**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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Form 10-K

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31,2004**

**CommissionFile Number 1-32375**

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**ComstockHomebuilding 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   Suite 510 Reston, Virginia 20190   (703) 883-1700**                      |
|-----------------------------------------------------------------------------------------------------------|
| (Address including  zip code, and telephone number, including area code, of principal executive  offices) |

 

**Securitiesregistered pursuant to Section 12(b) of the Act:  None**

**Securitiesregistered pursuant to Section 12(g) of the Act:**

| **Class A common stock, par  value $.01 per share** |
|----------------------------------------------------------|
| (Title of Class)                                         |

 

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 ofthe Act). Yes o  No x

The aggregate market value of theClass A common stock held by nonaffiliates of the registrant (4,887,634 shares)based on the last reported sale price of the registrant’s Class A commonstock on the Nasdaq National Market on December 31, 2004, which was thelast business day of the registrant’s most recently completed fourth fiscalquarter, was $107,381,318. For purposes of this computation, all officers,directors, and 10% beneficial owners of the registrant are deemed to beaffiliates. Such determination should not be deemed to be an admission thatsuch officers, directors, or 10% beneficial owners are, in fact, affiliates ofthe registrant. The registrant’s Class A common stock was not registeredpursuant to Section 12(g) of the Securities Exchange Act as of thelast business day of the registrant’s most recently completed second fiscalquarter.

As of March 24, 2005, therewere outstanding 8,887,166 shares of the registrant’s Class A commonstock, par value $.01 per share, and 2,733,500 shares of the registrant’s Class Bcommon stock, par value $.01 per share.

**DocumentsIncorporated by Reference**

Portions of the registrant’s definitive Proxy Statementfor the 2005 Annual Meeting of Stockholders are incorporated by reference into Part IIIof this Form 10-K.

 

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**COMSTOCK HOMEBUILDING COMPANIES, INC.**

**ANNUAL REPORT ON FORM 10-KFor the Fiscal Year Ended December 31, 2004**

**TABLE OF CONTENTS**
|                                             | ** ** | ** **                                                                                                              | ** ** | **Page** |
|---------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**                             |
| ITEM 1.                                     |       | BUSINESS                                                                                                                |       | 2        |
| ITEM 2.                                     |       | PROPERTIES                                                                                                              |       | 31       |
| ITEM 3.                                     |       | LEGAL PROCEEDINGS                                                                                                       |       | 31       |
| ITEM  4.                                    |       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                    |       | 31       |
| **PART II**                            |
| ITEM  5.                                    |       | MARKET  FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES |       | 32       |
| ITEM 6.                                     |       | SELECTED  FINANCIAL DATA                                                                                                |       | 33       |
| ITEM  7.                                    |       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                             |       | 34       |
| ITEM  7A.                                   |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                             |       | 50       |
| ITEM  8.                                    |       | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                            |       | 50       |
| ITEM  9.                                    |       | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                   |       | 50       |
| ITEM 9A.                                    |       | CONTROLS AND  PROCEDURES                                                                                                |       | 51       |
| ITEM 9B.                                    |       | OTHER INFORMATION                                                                                                       |       | 51       |
| **PART III**                           |
| ITEM  10.                                   |       | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                     |       | 51       |
| ITEM 11.                                    |       | EXECUTIVE COMPENSATION                                                                                                  |       | 52       |
| ITEM  12.                                   |       | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                        |       | 52       |
| ITEM  13.                                   |       | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                                         |       | 52       |
| ITEM  14.                                   |       | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                 |       | 52       |
| **PART IV**                            |
| ITEM  15.                                   |       | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                                                                             |       | 52       |
| SIGNATURES                                  |       | 55                                                                                                                      |
| INDEX TO CONSOLIDATED  FINANCIAL STATEMENTS |       | F-1                                                                                                                     |

 

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**PART I**

**Item 1.**                        Business

**Overview**

We are a production home builder that develops, buildsand markets single-family homes, townhouses and condominiums. We focus ongeographic areas, products and price points where we believe there issignificant demand for our homes and the greatest profit potential. Wecurrently operate in the Washington, D.C. and Raleigh, North Carolina marketswhere we target a diverse range of buyers, including first-time, early move-up,secondary move-up, empty nester move-down and active adult home buyers. Webelieve that this demographic represents a significant and stable segment ofthe home buying market.

Over the past several years we have successfullyexpanded our business model to include the development of land for our homebuilding operations as a complement to the purchasing of finished building lotsdeveloped by others. Our markets have generally been characterized by strongpopulation and economic growth trends that have led to strong demand forhousing. We believe that these markets provide attractive long-term growthopportunities.

We were incorporated inDelaware in May 2004. Our business was started in 1985 by ChristopherClemente, our Chief Executive Officer, as a residential land developer and homebuilder focused on the upscale home market in the northern Virginia suburbs ofWashington, D.C. Prior to our initial public offering in December 2004, weoperated our business through four primary holding companies. In connectionwith our initial public offering, these primary holding companies wereconsolidated and ultimately merged into Comstock Homebuilding Companies, Inc.Our principal executive offices are located at 11465 Sunset Hills Road, Suite 510,Reston, Virginia 20190, and our telephone number is (703) 883-1700.Our Web site is *www.comstockhomebuilding.com*.References to “Comstock,” “we,” “our” and “us” refer to Comstock HomebuildingCompanies, Inc. together in each case with our subsidiaries and anypredecessor entities unless the context suggests otherwise.

**Our Markets**

We operate in theWashington, D.C. and the Raleigh, North Carolina markets. We believe that inthe home building industry, local economic trends and influences have a moresignificant impact on supply and demand than national economic trends andinfluences. According to the National Association of Home Builders, theWashington, D.C. and Raleigh, North Carolina metropolitan areas are both rankedin the top 25 housing markets in the country with respect to total residentialbuilding permits issued in 2003.

***Greater Washington, D.C. Metropolitan Market***

Our current andanticipated projects for the Washington, D.C. market are in Arlington,Culpeper, Fairfax, Fauquier, Loudoun, Prince William and Stafford counties inVirginia, and Anne Arundel, Frederick, Howard, Montgomery, Prince Georgescounties in Maryland and in the District of Columbia. The Washington, D.C. newhome buying market is characterized by strong demand and a limited supply ofavailable housing inventory. Demand in the Washington, D.C. area is strongbecause of a low unemployment rate and relatively high household incomes, amongother factors. The supply of new homes in the market has been constrained inpart by slow-growth and environmental preservation initiatives that arestrictly enforced in many counties in the metropolitan area.

***Raleigh, North Carolina Market***

Our current and anticipated projects for the Raleigh,North Carolina market are in Durham, Franklin, Johnston and Wake counties,which includes the city of Raleigh. From 1990 to 2000, the Raleigh, North 

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Carolina market was the12th fastest growing metropolitan area in the United States and was the secondfastest growing area in the Southeast in terms of population growth, accordingto the U.S. Census Bureau.

Similar to the Washington,D.C. market, the local economy in the Raleigh, North Carolina market isgenerally stable and less sensitive to national economic trends because oflarge public sector employment. Raleigh is the state capital of North Carolina.The area is home to Research Triangle Park, a public/private, planned researchpark containing over nine million square feet of office space, and theheadquarters of multiple technology and research companies. Duke University,the University of North Carolina-Chapel Hill and North Carolina StateUniversity are also located in the Raleigh, North Carolina market. Additionallocal employers include numerous pharmaceutical and manufacturing companies andhospitals.

**Our Competitive Strengths**

We believe we possess the following competitivestrengths:

*Committed and experiencedmanagement.  *We have been building homes since 1985under the leadership of our current Chief Executive Officer. Our currentPresident joined us in 1991. Most of our senior executives have been with usfor at least five years. Many of our senior executives and managers have over15 years of experience in the home building industry with some having over30 years of experience.

*Attractive land position.  *AtDecember 31, 2004, we owned or controlled over 3,750 lots in our marketsincluding our backlog. In our business we define lots as individually saleablehousing units. We believe that restrictions on the development of new lots inour markets have increased, and will continue to increase, the market value ofour land position. Our land planning, processing and development expertiseallows us to acquire land positions in various stages of the entitlementprocess, which we believe provides us greater opportunities than many of ourcompetitors. We intend to continue to utilize our land acquisition anddevelopment process to further develop an attractive land inventory.

*Creative approach to landacquisition and development.  *We have developed aspecialized, selective approach to land acquisition and development, focused onmaximizing the value of each parcel. We have extensive knowledge regarding allaspects of the site selection, land planning, entitlement and developmentprocesses relative to all types of new home developments, from suburban single-familyhomes, townhouses and low-rise condominiums to high-rise, mixed-use urbancondominium developments. We have significant experience in dealing with thegovernmental and regulatory authorities that govern the site development andentitlement processes. We leverage this knowledge and experience to managedevelopment risk and create more value from the land that we acquire. Ourknowledge and experience also allow us to be active in the development of urbanmixed-use projects, which puts us in the position of acquiring and developingparcels of land that many of our competitors are not able to pursue.

*Diversified product mix.  *Ourproducts range from traditional single-family homes, townhouses andlow-rise condominiums designed for suburban settings, to contemporarytownhouses and high-rise condominiums designed for urban settings, and highlyamenitized buildings targeting the active adult home buyer. This product mixallows us to diversify our risks in fluctuating market conditions by ensuringthat we are positioned to attract a broad segment of the home buyingpopulation. We design all of our products to be attractively priced and valueoriented.

*Broad customer base.  *Byoffering a wide variety of affordably-priced products in distinctly differenttypes of locations we serve a broad customer base including first-time, earlymove-up, secondary move-up, empty nester move-down and active adult homebuyers. First-time and early move-up home buyers make up a significantpercentage of home buyers. The ownership of a home is a high priority for alarge percentage of the population in the United States. We believe the growthin immigration of almost one 

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million immigrants per yearin the 1990s has increased the number of potential home buyers in America andhas helped fuel growth in the first-time and early move-up home buyer market.In addition, we believe the large “baby boom” population in the United Statesis aging and is increasing demand for secondary move-up, empty nester move-downand active adult new homes. Active adult refers to age-restricted developmentsthat require at least one of the primary owners of the homes in the developmentto be at least 55 years old. As the baby boom generation ages, we believethat housing developments focused on this segment of the population will garnera larger share of the market.

*Quality control and customerservice.  *We strive to provide a high level of customerservice during the sales and construction process as well as after a Comstockhome is sold. Our sales representatives, on-site construction supervisors andpost-closing customer service personnel work as a team in an attempt to ensurea high level of customer satisfaction. Our sales staff receives extensivetraining in understanding the needs of the customer and assisting them in theselection of a Comstock home and mortgage program that meets their requirements.As part of our commitment to quality assurance, each Comstock home is subjectto a series of 25 stringent construction quality inspections covering virtuallyevery aspect of the construction process. Our customer service personnel aretrained to promptly and thoroughly address any concerns that our customers mayhave and also provide our home buyers with home maintenance training andadvice. We believe this high level of attention to quality assurance in theconstruction process and focus on our customers’ post-closing experience hasearned Comstock a reputation for delivering high-quality products andexcellent customer service. We believe this ultimately leads to enhancedcustomer satisfaction and additional sales through referrals.

*Brand recognition.  *Webelieve the “Comstock” brand is strong and widely recognized in the Washington,D.C. and Raleigh, North Carolina markets. We license the “Comstock” trademarkfrom Christopher Clemente, our Chief Executive Officer and Chairman of ourboard of directors. We plan to maintain and enhance this brand and continue tolive up to our reputation for building homes marked by quality and value.

