $10.7 million for the six months ended June 30, 2005. Operating margin for the six months ended June 30, 2006, was (11.7%), as compared to 15.6% for the six months ended June 30, 2005. The 35.2 and 27.3 percentage point decrease in operating margin for the three and six months ended June 30, 2006 are attributable to lower gross profit margins, impairments and write-offs and the increases in selling, general and administrative expenses as discussed above.

Other (income) expense, net

Other (income) expense, net increased by $201,000 to net income of $355,000 for the three months ended June 30, 2006, as compared to $154,000 for the three months ended June 30, 2005. Other (income) expense, net increased by $397,000 to net income of $587,000 for the six months ended June 30, 2006, as compared to $190,000 for the six months ended June 30, 2005. The increase in other (income) expense is primarily attributable to reduced corporate interest expense as a result of the payoff of a note payable to certain founding shareholders resulting from the Company’s restructuring concurrent with its initial public offering in December of 2004 and increased interest earned on the Company’s cash balances generated as a result of the proceeds from the Company’s recent stock and debt offerings.

Income taxes

For the three and six months ended June 30, 2006, the Company, due to net losses, recorded an income benefit of ($7.1) and ($5.8) million as compared to income tax expense of $3.1 and $6.8 million for the three months ended June 30, 2005.

As discussed in Note 12 in the accompanying notes to the financial statements, the company expects its effective tax rate to increase during the fourth quarter of 2006 as a result of non-realization of certain deferred tax assets related to employee stock compensation. The amount of the charge will be dependent on the Company’s closing stock price on December 31, 2006, the date certain stock awards will vest

Liquidity and Capital Resources

We require capital to post deposits on new deals, to purchase and develop land, to construct homes, to fund related carrying costs and overhead and to fund various advertising and marketing programs to facilitate sales. These expenditures include engineering, entitlement, architecture, site preparation, roads, water and sewer lines, impact fees and earthwork, as well as the construction costs of the homes and amenities. Our sources of capital include, and we anticipate will continue to include, funds derived from various secured and unsecured borrowings, operations which include the sale of constructed homes and finished lots, and the sale of equity securities. Our currently owned and controlled inventory of home sites will require substantial capital to develop and construct.

In production home building, it is common for builders such as us to employ revolving credit facilities whereby the maximum funding available under the facility exceeds the maximum outstanding balance allowed at any given time. Our overall borrowing capacity may be constrained by loan covenants which limit the ratio of our total liabilities to our total equity. This revolving debt will typically provide for funding of an amount up to a pre-determined percentage of the cost of each asset funded. The balance of the funding for that asset is provided for by us as equity. The efficiency of revolving debt in production home building allows us to operate with less overall debt capital than would be required if we built each project with long-term amortizing debt. At June 30, 2006, we had approximately $316.5 million of debt financing and $22.7 million of unrestricted cash. We believe that internally generated cash,

borrowings available under our credit facilities and access to public debt and equity markets will provide us with sufficient capital to meet our existing and expected capital needs.

Credit Facilities

At June 30, 2006, we had approximately $188.6 million available under existing secured revolving development and construction loans for planned construction and development expenditures. A majority of our debt is variable rate, based on LIBOR or the prime rate plus a specified number of basis points, typically ranging from 190 to 375 basis points over the LIBOR rate and 50 basis points over the prime rate. As a result, we are exposed to market risk in the area of interest rate changes. At June 30, 2006, the one-month LIBOR and prime rates of interest were 5.33% and 8.25%, respectively, and the interest rates in effect under our existing secured revolving development and construction credit facilities ranged from 7.23% to 9.25%. For information regarding risks associated with our level of debt and changes in interest rates, see Item 3 “Quantitative and Qualitative Disclosures about Market Risk.”

We have generally financed our development and construction activities on a project basis so that, for each project we develop and build, we have a separate credit facility. Accordingly, we have numerous credit facilities. The Company is subject to certain financial covenants which require the Company to: (1) maintain a minimum tangible net worth, adjusted for certain items, in the amount of $65.0 million for fiscal year 2005, increasing by 50% of consolidated after tax net earnings for each year thereafter and (2) maintain an adjusted debt to adjusted tangible net worth (“leverage ratio”) below 2.25:1. In addition to the financial covenants mentioned above the Company had covenant limiting the amount of unsecured borrowings to $25.0 million in connection with a $15 million unsecured line of credit. However, the Company’s unsecured borrowings totaled $45.0 million as of June 30, 2006 through the combination of the $15 million unsecured line of credit and the $30 million junior subordinated notes. The Company received a covenant waiver from the lender of the $15 million facility. The Company was fully funded on the $15 million unsecured line of credit at June 30, 2006 with a maturity date of August 22, 2006.