*Extensiveselection of options and upgrades.  *Our home buyers canchoose from hundreds of options and upgrades to customize their homes to meettheir individual preferences. These options and upgrades include exteriorfinishes, bonus rooms, additional bathrooms and upgraded bath finishes,upgraded appliances, cabinets and countertop surfaces in the kitchen,decorative trims, various flooring finishes, fireplaces, lighting packages andtechnology options such as high speed data cabling, in-home stereo systems,in-home theatres and built-in flat screen televisions. We believe that bymaking many upgraded features available as options at an additional cost we areable to keep our products affordable to a greater number of potential homebuyers. The availability of these options allows us to meet individual homebuyer preferences while enhancing profitability through the sale of optionalfeatures.

**Our Growth Strategy**

Our business strategy is to focus on geographic areas,products and price points where we believe there is the greatest marketpotential. Our strategy has the following key elements:

*Build in and expand with the stronggrowth markets in which we currently operate.  *Webelieve there are significant opportunities for growth in our existing markets.We plan to maintain and expand our business in the Washington, D.C. andRaleigh, North Carolina markets to capitalize on their robust economies andcontinued population growth. We expect the growth in these two markets tocontinue. We plan to utilize our strong regional presence and our extensiveexperience in the these markets to expand our operations in both marketsthrough acquisition of additional land, and we may acquire local home builderswhose operations would complement ours and enhance our competitive position inthe marketplace.

*Acquire and develop a high-marginand high-return land inventory.  *We believe that ourmarket knowledge and experience in land entitlement and development enable usto successfully identify attractive 

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land acquisitionopportunities, efficiently manage the process of obtaining development rightsand maximize land value. We have the expertise to acquire land positions invarious stages of the entitlement and development process, which we believeprovides us more opportunities to build land inventory than many of ourcompetitors. We intend to continue to utilize our land acquisition anddevelopment process to further develop an attractive land inventory. As acomplement to our development strategy, we will continue to grow our landinventory through acquisition of finished lots from other developers. Webelieve our network of relationships and broad recognition in our core marketsgives us an advantage over some of our competitors in acquiring finished lots.In addition, since we can often acquire options on large numbers of finishedlots with minimal deposits, this strategy allows us to cost-effectively controlsignificant land positions with reduced risk. As such, we intend to continue tooption land positions whenever possible.

*Create opportunities in areasoverlooked by our competitors.  *We believe there is asignificant market opportunity for well-designed, upscale homes andcondominiums in urban and suburban areas in close proximity to transportationfacilities. Local governments in our markets, especially the Washington, D.C.market, have modified zoning codes in response to mounting traffic concerns toallow for high-density residential development near transportationimprovements. In our experience, buyers place a premium on new homes indevelopments within these areas. We believe that our townhouse and condominiumproducts, along with our substantial experience in dealing with both the marketand regulatory requirements of urban mixed-use developments, enable us toidentify and create value in land parcels often overlooked by larger productionhome builders. As a result, we believe we can achieve higher overall margins onour products than larger production home builders who are only focused onvolume. We plan to continue to focus on developing and creating theseopportunities within our core markets.

*Focus on a broad segment of the homebuying market.  *Our single-family homes,townhouses and condominiums are designed and priced to appeal to a wide segmentof the home buying market. We serve a broad customer base including first-time,early move-up, secondary move-up, empty nester move-down and active adult homebuyers. We believe first-time and early move-up home buyers are a significantportion of home buyers and have in the past, we believe, been more resistant tomarket downturns. We believe that the aging of the American population makes itmore likely that a significant percentage of the population will continue to beattracted to secondary move-up, empty nester move-down and active adultproducts as well. We expect our diversified product offerings to position us tobenefit from the projected population growth in our core markets and the agingpopulation in America, and to provide a degree of protection against marketfluctuations.

*Expand into selected new geographicmarkets within our region.  *We intend to expand intoselected new geographic markets in the eastern United States through both start-upoperations and acquisitions of other home builders that have strategic landpositions, strong local management teams and sound operating principles. Inevaluating expansion opportunities, we prefer new markets that are easilyreached from our headquarters in northern Virginia in order to enhance ourability to integrate the acquired operation into our core operation. We expectto target new markets that have favorable demographic and economic trends wherewe believe we will be able to achieve sufficient scale to successfullyimplement our business strategy. While we are currently evaluating variouspotential expansion opportunities, we have not identified any specificgeographic markets into which we intend to expand our operations or enteredinto serious negotiations to establish a market presence in any othergeographic area.

*Expand into the growing active adultmarket.  *Many localities are adopting zoning rules thatencourage construction of mixed-use and active adult developments. We expectthe large and aging baby boom population in the United States to fuel growth inthe active adult market of the home building industry. As the baby boomgeneration ages, we anticipate that housing developments focused on thispopulation will capture a larger share of the market. We believe this growingsegment of the population will also likely be attracted to the urbanconvenience and activities available in upscale urban active adultdevelopments. Active adult developments are often favored by local governmentsbecause they increase the tax base while 

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requiring fewer government-fundedservices and infrastructure, such as schools and summer programs, as comparedto traditional developments that attract families. We believe that we are wellpositioned to take advantage of this growing demand.

*Maximizeour economies of scale.  *As a production home builder,we construct a large number of homes each year. In many instances, we utilizeplans we have built numerous times which allows us to minimize cost throughvalue engineering resulting from previous field experience. We are also able tocoordinate labor and material purchasing under bulk contracts thereby reducingunit costs. As a result, we are able to realize economies of scale in thepurchase of raw materials, supplies, manufactured inputs and labor. As weexpand, we will seek to maximize these benefits through purchasing arrangementswith national and regional vendors.

**Our Operations**

We integrate the processof building a home by carefully controlling each phase of the process from landacquisition to the construction, marketing and sale of a home. During everystage of the process we manage risk and focus on products, geographic areas andprice points that maximize our revenue and profit opportunities.

***Land Identification and Acquisition***

We believe that by controlling and managing asignificant portion of our land inventory we are better able to manage ourgrowth in accordance with our business plan.

We acquire land for our home building operations bothas finished building lots and as raw land that we develop. We primarily acquireland that has vested development rights. Often we contract to purchase landfrom land developers that will maintain ownership of the land through theentitlement process. Similarly we often will contract to purchase finishedbuilding lots from land developers that will maintain ownership of the landthrough the land development process. When we purchase land in this manner wetypically will provide our home building expertise to the seller in order toensure the land is developed in a manner consistent with our plans for theproject. By contracting to purchase land that is owned by the land developerduring the entitlement and development process we minimize the risks associatedwith seeking entitlements and performing land development.

We also buy land that we develop into building lotsourselves. We generally buy undeveloped land when we are developinghigh-density projects because the product design is often integrated into thesite development operations. We also buy land that we develop into traditionalbuilding lots when we believe the additional risk associated with developingthe land is manageable and the return on investment will likely be enhanced. Weroutinely purchase these sites after the development rights have been secured,which eliminates or substantially reduces risks associated with seeking entitlements.

We have recently begun to engage in the business ofconverting existing rental apartment properties to for-sale condominiumprojects. This process involves the purchase of existing structures which maybe new and never occupied or may be occupied by tenants with leases of varyingduration. When we purchase these properties we subdivide the units and form acondominium association. In these projects we will usually invest capital inthe improvement of the common areas and exteriors. If the properties areoccupied, as the tenants’ leases expire we will renovate the interiors of theapartments and then sell each apartment as an individual condominium unit.These conversion projects typically produce lower profit margins than ourstandard real estate development projects. However, since they takesignificantly less time to complete than our real estate development projects,they tend to generate higher returns on invested capital. We expect to continueto acquire condominium conversion and similar projects to the extent qualityopportunities present themselves.

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Our landacquisition and development process is managed by our executive land committeethat includes representatives from our various business departments. Thiscommittee meets regularly to evaluate prospective land acquisitions andevaluates several factors that could affect the outcome of a project underconsideration. These factors include:

·       supplyand absorption rates of similar new home projects;

·       supplyand absorption rates of existing homes in the area;

·       projectedequity requirements;

·       projectedreturn on invested capital;

·       statusof land development entitlements;

·       projectednet margins of homes to be sold by us;

·       projectedabsorption rates;

·       demographics,school districts, transportation facilities and other locational factors; and

·       competitivemarket positioning.

We focus on opportunities that we believe have thepotential to generate revenue on home sales as well as appreciation in landvalue through the application of our expertise. Many of the sites we select maybe overlooked by large, national competitors due to the complexity of zoningand entitlement issues or other development characteristics of the site. Ouracquisition due diligence process involves a high level of scrutiny whichincludes a variety of analyses, including land title examination, applicablezoning evaluations, environmental analysis, soil analysis, utility availabilitystudies, and marketing studies that review population and employment trends,school districts, access to regional transportation facilities, prospectivehome buyer profiles, sales forecasts, projected construction costs, labor andmaterial availability, assessment of political risks and other factors.

***Land Entitlementand Development***

We manage developmentopportunities and risks through our entitlement process.

We have extensiveknowledge and experience in all aspects of the site selection, land planning,entitlement and land development processes. Specifically, we have significantexperience in dealing with the governmental and regulatory authorities thatgovern the site selection, development and zoning processes. Entitlement is theprocess by which a local government determines the density it will permit to bedeveloped on a particular property. Entitlements and development permits areoften obtained through negotiations with local governmental authorities. Thisprocess often involves consultation with various parties, including the localhomeowner associations, federal governmental agencies and environmentalprotection groups. Infrastructure improvements, such as sewers, roads,utilities and transportation improvements are often required to be built inconnection with the development of a parcel of land.

Our experience andknowledge allow us to effectively negotiate with all concerned parties in anattempt to ensure the costs of the improvements associated with obtainingentitlements are commensurate with the development potential of the subjectproperty. We can quickly assess the likely approvals on a particular propertyin the early stages of our due diligence process. As a result, we can controlthe details of development, from the design of each community entryway to theplacement of streets, utilities and amenities, in order to efficiently design adevelopment that we expect will improve our ability to maximize the potentialreturn on our investment in the property. We seek to manage development risk byacquiring options to purchase properties after the approval of the necessaryentitlements, while assuming control of their entitlement process, therebydeferring acquisition of the property until all necessary entitlements areobtained.

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At times, we may sell lotsand parcels within our developments to other home builders. This enables us tocreate a more well-rounded community. As of December 31, 2004, wecontrolled over 3,750 building lots in our market. Of that inventory we ownedapproximately 50% of the building lots and controlled the balance of thebuilding lots through option or deferred settlement contracts. Accordingly, weare able to reduce the risk associated with ownership of the land in ourinventory. We expect to expand our inventory of building lots throughadditional acquisitions of finished building lots and development sites.

***Sales andProduction***

We have a wide variety ofproduct lines and custom options for our products that enable us to meet thespecific needs of each of our markets and each of our home buyers. We believethat our diversified product strategy enables us to best serve a wide range ofhome buyers and adapt quickly to changing market conditions. We continuallyreevaluate and improve upon our existing product designs and develop newproduct offerings to keep up with changing consumer demands and emerging markettrends.

Our single-familyhomes range in size from approximately 2,000 square feet to over 6,000 squarefeet and are priced from the $300,000s to the $700,000s. Our townhouses rangein size from approximately 1,200 square feet to over 4,500 square feet and arepriced from the $100,000s to the $600,000s. Unlike many of our traditional homebuilding competitors, we also design, sell and build mid-rise and high-risecondominiums. We believe that our condominium products are particularlywell-suited to the high-density, infill and active adult home buyer market. Ourcondominiums range in size from approximately 400 square feet to over 2,400square feet and are priced from the $200,000s to the $700,000s.