On May 26, 2006, the Company entered into $40 million Secured Revolving Borrowing Base Credit Facility for the financing of entitled land, land under development, construction and letters of credit. All letters of credit issued will also be secured by collateral in the facility. Funding availability will be limited to compliance with a borrowing base and facility covenants. As of June 30, 2006, $11.6 million was outstanding with this facility and the Company was in compliance with the financial covenants set forth in the loan agreement.

On May 4, 2006, the Company closed on a $30 million Junior Subordinated Note Offering. The term of the note is thirty years and can be retired after five years with no penalty. The rate is fixed at 9.72% the first five years and Libor plus 420 basis points for the remaining twenty five years. As of June 30, 2006 we were in compliance with the financial covenants.

From time to time, we employ subordinated and unsecured credit facilities to supplement our capital resources or a particular project or group of projects. Our lenders under these credit facilities will typically charge interest rates that are substantially higher than those charged by the lenders under our senior and secured credit facilities. These credit facilities will vary with respect to terms and costs. As of June 30, 2006, the annual rate of interest on these facilities ranged from 7.2% to 16%. At June 30, 2006, we had approximately $75.1 million outstanding under these subordinate and unsecured facilities. We intend to continue to use these types of facilities on a selected basis to supplement our capital resources.

We are considering replacing our credit facilities with one or more larger facilities, which may reduce our aggregate debt financing costs. We would be the borrower and primary obligor under this larger facility or facilities, and we anticipate the indebtedness would be secured, nonrecourse and based on an available borrowing base.

Cash Flow

Net cash used in operating activities was $118.6 million for the six months ended June 30, 2006, as compared to $99.7 million for the six months ended June 30, 2005. The $18.9 million increase is primarily the result of payments made related to accounts payable and accrued liabilities. The majority of the Company’s uses for cash are related to real estate held for development and sale. During the six months ended June 30, 2006, the Company purchased approximately $32.4 million of new real estate. The Company expects to make significant investment in

real estate over the foreseeable future.

Net cash used in investing activities was $16.7 million for the six months ended June 30, 2006, as compared to $61,000. The increase is due the Company’s acquisition of Parker Chandler Homes, Inc. and Capitol Homes, Inc.

Net cash provided by financing activities was $115.9 million for the six months ended June 30, 2006 as compared to $102.6 million for the six months ended June 30, 2005. Net cash provided by financing for the six months ended June 30, 2006 included cash proceeds of $18.6 million related to a private placement, $30.0 million related to proceeds from the issuance of junior subordinated debt and $11.6 million related to a newly established credit facility with Wachovia bank. Net proceeds were offset by payments made on borrowings assumed in connection with our acquisition of Parker Chandler Homes, Inc. and Capitol Homes, Inc.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, “An Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 reflects the benefit recognition approach, where a tax benefit is recognized when it is “more likely than not” to be sustained based on the technical merits of the position. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of FIN No. 48 on its consolidated financial statements.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2006 compared with those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2005.

Outlook

Our outlook is tempered with caution as conditions the markets we serve have become more challenging in recent months. A number of our markets have been affected by a build-up of new and resale home inventories. Higher interest rates and higher cancellation rates have adversely affected consumer demand for our homes, particularly in markets that have experienced rapid price appreciation or substantial investor activity, or both, in the past few years. As a result, our sales have been adversely affected during the three and six months ended June 30, 2006 as compared to the three and six months ended June 30, 2005. While we expect the current negative trends in the U.S. housing market to continue for the remainder of 2006 and, possibly, into 2007, we anticipate individual markets will normalize at different rates and over different periods of time. In the long run, we believe the underlying fundamentals of strong demographics and job growth continue to support favorable domestic housing demand.

Due to these fundamentals, expectations of an overall healthy U.S. economy and the recently expanded geographical diversity of our homebuilding operations, we remain optimistic about the long-term prospects for our business. In keeping with our current business model of focusing on our core region of the Southeastern United States, we expect that during the remainder of 2006 we will become more selective in the acquisition and retention of land. We also will remain focused on financial management, operational and purchasing efficiencies, cash flow generation and optimizing returns.