We typically act as thegeneral contractor in the construction of our single-family homes,townhouses and mid-rise condominium buildings. On projects where we offer theseproduct lines our employees provide land development management, constructionmanagement, material purchasing and quality control supervision on the homes webuild. Substantially all construction work on these types of projects is doneby subcontractors that contract directly with us and with whom we typicallyhave an established relationship. On our high-rise and mixed-use developmentswhere we typically build concrete structures, we engage a general contractorfor the site preparation and construction management, and typically we have afixed price or a gross maximum price contract with the selected bonded generalcontractor. In these instances the subcontractors that perform the constructionwork are typically contracted directly with the general contractor that weselect. On projects where we offer these product lines our employees provideland development oversight management, construction quality supervision andconstruction management services. In all instances we follow generally acceptedmanagement procedures and construction techniques which are consistent withlocal market practices. We believe that we comply with local and state buildingcodes on all of our developments.

We seek to obtainfavorable purchasing arrangements with our vendors and subcontractors using ourleverage as a production home builder. We typically enter into forwardcontracts with our vendors for the construction materials used in building ourhomes. This process allows us to manage the pricing risk associated withfluctuating prices for the materials, such as lumber. We do not have long-termcontracts with our subcontractors but in general we have contracts that fix theprice of work being provided on homes that have been sold.

We primarily build oursingle-family homes after contracts are signed and mortgage approval hasbeen obtained by the home buyer. We generally begin construction of ourtownhouses and condominiums after we have obtained customer commitments for asignificant percentage of the units in the building. Depending on the marketconditions and the specific community, we may also build speculative homes.Most of these homes are sold while under construction or are used as modelhomes during the marketing phase of the project. We closely monitor ourinventory of speculative units applying a measured approach to unit productionin keeping with sales absorption. On occasion we will sell a completed modelhome to a 

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thirdparty investor purchaser who is willing to lease back the home to us for useduring the marketing phase of a project.

To facilitate the sale ofour products, we normally build, decorate, furnish and landscape model homesfor each product line and maintain onsite sales offices. In most cases, weemploy in-house commissioned sales personnel to sell our homes. On occasion wewill contract for marketing services with a third party brokerage firm. Allpersonnel engaged in the sale of Comstock homes receive extensive training inthe sales process. We strive to provide a high level of customer service duringthe sales process. Through relationships that we have created with ourpreferred mortgage lenders and utilization of a proprietary custom marketingprogram, we are able to help our customers prepare for home ownership andobtain a mortgage tailored to their specific needs.

OurNextHomeTM programs are designed to assist our customers in many aspects ofpurchasing a Comstock home, as follows:

·       DownRightTM—aprogram designed to help identify ways to meet the down payment requirements ofa new home purchase;

·       TailorMadeTM—a program with unique financing products and agreements with majorlenders that tailor a monthly payment in order to make home ownershipaffordable in any interest rate climate;

·       GetIt SoldTM—a program designed to help our customers sell their current homequickly and efficiently in order to facilitate their purchase of a new Comstockhome;

·       All@HomeTM—aprogram enabling our customers to design technology solutions for their newComstock home to meet their individual specifications;

·       BuiltRightTM—a quality assurance program incorporating quality assurance inspectionswith high-quality materials; and

·       HomeStyleTM—an optional upgrade program providing hundreds of options to choose fromto customize a new Comstock home to suit the specific desires of our customers.

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**Our Communities**

We currently havecommunities under development in Arlington, Fairfax, Loudoun and Prince Williamcounties in Virginia. In Maryland we are currently active in Frederick County.In North Carolina we have active communities in Wake County. The followingchart summarizes certain information for our current and planned communities atDecember 31, 2004:
| ** **                                           | ** ** | **As of December 31, 2004** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Lots under** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **                                      | ** ** | **Estimated** | ** ** | ** ** | ** ** | ** ** | ** ** | **Lots** | ** ** | **Option** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **                                      | ** ** | ** Units at** | ** ** | **Units** | ** ** | ** ** | ** ** | **Owned** | ** ** | **Agreement** | ** ** | **Average** | ** ** |
| **Project**                                          | ** ** | ** **                                      | ** ** | **Status(1)** | ** ** | **Completion** | ** ** | **Settled** | ** ** | **Backlog(2)** | ** ** | **Unsold** | ** ** | **Unsold** | ** ** | **Sales Price** | ** ** |
| **Virginia**                                         |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Blooms Mill  TH 20                              |       | Active                                          |       |   | 91 |   |   |   | 89 |   |   |   | — |   |   |   | 2 |   |   |   | — |   |   |   | $ | 271,000 |   |   |
| Blooms Mill  TH 22                              |       | Active                                          |       |   | 113 |   |   |   | 24 |   |   |   | 12 |   |   |   | 77 |   |   |   | — |   |   |   | $ | 385,000 |   |   |
| Blooms Mill  Carriage                                |       | Active                                          |       |   | 91 |   |   |   | 23 |   |   |   | 21 |   |   |   | 47 |   |   |   | — |   |   |   | $ | 414,000 |   |   |
| Blooms Mill  Singles                                 |       | Active                                          |       |   | 35 |   |   |   | 30 |   |   |   | 4 |   |   |   | 1 |   |   |   | — |   |   |   | $ | 488,000 |   |   |
| Commons on Potomac  Sq                               |       | Active                                          |       |   | 192 |   |   |   | — |   |   |   | — |   |   |   | 192 |   |   |   | — |   |   |   | n/a |   |   |
| Commons on  Williams Sq                              |       | Active                                          |       |   | 180 |   |   |   | — |   |   |   | 15 |   |   |   | 165 |   |   |   | — |   |   |   | $ | 322,000 |   |   |
| The Eclipse on  Center Park                          |       | Active                                          |       |   | 465 |   |   |   | — |   |   |   | 281 |   |   |   | 184 |   |   |   | — |   |   |   | $ | 373,000 |   |   |
| River Club at  Belmont Bay 5                    |       | Active                                          |       |   | 84 |   |   |   | 11 |   |   |   | 46 |   |   |   | 27 |   |   |   | — |   |   |   | $ | 439,000 |   |   |
| Woodlands at Round  Hill                             |       | Active                                          |       |   | 65 |   |   |   | — |   |   |   | 5 |   |   |   | 60 |   |   |   | — |   |   |   | $ | 673,000 |   |   |
| Wescott Ridge                                        |       | Active                                          |       |   | 133 |   |   |   | 106 |   |   |   | 27 |   |   |   | — |   |   |   | — |   |   |   | $ | 332,000 |   |   |
| Wescott  Ridge—ADUs(3)                          |       | Active                                          |       |   | 37 |   |   |   | 25 |   |   |   | 9 |   |   |   | 3 |   |   |   | — |   |   |   | $ | 77,000 |   |   |
| Total Virginia Active                                |       |                                            |       |   | 1,486 |   |   |   | 308 |   |   |   | 420 |   |   |   | 758 |   |   |   | — |   |   |   | $ | 377,400 |   |   |
| Total Virginia Active Weighted  Average(4)           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 324,328 |   |   |
| Aldie Singles                                        |       | Development                                     |       |   | 15 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 15 |   |   |   | n/a |   |   |
| Barrington Park                                      |       | Development                                     |       |   | 134 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 134 |   |   |   | n/a |   |   |
| Blakes Crossing                                      |       | Development                                     |       |   | 130 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 130 |   |   |   | n/a |   |   |
| Brandy Station                                       |       | Development                                     |       |   | 350 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 350 |   |   |   | n/a |   |   |
| Countryside                                          |       | Development                                     |       |   | 102 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 102 |   |   |   | n/a |   |   |
| Loudoun Station Condominiums                         |       | Development                                     |       |   | 218 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 218 |   |   |   | n/a |   |   |
| Penderbrook                                          |       | Development                                     |       |   | 424 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 424 |   |   |   | n/a |   |   |
| River Club at  Belmont Bay 8&9              |       | Development                                     |       |   | 600 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 600 |   |   |   | n/a |   |   |
| Total Virginia Development                           |       |                                            |       |   | 1,973 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,973 |   |   |   |   |   |   |
| Total Virginia                                       |       |                                            |       |   | 3,459 |   |   |   | 308 |   |   |   | 420 |   |   |   | 758 |   |   |   | 1,973 |   |   |   |   |   |   |
| **Maryland**                                         |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Emerald Farm                                         |       | Active                                          |       |   | 84 |   |   |   | 40 |   |   |   | 18 |   |   |   | 26 |   |   |   | — |   |   |   | $ | 409,000 |   |   |
| **North Carolina**                              |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allyn’s Landing                                 |       | Active                                          |       |   | 117 |   |   |   | 11 |   |   |   | 2 |   |   |   | 104 |   |   |   | — |   |   |   | $ | 229,000 |   |   |
| Beckett Crossing                                     |       | Active                                          |       |   | 115 |   |   |   | 98 |   |   |   | 5 |   |   |   | 12 |   |   |   | — |   |   |   | $ | 308,000 |   |   |
| Delta  Ridge II Townhouses                      |       | Active                                          |       |   | 41 |   |   |   | 37 |   |   |   | — |   |   |   | 4 |   |   |   | — |   |   |   | $ | 175,000 |   |   |
| Kelton at Preston                                    |       | Active                                          |       |   | 56 |   |   |   | 21 |   |   |   | 2 |   |   |   | 33 |   |   |   | — |   |   |   | $ | 304,000 |   |   |
| North Shore  Condominiums                            |       | Active                                          |       |   | 196 |   |   |   | — |   |   |   | 5 |   |   |   | 191 |   |   |   | — |   |   |   | $ | 282,000 |   |   |
| North Shore  Townhouses                              |       | Active                                          |       |   | 163 |   |   |   | 20 |   |   |   | 1 |   |   |   | 142 |   |   |   | — |   |   |   | $ | 225,000 |   |   |
| Wakefield  Plantation                                |       | Active                                          |       |   | 77 |   |   |   | 27 |   |   |   | — |   |   |   | 50 |   |   |   | — |   |   |   | $ | 463,000 |   |   |
| Total North Carolina Active                          |       |                                            |       |   | 765 |   |   |   | 214 |   |   |   | 15 |   |   |   | 536 |   |   |   | — |   |   |   | $ | 283,714 |   |   |
| Total North Carolina Active Weighted Average(4) |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 279,752 |   |   |
| TOTAL ACTIVE                                         |       |                                            |       |   | 2,335 |   |   |   | 562 |   |   |   | 453 |   |   |   | 1,320 |   |   |   | — |   |   |   |   |   |   |
| TOTAL DEVELOPMENT                                    |       |                                            |       |   | 1,973 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,973 |   |   |   |   |   |   |
| TOTAL                                                |       |                                            |       |   | 4,308 |   |   |   | 562 |   |   |   | 453 |   |   |   | 1,320 |   |   |   | 1,973 |   |   |   |   |   |   |
|                                                      |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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Key—for purposes of this chart:

(1)    "Active” communities are open for sales. “Development”communities are in the development process and have not yet opened for sales.

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

(3)    "ADUs” are affordable dwelling units.

(4)    Weighted average is calculated as total estimated homesat completion for projects with average sales prices multiplied by averagesales price divided by total of estimated homes at completion(i.e.: S (estimated homes at completion  ́ averagesales price)  ̧ S estimated homes atcompletion).

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***Virginia***

*BloomsMill*is a 377-unit development in Manassas, Virginia. Thisdevelopment offers a mix of single-family homes, attached carriage homes andtownhouses. The development offers amenities that include a community club,swimming pool and “family friendly” street plan all in a traditional villagesetting. In May of 2003 we contracted to sell 47 developed lots in thisdevelopment to another home builder. At December 31, 2004,  we had settled all 47 of these lots. Thisproject is expected to continue to settle townhouses and carriage homes throughthe first half of 2006.

*Commonson Potomac Square* is planned to be a 192-unit mid-risecondominium complex in Loudoun County, Virginia. The complex will consist of upto four buildings. The project is positioned for first-time homeowners and isintended to offer significant appeal to renters in the market seeking to moveup to home ownership. Sales opened in the first quarter of 2005 with the firstsettlements expected in 2005 and the balance of the settlements expected during2006 and early 2007.

*Commonson William Square* is a 180-unit two-over-two townhousecondominium development in Prince William County, Virginia. The project wasoriginally designed to accommodate a mid-size apartment complex. Based on ourunderstanding of zoning and our creative approach to land use, our landdevelopment group redesigned the project to maximize available density using aunique, stacked townhouse product. Sales opened in the fourth quarter of 2004with settlements expected to begin in the second half of 2005 and continue in2006.

*TheEclipse on Center Park* is a 465-unit high-rise condominiumcomplex in Arlington County, Virginia. Located at Potomac Yard, just minutesfrom downtown Washington, D.C., the Pentagon and Reagan National Airport, theEclipse is designed as an upscale, urban-style mixed-use complex withresidential condominiums being built above an 80,000 square foot retail complexthat will host a grocery store and other convenience oriented retailers. Upperfloors will have views of the Potomac River and the monuments in Washington,D.C. Sales opened in June 2004 with settlements projected to begin in thesecond half of 2006 and continue in the first quarter of 2007.

*RiverClub at Belmont Bay 5* is a three-building, 84-unitcondominium development located at the convergence of the Potomac and OccoquanRivers at Belmont Bay in Woodbridge, Virginia. The project has an 18-hole golfcourse, full-service marina and a Virginia Rail Express commuter train stationon site. The project consists of three 28-unit upscale mid-rise concretecondominium buildings with open rooftop decks overlooking the water and thegolf course. At December 31, 2004, we had delivered 11 of these units. Weexpect to deliver the balance of the units during 2005.

*Woodlandsat Round Hill* is located in western Loudoun County, Virginia,the fastest growing county in the United States. This large lot single-familyhome development has 65 lots of three or more acres each. We are acting as thedeveloper of the site, and we are currently building road and utilityinfrastructure for the home sites. This project opened for sales in 2004. Weexpect settlements to begin in 2005 and continue into 2007.

*WescottRidge Condominiums* is a 170-unit mid-rise condominiumdevelopment in Fairfax, Virginia. The complex consists of 10 buildings and isconveniently located near major transportation routes and suburban employmentand shopping centers. Amenities at Wescott Ridge include elevators, privateindoor garages and a community swimming pool. The project includes 37 units ofaffordable dwelling units which were pre-sold to Fairfax County. These unitswill be sold by Fairfax County at a discount to market value to individualswith incomes in an established range. This project is currently sold out withsettlements expected to be completed in 2005.

*AldieSingles*is a 15-unit in development in Aldie, Virginia. Thecommunity is planned to have 15 single family homes on 3 acre and above homesites. At December 31, 2004 the project was under contract. The project isexpected to be ready to open for sales in late 2006 with settlements expectedto begin in 2007.

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*BarringtonPark* is a 134-unit mid-rise, walk-up, garden stylecondominium development in Manassas Park, Virginia. At December 31, 2004the project was under contract with a non-refundable deposit posted. Weacquired the land in March 2005. We are currently in the process offinalizing the site plan and we expect to open for sales in the second half of2005 with settlements beginning in 2006.

*BlakesCrossing* is planned to be a 130-unit mixed-use parcel inCulpeper, Virginia which will be a combination of townhouses and retail sites.At December 31, 2004 the project was under contract. We acquired the landin March 2005. We are currently in the process of determining the optimalsite plan configuration for this site. We expect to receive site plan approvalfor this project in the second half of 2006 and open for sales soon thereafter.We expect to sell the retail portion of this parcel when site plan approval isreceived. Settlements are expected to begin in 2007.

*BrandyStation* is a 350-unit single-family home development inCulpeper, Virginia. The project is currently under contract while we manage itthrough the entitlement process. We will close on the property when approvalshave been received. We expect to open for sales in 2006.

*Countryside* is a102-unit apartment complex in Sterling, Virginia that we intend to convert tocondominiums. At December 31, 2004 we have the project undercontract. We acquired the property in March 2005. We expect to invest insignificant improvements to the common areas and exteriors of the buildingsprior to selling the units. Sales are expected to commence during secondquarter of 2005 witha significant portion of the settlements to occur in 2005.

*LoudounStation Condominiums* is a being planned as an up to 218 unitmid-rise condominium complex located in Ashburn, Virginia. The project is partof a high-density, transit-oriented, mixed-use development which is modeledafter the successful Reston Town Center in Reston, Virginia. When completed,Loudoun Station will be at the terminus of the planned Metro extension pastWashington Dulles International Airport and will have an approximately 1,500for-sale and rental residential units. Loudoun Station will also have over onemillion square feet of retail and commercial space. Sales of our condominiumsare expected to begin in late 2005 or early 2006. We have a right of firstrefusal on the balance of the residential units in the development.

*Penderbrook* is arental apartment complex which we are converting to a 424-unit condominium projectin the Fair Oaks area of Fairfax County, Virginia. At December 31, 2004 wehad the project under contract. We acquired the property in February 2005.We expect to make a significant investment in renovations at this projectincluding common areas, building exteriors and units heating systems. Sales areexpected to open in early 2005 with settlements to begin in the third quarterof 2005 and continue into the first quarter of 2006.

*RiverClub at Belmont Bay 8 & 9* is planned as a 600-unitactive adult condominium community located at the convergence of the Potomacand Occoquan Rivers at Belmont Bay in Woodbridge, Virginia. This development isdesigned as a combination of nine- and five-story buildings with open rooftopdecks overlooking the water and golf course. The project will be deed-restrictedsuch that one of the buyers for each unit must be 55 years of age or older andwill include active adult lifestyle amenities, such as a health and wellnesscenter, a business center, guest accommodations and swimming pools. Sales areexpected to begin in 2006 with settlements expected in late 2006 or early 2007.

***Maryland***

*EmeraldFarm* is an 84-unit development of single-family homes inFrederick, Maryland. The development is conveniently located near majortransportation routes. Frederick, Maryland recently abated a water moratoriumthat had shut down development in the area. Since the abatement, the demand fornew housing in Frederick is extremely strong. The project has been open forsales since 2000 and is expected to deliver homes through 2006.

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***North Carolina***

*Allyn’s Landing*isa 117-unit townhouse development located in the heart of Raleigh, NorthCarolina near Research Triangle Park and the Raleigh-Durham InternationalAirport. The project overlooks an eight-acre lake and includes amenities suchas a fountain, gazebo, walking trails and canoe rack. The project is currentlyopen for sales and is delivering homes.

*Beckett Crossing*isa 115-unit development located in Apex, North Carolina consisting of single-familyhomes situated on large wooded lots. The project is open for sales and isdelivering homes with settlements expected through 2005.

*Delta Ridge II*isa 41-unit townhouse development located in Raleigh, North Carolina. Thedevelopment is close to Research Triangle Park and the trails of Umstead StatePark. The project is nearly sold out and is expected to complete deliveries in2005.

*Kelton at Preston*isa 56-unit upscale townhouse development in the prestigious Kelton golf coursecommunity of Cary, North Carolina. This community has three 18-hole courses, aswimming complex and a clubhouse with fitness, tennis and dining facilities.Many of our home sites have golf course views. This project is currently openfor sales and is delivering homes.

*North Shore*is aunique community located on the Centennial Campus of North Carolina StateUniversity. It consists of 196 townhouses and 163 mid-rise condominium units.The mid-rise condominium residences are five-story elevator buildings withstructured garage parking. The townhouse residences feature four finishedlevels, private garages, a rear deck and a rooftop terrace. Designed as anurban-style neighborhood with rear alleys, North Shore, which is minutesfrom downtown Raleigh and Research Triangle Park, is situated on the shore ofLake Raleigh. This project is currently open for sales and is delivering homes.

*WakefieldPlantation*is a 57-unit development in Raleigh, NorthCarolina consisting of 53 carriage homes and 4 single family lots. Our uniquecarriage homes at Wakefield are attached homes with as much as 5,300 squarefeet of finished living space in three-and four-unit configurationswith two-car garages and interior court yards. Many of the homes arelakefront and with golf course views. Home buyers at Wakefield qualify for socialmembership in the Wakefield Country Club, which offers amenities such as finedining, swimming pools, tennis and golf. This project is currently open forsales and is delivering homes.

**Warranty**

We provide our single-familyand townhouse home buyers with a one-year limited warranty covering workmanshipand materials. The limited warranty is transferable to subsequent buyers notunder direct contract with us and requires that home buyers agree to thedefinitions and procedures set forth in the warranty. Our condominium homebuyers typically have a statutory two-year warranty on their purchases. Inaddition, we provide a five-year structural warranty pursuant tostatutory requirements. From time to time, we assess the appropriateness of ourwarranty reserves and adjust future accruals as necessary. When deemedappropriate by us, we will accrue additional warranty reserves. We self-insureall of our warranties.

**Sales and Marketing**

All personnel involved in the sale of our homesreceive extensive training on the product they are selling. In addition, oursales professionals are trained on the specialized programs offered by us inconnection with the purchasing, customizing and financing of a Comstock homeand the warranty we provide. We employ in-house commissioned sales personnel tosell our homes. We employ our sales personnel on a long-term basis, rather thana project-by-project basis, which we believe results in a more 

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committed and motivatedsales force with better product knowledge. We believe that this has a positiveimpact on sales and conversion.

Division managers are responsible for developingmarketing objectives, sales strategies, and advertising and public relationsprograms for their assigned communities. These objectives, strategies and homepricing decisions are subject to approval by senior management. We typicallybuild, decorate, furnish and landscape model homes for each product line andmaintain onsite sales offices, which are open seven days a week. We believethat model homes play a critical role in our marketing efforts.

Our homes are typicallysold before or during construction through sales contracts that are accompaniedby a cash deposit. Such sales contracts are usually subject to certaincontingencies such as the home buyer’s ability to qualify for financing.Cancellation rates are subject to a variety of factors beyond our control suchas adverse economic conditions and increases in mortgage interest rates.

**Competition**

The real estate development and home buildingindustries are highly competitive and fragmented. Competitive overbuilding inlocal markets, among other competitive factors, could materially adverselyaffect home builders in those markets. Home builders compete for financing, rawmaterials and skilled labor, as well as for the sale of homes. Additionally,competition for prime properties is intense and the acquisition of suchproperties may become more expensive in the future to the extent demand andcompetition increase. We compete with other local, regional and national realestate companies and home builders. Some of our competitors have greaterfinancial, marketing, sales and other resources than we have.

The principalcompetition we face in each of our markets is as follows:

·       *Washington, D.C.*   In the greaterWashington, D.C. metropolitan market, we compete against approximately 15 to 20publicly-traded national home builders, approximately 10 to 15 privately-ownedregional home builders, and many local home builders, some of whom are verysmall and may build as few as five to 25 homes per year.

·       *Raleigh, North Carolina*.   In theRaleigh, North Carolina market, we compete against approximately 10 to 15publicly-traded national home builders, approximately 10 to 15 privately-ownedregional home builders, and a large number of small, local home builders.

We do not compete againstall of the builders in our geographic markets in all of our product types orsubmarkets, as some builders focus on particular types of projects within thosemarkets, such as large estate homes, that are not in competition with ourcommunities. We believe the factors that home buyers consider in decidingwhether to purchase from us include the location, value and design of ourproducts. We believe that we typically build attractive, innovative products insought-after locations that are perceived as good values by customers.Accordingly, we believe that we compare favorably on these factors.

**Regulation**

We and our competitors are subject to various local,state and federal statutes, ordinances, rules and regulations concerningzoning, building design, construction and similar matters, including localregulation, which imposes restrictive zoning and density requirements in orderto limit the number of homes that can ultimately be built within the boundariesof a particular project. We and our competitors may also be subject to periodicdelays or may be precluded entirely from developing in certain communities dueto building moratoriums or “slow-growth” or “no-growth” initiatives that couldbe implemented in the future in the states in which we operate. Local and stategovernments also have broad discretion regarding the imposition of developmentfees for projects in their jurisdiction.