As previously announced, our board of directors authorized the repurchase of 1 million shares of common stock. During the first half of 2006, we repurchased 258,400 shares pursuant to this. We expect to continue to repurchase shares from time to time based on our assessment of market conditions and buying opportunities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows, due to adverse changes in financial and commodity market prices and interest rates. We are exposed to market risk in the area of interest rate changes. A majority of our debt is variable rate based on LIBOR and prime rate, and, therefore, affected by changes in market interest rates. Based on current operations, as of June 30, 2006, an increase/decrease in interest rates of 100 basis points on our variable rate debt would have resulted in a corresponding increase/decrease in interest actually incurred by us of approximately $2.6 million in a fiscal year, a significant portion of which would be capitalized and included in cost of sales as homes are delivered. As a result, the effect on net income would be deferred until the underlying units settled and the interest was released to cost of goods sold. Changes in the prices of commodities that are a significant component of home construction costs, particularly lumber and concrete, may result in unexpected short-term increases in construction costs. Because the sales price of our homes is fixed at the time a buyer enters into a contract to acquire a home and we generally contract to sell our homes before construction begins, any increase in costs in excess of those anticipated at the time of each sale may result in lower consolidated operating income for the homes in our backlog. We attempt to mitigate the market risks of the price fluctuation of commodities by entering into fixed price contracts with our subcontractors and material suppliers for a specified period of time, generally commensurate with the building cycle. These contracts afford us the option to purchase materials at fixed prices but do not obligate us to any specified level of purchasing.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our Chairman and Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other employees. Based on their evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are effective and sufficient to ensure that we record, process, summarize, and report information required to be disclosed by us in our periodic reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. During the quarterly period covered by this report, there have not been any changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We do not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company, as manager of an affiliated entity, exercised its option rights to purchase the project acquisition, development and construction loans made for the benefit of North Shore. The Company subsequently issued a notice of default under the acquisition and development loan at maturity on September 30, 2005 and thereafter, filed suit for collection of the loans against one of the individual guarantors under the loan on or about October 21, 2005. The Company, as manager of an affiliated entity, set and held a foreclosure sale on March 24, 2006 in which it was the high bidder. However, transfer of title to the property has been delayed pending judicial resolution of a suit filed on March 24, 2006 by the non-affiliated 50% owner of North Shore. On June 30, 2006, the Company, on its own behalf and on behalf of affiliates, filed an additional lawsuit expanding the number of party defendants, demanding equitable relief and demanding $33 million in damages.

On August 11, 2005, the Company was served with a motion to compel arbitration resulting from an allegation of a loan brokerage fee being owed for placement of a $147.0 million project loan for the Potomac Yard project. The claim in the base amount of $2.0 million plus interest and costs is based on breach of contract and equitable remedies of unjust enrichment and quantum meruit. The claims have been denied by the Company.

Other than the foregoing, we are not currently subject to any material legal proceedings. From time to time, however, we are named as a defendant in legal actions arising from our normal business activities. Although we cannot accurately predict the amount of our liability, if any, that could arise with respect to legal actions currently pending against us, we do not expect that any such liability will have a material adverse effect on our financial position, operating results or cash flows. We believe that we have obtained adequate insurance coverage or rights to indemnification, or where appropriate, have established reserves in connection with these legal proceedings. In the normal course of its business, the Company and/or its subsidiaries are names as defendants in certain legal actions arising from its normal business activities. Management believes that none of these litigation matters in which the Company or any subsidiary is involved would have a material adverse effect on the consolidated financial condition or operations of the Company.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors as previously disclosed in our Form 10-K for the year ended December 31, 2005 in response to Item 1A. to Part I of such Form 10-K, except as follows:

Home prices and sales activities in the Washington, D.C., Raleigh, North Carolina and Atlanta, Georgia geographic markets have a large impact on our profitability because we conduct substantially all of our business in these markets. Recently these markets have begun to exhibit signs of decreasing consumer demand, and as a result we are experiencing reduced traffic, weakening demand, higher cancellation rates and an over-supply of inventory, similar to what other homebuilders are experiencing. As a result of these economic conditions, we have offered, and may continue to offer, certain sales incentives. These economic conditions being experienced throughout the industry will likely continue to impact housing demand for the remainder of 2006 and into 2007. As a result of these conditions, we currently believe there may be a reduction in the number of new contracts compared to 2005 in most of our markets, and that gross margins on new contracts may be negatively impacted in all of our regions. This could adversely affect our results of operations and cash flows.