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We and our competitors are also subject to a varietyof local, state and federal statutes, ordinances, rules and regulationsconcerning protection of the environment. Some of the laws to which we and ourproperties are subject may impose requirements concerning development in watersof the United States, including wetlands, the closure of water supply wells,management of asbestos-containing materials, exposure to radon, andsimilar issues. The particular environmental laws that apply to any givencommunity vary greatly according to the community site, the site’senvironmental conditions and the present and former uses of the site. Theseenvironmental laws may result in delays, may cause us and our competitors toincur substantial compliance and other costs, and may prohibit or severelyrestrict development in certain environmentally sensitive regions or areas.However, environmental laws have not, to date, had a material adverse impact onour operations.

We also compete withresales of existing homes and condominiums and available rental housing.

**Technology**

We are committed to theuse of Internet-based technology for managing our business andcommunicating with our customers. We use Builder’s Co-PilotÔ,a management information system that was custom developed in accordance withour needs and requirements. This system allows us to integrate our field andoffice operations as well as to track the progress of construction on each ofour projects. In addition, this system allows online and collaborative effortsbetween our sales and marketing functions. We believe real-time access to ourconstruction progress and our sales and marketing data and documents throughour systems increases the effectiveness of our sales and marketing efforts aswell as management’s ability to monitor our business. Through our Web site, *www.comstockhomebuilding.com*, ourprospects receive automatic electronic communications from us on a regularbasis. We believe this application of technology has greatly enhanced ourconversion rates.

**IntellectualProperty and Other Proprietary Rights**

We rely primarily on acombination of copyright, trade secret and trademark laws to protect ourproprietary rights. We do not own the “Comstock” brand or trademark.Christopher Clemente owns the “Comstock” brand and trademark and has licensedthem to us under a perpetual, royalty-free license agreement. We havefiled a U.S. federal trademark application with respect to “Comstock HomesWorthy of the Investment” and we will file a U.S. federal trademark applicationwith respect to “Comstock Homebuilding Companies.” We believe the strength ofthese trademarks benefits our business.

**Employees**

At December 31, 2004,we had approximately 102 full-time and part-time employees. Our employeesare not represented by any collective bargaining agreement and we have neverexperienced a work stoppage. We believe we have good relations with ouremployees.

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**Executive Officers**

Ourexecutive officers and other management employees and their respective ages andpositions as of December 31, 2004 are as follows:
| **Name**               | ** ** | ** ** | ** ** | **Age**                                          | ** ** | **Position** |
|------------------------|------------|------------|------------|--------------------------------------------------|------------|--------------|
| Christopher Clemente*  |       | 45         |       | Chairman and Chief  Executive Officer            |
| Gregory V. Benson*     |       | 50         |       | President, Chief  Operating Officer and Director |
| Bruce J. Labovitz*     |       | 37         |       | Chief Financial Officer                          |
| William P. Bensten     |       | 57         |       | Senior Vice President                            |
| Jason Parikh*          |       | 34         |       | Chief Accounting Officer                         |
| David D. Howell        |       | 54         |       | Vice President—Market  Development          |
| Thomas A. Williamson** |       | 44         |       | Vice President—Land  Acquisition            |
| Jubal R. Thompson      |       | 35         |       | General Counsel and  Secretary                   |

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*                    Section 16officers.

**             ThomasWilliamson resigned as an officer of the Company effective as of March 1, 2005.

**ExecutiveOfficers and Key Employees**

*Christopher Clemente*foundedComstock in 1985. Since 1992, Mr. Clemente has served as our Chairman andChief Executive Officer. Mr. Clemente has over 20 years of experiencein all aspects of real estate development and home building, and 25 years ofexperience as an entrepreneur.

*Gregory V. Benson*joined us in 1991 as President and Chief Operating Officer. Mr. Benson isalso a member of our board of directors. Mr. Benson has over 30 yearsof home building experience including over 13 years at national homebuilders, including NVHomes, Ryan Homes and Centex Homes.

*Bruce J. Labovitz*has served as our Chief Financial Officer since January 2004, afterserving as our Vice President—Finance from April 2002 to January 2004and Vice President—Investment Finance from January 2002 to April 2002.From June 2001 to January 2002, Mr. Labovitz was a VicePresident of Viking Communications, a telecommunications company. From November 2000to June 2001, Mr. Labovitz was the President, Marketing &Services of Inlec Communications, a telecommunications company. Prior to that,from May 1996 to November 2000, Mr. Labovitz was Executive VicePresident/Chief Operating Officer of BMK Advertising, an advertising agency.

*William P. Bensten*has served as our Senior Vice President since November 2004 and as ourVice President—Business Development from December 2003 to November 2004,after serving as our Vice President—Land Acquisition from 1995 to 2003. During1997 and 1998 Mr. Bensten served as our division manager of our Raleigh,North Carolina division and was responsible for opening the division. Mr. Benstenhas over 30 years of experience in the home building industry, includingserving in various positions with Centex Homes, a national home builder, andCharter Communities.

*Jason Parikh*hasserved as our Chief Accounting Officer since April 2004. Mr. Parikhwas Chief Financial Officer and Secretary of On-Site Sourcing, Inc. from May 2000to April 2004 and Controller from July 1997 to May 2000. From July 1994until July 1997, Mr. Parikh was Controller of ShirtExplosion Inc., a clothing manufacturer.

*David D. Howell*has served as our Vice President—Market Development since August 2004.Prior to that, from July 2000 to July 2004, Mr. Howell served asVice President—Comstock Homes of Washington. From 1995 to March 2000, Mr. Howellwas a Division President with M/I Homes, Inc., a national home builder.Prior to that Mr. Howell spent several years as division manager at RyanHomes.

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*Thomas A. Williamson*has served as our Vice President—Business Development andLand Acquisition since February 2004. Prior to joining us, from 1998 to 2004,Mr. Williamson served as Vice President and General Manager of Reston TownCenter and Broadlands for Terrabrook. Prior to 1998, Mr. Williamson was theDirector, Administrative and Operations Services for the Fairfax County Schoolboard.

*Jubal R. Thompson*has served as our General Counsel since October 1998. and our Secretary asof December 2004. From April 2002 to April 2003, Mr. Thompsonalso served as our Vice President—Finance. From 1995 to 1998, Mr. Thompsonwas associated with Robert Weed & Associates, PLLC, a law firm.

**Other Information**

We file annual, quarterly, and current reports, proxystatements, and other documents with the Securities and Exchange Commission (“SEC”)under the Securities Exchange Act of 1934 (the “Exchange Act”). The public mayread and copy any materials that we file with the SEC at the SEC’s PublicReference Room at 450 Fifth Street, NW, Washington, DC 20549. The publicmay obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. Also, the SEC maintains anInternet website that contains reports, proxy and information statements, andother information regarding issuers, including us, that file electronicallywith the SEC. The public can obtain any documents that we file with the SEC at *http://www.sec.gov*.

We also make available,free of charge, at our Internet website located at *www.comstockhomebuilding.com*,our annual reports on Form 10-K, our proxy statements, our quarterlyreports on Form 10-Q, and our current reports on Form 8-Kas well as Form 3, Form 4, and Form 5 Reports for our directors,officers, and principal stockholders, together with amendments to those reportsfiled or furnished pursuant to Section 13(a), 15(d), or 16 under theExchange Act. These reports are available as soon as reasonably practicableafter their electronic filing with the Securities and Exchange Commission.

**CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS**

Some of the statements contained in this reportinclude forward-looking statements. These forward-looking statementscan be identified by the use of words such as “anticipate,” “believe,” “estimate,”“may,” “intend,” “expect,” “will,” “should,” “seeks” or other similarexpressions. Forward-looking statements are based largely on ourexpectations and involve inherent risks and uncertainties including certainrisks described in this report. When considering those forward-lookingstatements, you should keep in mind the risks, uncertainties and othercautionary statements made in this report. You should not place undue relianceon any forward-looking statement, which speaks only as of the date made.Some factors which may affect the accuracy of the forward-looking statementsapply generally to the real estate industry, while other factors apply directlyto us. Any number of important factors which could cause actual results todiffer materially from those in the forward-looking statements include,without limitation: general economic and market conditions, including interestrate levels; our ability to service our substantial debt; inherent risks ininvestment in real estate; our ability to compete in the Washington, D.C. andRaleigh, North Carolina real estate and home building markets; regulatoryactions; fluctuations in operating results; our anticipated growth strategies;shortages and increased costs of labor or building materials; the availabilityand cost of land in desirable areas; natural disasters; our ability to raisedebt and equity capital and grow our operations on a profitable basis; and ourcontinuing relationships with affiliates.

Many of these factors are beyond our control. For adiscussion of factors that could cause actual results to differ, please see thediscussion in the section of this report entitled “Business—RiskFactors.”

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**RISKFACTORS**

*Youshould carefully consider the following risk factors, in addition to thosediscussed elsewhere in the report, in evaluating our Company and our business.*

**Risks Relating to Our Business**

**Weengage in construction and real estate activities which are speculative andinvolve a high degree of risk.**

The home buildingindustry is speculative and is significantly affected by changes in economicand other conditions, such as:

·        employmentlevels;

·        availabilityof financing;

·        interestrates; and

·        consumerconfidence.

These factors can negatively affect the demand for andpricing of our homes and our margin on sale. We are also subject to a number ofrisks, many of which are beyond our control, including:

·        delaysin construction schedules;

·        costoverruns;

·        changesin governmental regulations (such as slow- or no-growth initiatives);

·        increasesin real estate taxes and other local government fees;

·        laborstrikes;

·        transportationcosts for delivery of materials; and

·        increasesand/or shortages in raw materials and labor costs.

**Fluctuationsin market conditions may affect our ability to sell our land and homeinventories at expected prices, if at all, which could adversely affect ourrevenues and earnings.**

We are subject to thepotential for significant fluctuations in the market value of our land and homeinventories. We must constantly locate and acquire new tracts of undevelopedand developed land to support our home building operations. There is a lagbetween the time we acquire control of undeveloped land or developed home sitesand the time that we can bring the communities built on that land to market anddeliver our homes. This lag time varies from site to site as it is impossibleto determine in advance the length of time it will take to obtain governmentalapprovals and building permits. The risk of owning undeveloped land, developedland and homes can be substantial. The market value of undeveloped land,buildable lots and housing inventories can fluctuate significantly as a resultof changing economic and market conditions. Inventory carrying costs can besignificant and can result in losses in a poorly performing development ormarket. Material write-downs of the estimated value of our land and homeinventories could occur if market conditions deteriorate or if we purchase landor build home inventories at higher prices during stronger economic periods andthe value of those land or home inventories subsequently declines during weakereconomic periods. We could also be forced to sell homes, land or lots forprices that generate lower profit than we anticipate, or at a loss, and may notbe able to dispose of an investment in a timely manner when we finddispositions advantageous or necessary. Furthermore, a decline in the marketvalue of our land or home inventories may give rise to a breach of financialcovenants contained in one or more of our credit facilities, which could causea default under those credit facilities.

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**Becauseour business depends on the acquisition of new land, the potential limitationson the supply of land could reduce our revenues or negatively impact ourresults of operations.**

Due to increased demandfor new homes, we have experienced an increase in competition for availableland and developed home sites in the Washington, D.C. and Raleigh, NorthCarolina markets. In these markets, we have experienced competition for homesites from other, sometimes better capitalized, home builders. In the Raleigh,North Carolina market, we have recently experienced competition from large,national home builders entering the market. Our ability to continue our homebuilding activities over the long term depends upon our ability to locate andacquire suitable parcels of land or developed home sites to support our homebuilding operations. As competition for land increases, the cost of acquiringit may rise, and the availability of suitable parcels at acceptable prices maydecline. The increased cost of land requires us to increase the prices of ourhomes. This increased pricing could reduce demand for our homes and,consequently, reduce the number of homes we sell and lead to a decrease in ourrevenues and earnings.

**Ourbusiness is subject to governmental regulations that may delay, increase thecost of, prohibit or severely restrict our development and home buildingprojects and reduce our revenues and growth.**

We are subject toextensive and complex laws and regulations that affect the land development andhome building process, including laws and regulations related to zoning,permitted land uses, levels of density (number of dwelling units per acre),building design, access to water and other utilities, water and waste disposaland use of open spaces. In addition, we and our subcontractors are subject tolaws and regulations relating to worker health and safety. We also are subjectto a variety of local, state and federal laws and regulations concerning theprotection of health and the environment. In some of our markets, we arerequired to pay environmental impact fees, use energy saving constructionmaterials and give commitments to provide certain infrastructure such as roadsand sewage systems. We must also obtain permits and approvals from localauthorities to complete residential development or home construction. The lawsand regulations under which we and our subcontractors operate, and our andtheir obligations to comply with them, may result in delays in construction anddevelopment, cause us to incur substantial compliance and other increasedcosts, and prohibit or severely restrict development and home building activityin certain areas in which we operate. If we are unable to continue to developcommunities and build and deliver homes as a result of these restrictions or ifour compliance costs increase substantially, our revenues and earnings may bereduced and we may not be able to continue our current level of growth.

**Citiesand counties in which we operate have adopted, or may adopt, slow or no-growthinitiatives that would reduce our ability to build and sell homes in these areasand could adversely affect our revenues and earnings.**

From time to time, certain cities and counties inwhich we operate have approved, and others in which we operate may approve,various “slow-growth” or “no-growth” initiatives and other similarballot measures. Such initiatives restrict development within localities by,for example, limiting the number of building permits available in a given year.Approval of slow- or no-growth measures could reduce our ability toacquire land, obtain building permits and build and sell homes in the affectedmarkets and could create additional costs and administration requirements,which in turn could have an adverse effect on our revenues and earnings.

Increased regulation in the housing industry increasesthe time required to obtain the necessary approvals to begin construction andhas prolonged the time between the initial acquisition of land or land optionsand the commencement and completion of construction. These delays increase ourcosts, decrease our profitability and increase the risks associated with theland inventories we maintain.

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Municipalities mayrestrict or place moratoriums on the availability of utilities, such as waterand sewer taps. If municipalities in which we operate take actions like these,it could have an adverse effect on our business by causing delays, increasingour costs or limiting our ability to build in those municipalities. This, inturn, could reduce the number of homes we sell and decrease our revenues andearnings.

**Ourability to sell homes, and, accordingly, our results of operations, will beaffected by the availability of financing to potential home buyers.**

Most home buyersfinance their purchases through third-party mortgage financing. Realestate demand is generally adversely affected by:

·        increasesin interest rates and/or related fees;

·        increasesin real estate transaction closing costs;

·        decreasesin the availability of mortgage financing;

·        increasinghousing costs;

·        unemployment;and

·        changesin federally sponsored financing programs.

Increases in interestrates or decreases in the availability of mortgage financing could depress themarket for new homes because of the increased monthly mortgage costs or theunavailability of financing to potential home buyers. Even if potential homebuyers do not need financing, increases in interest rates and decreasedmortgage availability could make it harder for them to sell their homes. Thiscould adversely affect our operating results and financial condition.

**Thecompetitive conditions in the home building industry could increase our costs,reduce our revenues and earnings and otherwise adversely affect our results ofoperations or limit our growth.**

The home building industry is highly competitive andfragmented. We compete in each of our markets with a number of national,regional and local builders for customers, undeveloped land and home sites, rawmaterials and labor. In the Washington, D.C. market, we compete againstapproximately 15 to 20 publicly-traded national home builders,approximately 10 to 15 privately-owned regional home builders, and manylocal home builders, some of whom are very small and may build as few as fiveto 25 homes per year. In the Raleigh, North Carolina market, we compete againstapproximately 10 to 15 publicly-traded national home builders,approximately 10 to 15 privately-owned regional home builders, and alarge number of small, local home builders. We do not compete against all ofthe builders in our geographic markets in all of our product types or submarkets,as some builders focus on particular types of projects within those markets,such as large estate homes, that are not in competition with our projects.

We competeprimarily on the basis of price, location, design, quality, service andreputation. Some of our competitors have greater financial resources, moreestablished market positions and better opportunities for land and home siteacquisitions than we do and have lower costs of capital, labor and materialthan us. The competitive conditions in the home building industry could, amongother things:

·        makeit difficult for us to acquire suitable land or home sites in desirablelocations at acceptable prices and terms, which could adversely affect ourability to build homes;

·        requireus to increase selling commissions and other incentives, which could reduce ourprofit margins;

·        resultin delays in construction if we experience delays in procuring materials orhiring trades people or laborers;

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·        resultin lower sales volume and revenues; and

·        increaseour costs and reduce our earnings.

We also compete withresales of existing homes and condominiums and available rental housing. Anoversupply of competitively priced resale or rental homes in our markets couldadversely affect our ability to sell homes profitably.

**Ourbusiness is concentrated in two geographic areas which increases our exposureto localized risks.**

We currently develop andsell homes principally in the Washington, D.C. and Raleigh, North Carolinamarkets. Our limited geographic diversity means that adverse general economic,weather or other conditions in either of these markets could adversely affectour results of operations or our ability to grow our business.

**Ourgrowth strategy to expand into new geographic areas poses risks.**

We may expand ourbusiness to new geographic areas outside of the Washington, D.C. and Raleigh-Durham,North Carolina metropolitan areas. We will face additional risks if we developcommunities in geographic areas or climates in which we do not have experienceor if we develop a different size or style of community than those currentlybeing developed, including:

·        adjustingour construction methods to different geographies and climates;

·        obtainingthe necessary construction materials and labor in sufficient amounts and onacceptable terms;

·        obtainingnecessary entitlements and permits under unfamiliar regulatory regimes;

·        attractingpotential customers in a market in which we do not have significant experience;and

·        thecost of hiring new employees and increased infrastructure costs.

We may not be able tosuccessfully manage the risks of such an expansion, which could have a materialadverse effect on our revenues, earnings and financial condition.

**Wemay not be able to successfully identify, complete or integrate acquisitions.**

As part of ourbusiness strategy, we expect to review acquisition prospects in our existingmarkets and in new markets in the Mid-Atlantic region or elsewhere that wouldcomplement our existing business, or that might otherwise offer growthopportunities. We have not currently identified any acquisition targets, and wemay not be successful in identifying suitable acquisition targets or incompleting acquisitions. Further, to the extent we complete acquisitions, wemay be unable to realize the anticipated benefits because of operationalfactors or difficulties in integrating the acquisitions with our existingbusiness. Acquisitions entail numerous risks, including, but not limited to:

·        difficultiesin assimilating acquired management and operations;

·        risksassociated with investing the necessary resources in order to achieveprofitability;

·        theincurrence of significant due diligence expenses relating to acquisitions thatare not completed;

·        unforeseenexpenses and liabilities;

·        risksassociated with entering new markets or sub-markets in which we have limited orno prior experience;

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·        thediversion of our management’s attention from our current business;

·        thepotential loss of key employees of acquired organizations; and

·        risksassociated with transferred assets and liabilities.

We may not be able toacquire or manage profitably additional businesses, or to integratesuccessfully any acquired businesses, properties or personnel into ourbusiness, without substantial costs, delays or other operational or financialdifficulties. Our failure to do so could have a material adverse effect on ourbusiness, financial condition and results of operations.

**Weare dependent on the services of certain key employees and the loss of theirservices could harm our business.**

Our success largelydepends on the continuing services of certain key employees, including ourChairman and Chief Executive Officer, Christopher Clemente, Gregory Benson, ourPresident and Chief Operating Officer, and Bruce Labovitz, our Chief FinancialOfficer. Our continued success also depends on our ability to attract andretain qualified personnel. We believe that Messrs. Clemente, Benson andLabovitz each possesses valuable industry knowledge, experience and leadershipabilities that would be difficult in the short term to replicate. The loss ofthese or other key employees could harm our operations and business plans.

**Mr. Clementemay devote a portion of his time to his personal business interests, which mayreduce the amount of time he devotes to the Company.**

Mr. Clemente retainscertain personal business interests. The Company may be disadvantaged to theextent that Mr. Clemente does not devote substantially all of his time tothe business of the Company.

**Oursignificant level of debt could adversely affect our financial condition andprevent us from fulfilling our debt service obligations.**

We currently have a significant amount of debt, andour ability to meet our debt service obligations will depend on our futureperformance. Numerous factors outside of our control, including changes ineconomic or other business conditions generally, such as employment levels,population growth and consumer confidence, or in the markets or industry inwhich we do business, may adversely affect our operating results and cashflows, which in turn may affect our ability to meet our debt serviceobligations. As of December 31, 2004, we had $89.3 million aggregateprincipal amount of total debt outstanding (including our distribution payableto our pre-initial public offering stockholders), or 145.3% of our totalshareholders’ equity as of that date. We may incur additional debt to fund ouroperations.

For the year ended December 31,2004, our interest payments on account of outstanding indebtedness totaled $4.7million or 4.9% of our total revenues for that period. If we are unable to meetour debt service obligations, we may need to restructure or refinance our debt,seek additional equity financing or sell assets. We may be unable to restructureor refinance our debt, obtain additional equity financing or sell assets onsatisfactory terms or at all. In addition, a substantial portion of our cashflow from operations must be dedicated to the repayment of debt, includinginterest, thereby reducing the funds available to us for other purposes. Ourlevel of debt may limit our flexibility to adjust to changing economic ormarket conditions, reduce our ability to withstand competitive pressures andmake us more vulnerable to a downturn in general economic conditions.

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**Our growth requires additional capital, which may notbe available.**

The real estatedevelopment industry is capital intensive and requires significant expendituresfor land purchases, land development and construction. We intend to pursue astrategy of continued investment in additional real estate related projects. Weanticipate that we will need to obtain additional financing as we expand ouroperations. These funds may be obtained through public or private debt orequity financings, additional bank borrowings or from strategic alliances orjoint ventures. We may not be successful in obtaining additional funds in atimely manner, on favorable terms or at all. Moreover, certain of our bankfinancing agreements contain provisions that limit the type and amount of debtwe may incur in the future without our lenders’ consent. In addition, theavailability of borrowed funds, especially for land acquisition andconstruction financing, may be greatly reduced, and lenders may require us toinvest increased amounts of equity in a project in connection with both newloans and the extension of existing loans. If we do not have access toadditional capital, we may be required to delay, scale back or abandon some orall of our acquisition plans or growth strategies or reduce capitalexpenditures and the size of our operations.

**Our growth depends on the availability ofconstruction, acquisition and development loans.**

Currently, we havemultiple construction, acquisition and development loans.**Weare considering replacing these credit facilities with one or more largerfacilities, which may reduce our aggregate debt financing costs. If we areunable to obtain a larger facility, we will need to continue to rely on oursmaller credit facilities. These smaller credit facilities generally havehigher costs and require significant management time to administer them.Additionally, if financial institutions decide to discontinue providing thesefacilities to us, we would lose our primary source of financing our operationsor the cost of retaining or replacing these credit facilities could increasedramatically. Further, this type of financing is typically characterized byshort-term loans which are subject to call. If our primary financing becomesunavailable or accelerated repayment is demanded, we may not be able to meetour obligations.