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

On May 12, 2006, we completed a private placement to certain accredited investors of an aggregate of 2,121,048 shares of our Class A common stock, at a purchase price of $9.43 per share, and warrants to purchase 636,316 shares of Class A common stock with an exercise price of $11.32 per share. We received net proceeds of approximately $18.6 million, which the Company will use for general corporate purposes, including working capital, and to fund new projects and acquisitions of assets and/or companies.

In connection with the private placement we were required to file with the Securities and Exchange Commission, within fifteen days from the closing date, a registration statement covering the resale of the Class A common shares issued and issuable in the offering. The Company was also required to cause the registration statement to go effective within a predetermined amount of time as defined in the Registration Rights Agreement and to exert its “best efforts” to maintain the effectiveness of the registration. The Company is subject to liquidated damages of two percent (2%) per month of the aggregate investment made by the investor with a 10% cap, as to the total liquidated damages, if the Company fails to cause the registration statement to become effective. Upon the registration statement being declared effective, the Company could be subject to the foregoing liquidated damages if it fails to maintain the effectiveness of the registration statement.

JPMorgan Securities, Inc. was the sole placement agent for this private placement and was paid an aggregate fee for acting as placement agents of cash equal to 6% of the proceeds from the sale of the common stock.

We believe that the issuance of the foregoing securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving a public offering. Each of the recipients was an accredited investor, acquired the securities for investment purposes only and not with a view to distribution and had adequate information about us. The registration statement we filed covering the resale of the securities was declared effective by the Securities and Exchange Commission on July 7, 2006.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

The 2006 Annual Meeting of Stockholders of the Company was held on June 1, 2006, at which the following matters set forth in the Company’s Proxy Statement dated April 14, 2006, which was filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, were voted upon with the results indicated below. All numbers reported are shares of the Company’s common stock.

1. The nominees listed below were elected directors with the respective votes set forth opposite their names:


Nominee	For		Authority Withheld
Mr. Gregory V. Benson		9,778,018		1,883,118
Mr. Norman D. Chirite		11,507,491		153,645
Mr. Socrates Verses		11,507,091		153,045

Messrs. Benson, Chirite and Verses has been elected for a three-year term expiring in 2009. Christopher Clemente and A. Clayton Perfall are in the class of directors whose terms will expire in 2007 and David M. Guernsey, James A. MacCutcheon and Robert P. Pincus are in the class of directors whose terms will expire in 2008.

2. The appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of our Company for the fiscal year ending December 31, 2006 was ratified with 11,601,820 votes for the proposal, 54,127 votes against and 5,125 votes abstaining.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS


Exhibit Number		Exhibit

3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004)

3.2		Amended and Restated Bylaws (incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004)

4.1		Specimen Stock Certificate (incorporated by reference to an exhibit to the Registrant’s Amendment No. 6 to the Registration Statement on Form S-1 filed with the Commission on December 9, 2004 (No. 333-118193)

10.1		Note Purchase Agreement with Kodiak Warehouse LLC, dated as of May 4, 2006

10.2		Junior Subordinated Indenture with Wells Fargo Bank, N.A., dated as of May 4, 2006

10.3		Credit Agreement with Wachovia Bank, N.A., dated as of May 26, 2006

10.4		Stock Purchase Agreement with Capitol Homes, Inc. and the Selling Shareholders identified therein, dated as of May 1, 2006

31.1		Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended

32.1		Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


Year Ended:	Amount
2006	$	608
2007		1,231
2008		1,120
2009		903
2010		164
Thereafter		5


	COMSTOCK HOMEBUILDING COMPANIES, INC.
Date: August 9, 2006	By:	/s/ Christopher Clemente
		Christopher Clemente
		Chairman and Chief Executive Officer


	By:	/s/ Bruce J. Labovitz
		Bruce J. Labovitz
		Chief Financial Officer


		Page
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS:

Consolidated Balance Sheets (unaudited) - June 30, 2006 and December 31, 2005

Consolidated Statements of Operations (unaudited) - Three and Six Months Ended June 30, 2006 and 2005

Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2006 and 2005

Notes to Consolidated Financial Statements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

SIGNATURES