**Ourbank credit facilities impose restrictions on our operations, which, ifviolated, could result in our indebtedness being immediately due and payableand the loss of our assets.**

Our bank credit facilitiesimpose restrictions on our operations and activities. The most significantrestrictions relate to debt incurrence, lien incurrence, sales of significantassets and cash distributions and require us to comply with certain financialcovenants. If we fail to comply with any of these restrictions or covenants,the banks could cause our debt to become payable immediately. In addition, someof our debt instruments contain cross-default provisions, which couldcause a default under a number of debt instruments if we default on only onedebt instrument. Most of our credit facilities are secured by the land,improvements and fixtures owned by the entity that is party to the facility. Ifwe were unable to repay indebtedness owed to our secured creditors, they couldforeclose on the collateral securing that indebtedness.

**Asignificant portion of our business plan involves construction of mixed-usedevelopments and high-rise projects with which we have less experience.**

We expect to increase ourconstruction and development of mixed-use and high-rise residential projects.Our experience is largely based on smaller wood-framed structures that are lesscomplex than high-rise construction or the development of mixed-use projects. Amixed-use project is one that integrates residential and non-residential usesin the same structure or in close proximity to each other, on the same land. Aswe expand into these new product types, we expect to encounter operating,marketing, customer service, warranty and management challenges with which wehave less familiarity. Although we have expanded our management team to includeindividuals with significant experience in this type of real estatedevelopment, we have not completed any projects managed by these persons. If weare unable to 

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successfullymanage the challenges of this portion of our business, we may incur additionalcosts and our results of operations could be adversely affected.

**If weexperience shortages of labor or supplies or other circumstances beyond ourcontrol, there could be delays or increased costs in developing our projects,which would adversely affect our operating results.**

We and the homebuilding industry from time to time may be affected by circumstances beyond ourcontrol, including:

·       workstoppages, labor disputes and shortages of qualified trades people, such ascarpenters, roofers, electricians and plumbers;

·       lackof availability of adequate utility infrastructure and services;

·       transportationcost increases;

·       ourneed to rely on local subcontractors who may not be adequately capitalized orinsured; and

·       shortagesor fluctuations in prices of building materials.

These difficulties havecaused and likely will cause unexpected construction delays and short-termincreases in construction costs. In an attempt to protect the margins on ourprojects, we often purchase certain building materials with commitments thatlock in the prices of these materials for 90 to 120 days or more. However,once the supply of building materials subject to these commitments isexhausted, we are again subject to market fluctuations and shortages. We maynot be able to recover unexpected increases in construction or materials costsby raising our home prices because, typically, the price of each home isestablished at the time a customer executes a home sale contract. Furthermore,sustained increases in construction costs may, over time, erode our profitmargins.

**Wedepend on the availability and skill of subcontractors.**

Substantially all of ourconstruction work is done by subcontractors with us acting as the generalcontractor or by subcontractors working for a general contractor we select fora particular project. Accordingly, the timing and quality of our constructiondepends on the availability and skill of those subcontractors. We do not havelong-term contractual commitments with subcontractors or suppliers. Although webelieve that our relationships with our suppliers and subcontractors are good,we cannot assure that skilled subcontractors will continue to be available atreasonable rates and in the areas in which we conduct our operations. Theinability to contract with skilled subcontractors or general contractors atreasonable costs on a timely basis could limit our ability to build and deliverhomes and could erode our profit margins.

**Productliability litigation and claims that arise in the ordinary course of businessmay be costly or negatively impact sales, which could adversely affect ourresults of operations.**

Our home building businessis subject to construction defect and product liability claims arising in theordinary course of business. These claims are common in the home buildingindustry and can be costly. Among the claims for which developers and buildershave financial exposure are property damage, environmental claims and bodilyinjury claims. Damages awarded under these suits may include the costs ofremediation, loss of property and health-related bodily injury. Inresponse to increased litigation, insurance underwriters have attempted tolimit their risk by excluding coverage for certain claims associated withenvironmental conditions, pollution and product and workmanship defects. As adeveloper and a home builder, we may be at risk of loss for mold-relatedproperty, bodily injury and other claims in amounts that exceed availablelimits on our comprehensive general liability policies. In addition, the costsof insuring against construction defect and product liability claims are highand the amount of coverage offered by insurance companies is limited. Uninsuredproduct liability and similar claims, claims in excess 

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of thelimits under our insurance policies and the costs of obtaining insurance tocover such claims could have a material adverse effect on our revenues andearnings.

**Increasedinsurance risk could negatively affect our business.**

Insurance and suretycompanies have reassessed many aspects of their business and, as a result, maytake actions that could negatively affect our business. These actions couldinclude increasing insurance premiums, requiring higher self-insured retentionsand deductibles, requiring additional collateral on surety bonds, reducinglimits, restricting coverages, imposing exclusions, and refusing to underwritecertain risks and classes of business. Any of these actions may adverselyaffect our ability to obtain appropriate insurance coverage at reasonablecosts, which could have a material adverse effect on our business.Additionally, coverage for certain types of claims, such as claims relating tomold, is generally unavailable. Further, we rely on surety bonds, typicallyprovided by insurance companies, as a means of limiting the amount of capitalutilized in connection with the public improvement sureties that we arerequired to post with governmental authorities in connection with landdevelopment and construction activities. The cost of obtaining these suretybonds is, from time to time, unpredictable and on occasion these surety bondsare unavailable. These factors can delay commencement of development projectsand adversely affect revenue and earnings.

**Weare subject to warranty claims arising in the ordinary course of business thatcould be costly.**

We provide servicewarranties on our homes for a period of one year or more post closing and astructural warranty for five years post closing. We self-insure all of ourwarranties and reserve an amount we believe will be sufficient to satisfy anywarranty claims on homes we sell. We also attempt to pass much of the riskassociated with potential defects in materials and workmanship on to thesubcontractors performing the work and the suppliers and manufacturers of thematerials. In such cases, we still may incur unanticipated costs if asubcontractor, supplier or manufacturer fails to honor its obligationsregarding the work or materials it supplies to our projects. If the amount ofactual claims materially exceeds our aggregate warranty reserves and/or theamounts we can recover from our subcontractors and suppliers, our operatingresults would be adversely affected.

**Ourbusiness, revenues and earnings may be adversely affected by adverse weatherconditions or natural disasters.**

Adverse weatherconditions, such as extended periods of rain, snow or cold temperatures, andnatural disasters, such as hurricanes, tornadoes, floods and fires, can delaycompletion and sale of homes, damage partially complete or other unsold homesin our inventory and/or decrease the demand for homes or increase the cost ofbuilding homes. To the extent that natural disasters or adverse weather eventsoccur, our business and results may be adversely affected. To the extent ourinsurance is not adequate to cover business interruption losses or repair costsresulting from these events, our revenues and earnings may be adverselyaffected.

**Weare subject to certain environmental laws and the cost of compliance couldadversely affect our business.**

As a current or previous owner or operator of realproperty, we may be liable under federal, state, and local environmental laws,ordinances and regulations for the costs of removal or remediation of hazardousor toxic substances on, under or in the properties or in the proximity of theproperties we develop. These laws often impose liability whether or not we knewof, or were responsible for, the presence of such hazardous or toxicsubstances. The cost of investigating, remediating or removing such hazardousor toxic substances may be substantial. The presence of any such substance, orthe failure promptly to remediate any such substance, may adversely affect ourability to sell the property, to use the property for our 

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intended purpose, or toborrow funds using the property as collateral. In addition, the constructionprocess involves the use of hazardous and toxic materials. We could be heldliable under environmental laws for the costs of removal or remediation of suchmaterials. In addition, our existing credit facilities also restrict our accessto the loan proceeds if the properties that are used to collateralize the loansare contaminated by hazardous substances and require us to indemnify the bankagainst losses resulting from such occurrence for significant periods of time,even after the loan is fully repaid.

Our Eclipse project ispart of a larger development located at Potomac Yard in northern Virginia.Potomac Yard was formerly part of a railroad switching yard contaminated byrail-related activities. Remediation of the property was conducted undersupervision of the U.S. Environmental Protection Agency, or EPA, incoordination with state and local authorities. In 1998, federal, state andlocal government agencies authorized redevelopment of the property. Our plansfor development of our portion of the project are consistent with thoseauthorizations. Although concentrations of contaminants remain on the propertyunder the EPA-approved remediation work plan, the EPA has determined that theydo not present an unacceptable risk to human health or the environment.However, it is possible that we could incur some costs to defend against anyclaims that might be brought in the future relating to any such contaminants.

**If weare not able to develop our communities successfully, our earnings could bediminished.**

Before a communitygenerates any revenues, material expenditures are required to acquire land, toobtain development approvals and to construct significant portions of projectinfrastructure, amenities, model homes and sales facilities. It can take a yearor more for a community development to achieve cumulative positive cash flow.Our inability to develop and market our communities successfully and togenerate positive cash flows from these operations in a timely manner wouldhave a material adverse effect on our ability to service our debt and to meetour working capital requirements.

**Our operating results may vary.**

We expect toexperience variability in our revenues and net income. Factors expected tocontribute to this variability include, among other things:

·       theuncertain timing of real estate closings;

·       ourability to continue to acquire additional land or options thereon on acceptableterms and the timing of all necessary regulatory approvals required fordevelopment;

·       thecondition of the real estate market and the general economy in the WashingtonD.C. and Raleigh, North Carolina markets, and other markets we may enter;

·       thecyclical nature of the home building industry;

·       thechanging regulatory environment concerning real estate development and homebuilding;

·       changesin prevailing interests rates and the availability of mortgage financing; and

·       costsof material and labor and delays in construction schedules.

The volume of salescontracts and closings typically varies from month to month and from quarter toquarter depending on several factors, including the stages of development ofour projects, weather and other factors beyond our control. In the early stagesof a project’s development, we incur significant start-up costs associatedwith, among other things, project design, land acquisition and development,construction and marketing expenses. Since revenues from sales of propertiesare generally recognized only upon the transfer of title at the closing of asale, no revenue is recognized during the early stages of a project unless landparcels or residential homesites are sold to other developers. Periodic salesof 

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propertiesmay be insufficient to fund operating expenses. Further, if sales and otherrevenues are not adequate to cover operating expenses, we will be required toseek sources of additional operating funds. Accordingly, our financial resultswill vary from community to community and from time to time.

**Actsof war or terrorism may seriously harm our business.**

Acts of war, any outbreakor escalation of hostilities between the United States and any foreign power oracts of terrorism, may cause disruption to the U.S. economy, or the localeconomies of either the Washington, D.C. or Raleigh, North Carolina market,cause shortages of building materials, increase costs associated with obtainingbuilding materials, result in building code changes that could increase costsof construction, affect job growth and consumer confidence, or cause economicchanges that we cannot anticipate, all of which could reduce demand for ourhomes and adversely impact our revenues and earnings.

**Beinga public company increases our administrative costs.**

We completed our initialpublic offering in December 2004. As a public company, we incursignificant legal, accounting and other expenses that we did not incur as aprivate company. In addition, the Sarbanes-Oxley Act of 2002, as well asnew rules subsequently implemented by the Securities and ExchangeCommission, have required changes in corporate governance practices of publiccompanies. In addition to final rules and rule proposals already madeby the Securities and Exchange Commission, the National Association ofSecurities Dealers, or NASD, has adopted revisions to its requirements forcompanies that are listed on the Nasdaq National Market. We expect these new rules andregulations to increase our legal and financial compliance costs, and to makesome activities more time consuming and/or costly. For example, in anticipationof becoming a public company we added personnel, particularly accounting staff,added independent directors, created board committees, adopted additionalinternal controls and disclosure controls and procedures, retained a transferagent and a financial printer, adopted an insider trading policy and othercorporate governance policies, and will have all of the internal and externalcosts of preparing and distributing periodic public reports in compliance withour obligations under the securities laws. We also expect these new rules andregulations to make it more expensive for us to obtain director and officerliability insurance. These new rules and regulations could also make itmore difficult for us to attract and retain qualified members of our board ofdirectors and qualified executive officers.

**Beinga public company will require us to significantly enhance our controls over thepreparation of financial statements in order to ensure the detection, in atimely manner, of misstatements that could occur in our financial statements inamounts that may be material.**

Our independent registered public accounting firm has inthe past reported material weaknesses in our internal controls that, if notremedied, could result in material misstatements in our financial statements,cause investors to lose confidence in our reported financial information andhave a negative effect on the trading price of our stock. In connection withthe audits of the combined consolidated financial statements of our previousthree holding companies for the three years ended December 31, 2003, in July 2004our independent auditors reported to our board of directors several mattersthat are “reportable conditions” and “material weaknesses” in our internalcontrols as defined in standards established by the American Institute ofCertified Public Accountants. In general, the reportable conditions aresignificant deficiencies in our internal controls that, if not addressed, couldadversely affect our ability to record, process, summarize and report financialdata consistent with the assertions of management in the financial statements.A material weakness is a reportable condition in which internal controls do notreduce to a low level the risk that undetected misstatements caused by error orfraud may occur in amounts that are material to audited financial statements.

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The conditions resulting in the material weaknesses gaverise to a number of adjustments under generally acceptable accountingprinciples, and adjustments relating to the completeness and accuracy ofcertain underlying data, which materially changed our 2003 financial statementsbetween initial presentation and issued audit. We have employed additionalqualified personnel and adopted and implemented policies and procedures toaddress the reported material weaknesses. However, the process of designing andimplementing effective internal controls and procedures is a continuous effortthat requires us to anticipate and react to changes in our business and theeconomic and regulatory environments and to expend significant resources tomaintain a system of internal controls that is adequate to satisfy our reportingobligations as a public company.

We have had only limitedoperating experience with the remedial measures we have made to date and wecannot be certain that the measures we have taken to date or any futuremeasures will adequately remediate the material weaknesses reported by ourindependent auditors or that the measures we implement will enable us tomaintain adequate controls over our financial processes and reporting in thefuture. In addition, we cannot be certain that additional material weaknesses orsignificant deficiencies in our internal controls will not be discovered in thefuture. Any failure to remediate the material weaknesses reported by ourindependent auditors or to implement required new or improved controls, ordifficulties encountered in their implementation, could harm our operatingresults, cause us to fail to meet our reporting obligations, subject us toincreased risk of errors and fraud related to our financial statements orresult in material misstatements in our financial statements. Any such failurealso could adversely affect the results of the periodic management evaluationsand annual auditor attestation reports regarding the effectiveness of our “internalcontrol over financial reporting” that will be required when the Securities andExchange Commission’s rules under Section 404 of the Sarbanes-OxleyAct of 2002 become applicable to us beginning with our Annual Report on Form 10-Kfor the year ending December 31, 2005 to be filed in early 2006.Inadequate internal controls could also cause investors to lose confidence inour reported financial information, which could have a negative effect on thetrading price of our stock.

**We donot own the Comstock brand or trademark, but use the brand and trademarkpursuant to the terms of a perpetual license granted by Christopher Clemente,our Chief Executive Officer and Chairman of the Board.**

Our Chief ExecutiveOfficer and Chairman of the Board, Christopher Clemente, has licensed the “Comstock”brand and trademark to us in perpetuity and free of charge. We do not own thebrand or the trademark and may be unable to protect it against infringementfrom third parties. However, Mr. Clemente retains the right to continueusing the “Comstock” brand and trademark individually and through affiliates,including in real estate development projects in our current or future markets.We will be unable to control the quality of projects undertaken by Mr. Clementeor others using the “Comstock” brand and trademark and therefore will be unableto prevent any damage to its goodwill that may occur. We will further be unableto preclude Mr. Clemente from licensing or transferring the ownership ofthe “Comstock” trademark to third parties, some of whom may compete against us.Consequently, we are at risk that our brand could be damaged which could have amaterial adverse effect on our business and operations.

**RisksRelated to our Common Stock and the Securities Markets**

**Volatilityof our stock price could adversely affect stockholders.**

The market price ofour Class A common stock could fluctuate significantly as a result of:

·       quarterlyvariations in our operating results;

·       generalconditions in the home building industry;

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·       interestrate changes;

·       changesin the market’s expectations about our operating results;

·       ouroperating results failing to meet the expectation of securities analysts orinvestors in a particular period;

·       changesin financial estimates and recommendations by securities analysts concerningour Company or the home building industry in general;

·       operatingand stock price performance of other companies that investors deem comparableto us;

·       newsreports relating to trends in our markets;

·       changesin laws and regulations affecting our business;

·       materialannouncements by us or our competitors;

·       materialannouncements by our construction lenders or the manufacturers and suppliers weuse;

·       salesof substantial amounts of Class A common stock by our directors, executiveofficers or significant stockholders or the perception that such sales couldoccur; and

·       generaleconomic and political conditions such as recessions and acts of war orterrorism.

Investors may not be ableto resell their shares of our Class A common stock following periods ofvolatility because of the market’s adverse reaction to that volatility. Our Class Acommon stock may not trade at the same levels as the stock of otherhomebuilders, and the market in general may not sustain its current prices.

**Investorsin our Class A common stock may experience dilution with the future exerciseof stock options and the grant of restricted stock.**

From time to time, we haveissued and we will continue to issue stock options or restricted stock grantsto employees and non-employee directors pursuant to our equity incentive plan.We expect that these options or restricted stock grants will generally vestcommencing one year from the date of grant and continue vesting over athree-year period. Investors may experience dilution as the options vest andare exercised by their holders and the restrictions lapse on the restrictedstock grants.

**Substantialsales of our Class A common stock, or the perception that such sales mightoccur, could depress the market price of our Class A common stock.**

A substantial amount ofthe shares of our Class A common stock are eligible for immediate resalein the public market. Any sales of substantial amounts of our Class Acommon stock in the public market, or the perception that such sales mightoccur, could depress the market price of our Class A common stock.

**Futuresales, or the availability for sale, of our Class A common stock may causeour stock price to decline.**

In connection with our initial public offering, we,along with our officers, directors and stockholders, have agreed that, subjectto limited exceptions, not to sell or transfer any shares of Class Acommon stock for 180 days after December 14, 2004 without theunderwriters’ consent. However, the underwriters may release these shares fromthese restrictions at any time. In evaluating whether to grant such a request,the underwriters may consider a number of factors with a view towardmaintaining an orderly market for, and minimizing volatility in the marketprice of, our Class A common stock. These factors include, among others,the number of shares involved, recent trading volume and prices of the stock,the length of time before the lock-up expires and the reasons for, and thetiming of, the request. We cannot predict what 

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effect, if any, marketsales of shares held by any stockholder or the availability of these shares forfuture sale will have on the market price of our Class A common stock.

Commencing one year after December 14,2004, existing stockholders may begin selling a portion of their shares of Class Acommon stock in the public market in accordance with the provisions of Rule 144under the Securities Act. Sales of substantial amounts of our Class Acommon stock in the public market, or the perception that such sales couldoccur, could adversely affect the market price of our Class A common stockand could materially impair our future ability to raise capital throughofferings of our Class A common stock.

**Theholders of our Class B common stock exert control over us and thus limitthe ability of other stockholders to influence corporate matters.**

Messrs. Clemente andBenson own 100% of our outstanding Class B common stock, which, togetherwith their shares of Class A common stock, represent approximately 87.6%of the combined voting power of all classes of our voting stock. As a result, Messrs. Clementeand Benson, acting together, have control over us, the election of our board ofdirectors and our management and policies. Messrs. Clemente and Benson,acting together, also have control over all matters requiring stockholderapproval, including the amendment of certain provisions of our certificate ofincorporation and bylaws, the approval of any equity-based employeecompensation plans and the approval of fundamental corporate transactions,including mergers. In light of this control, other companies could bediscouraged from initiating a potential merger, takeover or any othertransaction resulting in a change of control. Such a transaction potentiallycould be beneficial to our business or to our stockholders. This may in turnreduce the price that investors are willing to pay in the future for shares ofour Class A common stock.

**Thelimited voting rights of our Class A common stock could impact itsattractiveness to investors and its liquidity and, as a result, its marketvalue.**

The holders of our Class Aand Class B common stock generally have identical rights, except thatholders of our Class A common stock are entitled to one vote per share andholders of our Class B common stock are entitled to 15 votes per share onall matters to be voted on by stockholders. The difference in the voting rightsof the Class A and Class B common stock could diminish the value ofthe Class A common stock to the extent that investors or any potentialfuture purchasers of our Class A common stock ascribe value to thesuperior voting rights of the Class B common stock.

**Itmay be difficult for a third party to acquire us, which could inhibitstockholders from realizing a premium on their stock price.**

We are subject to the Delaware anti-takeover lawsregulating corporate takeovers. These anti-takeover laws prevent Delawarecorporations from engaging in business combinations with any stockholder,including all affiliates and employees of the stockholder, who owns 15% or moreof the corporation’s outstanding voting stock, for three years following thedate that the stockholder acquired 15% or more of the corporation’s votingstock unless specified conditions are met.

Our amended andrestated certificate of incorporation and bylaws contain provisions that havethe effect of delaying, deferring or preventing a change in control of us thatstockholders may consider favorable or beneficial. These provisions coulddiscourage proxy contests and make it more difficult for stockholders to electdirectors and take other corporate actions. These provisions could also limitthe price that investors might be willing to pay in the future for shares ofour common stock. These provisions include:

·       astaggered board of directors, so that it would take three successive annualmeetings to replace all directors;

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·       aprohibition of stockholder action by written consent; and

·       advance notice requirementsfor the submission by stockholders of nominations for election to the board ofdirectors and for proposing matters that can be acted upon by stockholders at ameeting.

**Ourissuance of shares of preferred stock could delay or prevent a change ofcontrol of us.**

Our board of directors hasthe authority to cause us to issue, without any further vote or action by thestockholders, up to 20,000,000 shares of preferred stock, par value $.01 pershare, in one or more series, to designate the number of shares constitutingany series, and to fix the rights, preferences, privileges and restrictionsthereof, including dividend rights, voting rights, rights and terms ofredemption, redemption price or prices and liquidation preferences of suchseries. The issuance of shares of preferred stock may have the effect ofdelaying, deferring or preventing a change in control of us without furtheraction by the stockholders, even where stockholders are offered a premium fortheir shares. The issuance of shares of preferred stock with voting andconversion rights may adversely affect the voting power of the holders of Class Acommon stock, including the loss of voting control. We have no present plans toissue any shares of preferred stock.

**Item 2.   Properties**

Our principaladministrative, sales and marketing facilities are located at our headquartersin Reston, Virginia. We currently lease 20,609 square feet of office space inthe Reston facility from Comstock Asset Management, L.C., an affiliate wholly-ownedby Christopher Clemente. Pursuant to this five-year headquarters lease which weentered into on October 1, 2004, we pay annual rental rates of $484,000,subject to a 4% annual increase. We also lease office space in Raleigh, NorthCarolina where we occupy approximately 3,300 square feet of office space. Webelieve these facilities are suitable and provide the appropriate level ofcapacity for our current operations.

**Item 3.   Legal Proceedings**

We are not currently subject to any material legalproceedings. From time to time, however, we are named as a defendant in legalactions arising from our normal business activities. Although we cannotaccurately predict the amount of our liability, if any, that could arise withrespect to legal actions currently pending against us, we do not expect thatany such liability will have a material adverse effect on our financialposition, operating results or cash flows.

We believe that we haveobtained adequate insurance coverage or rights to indemnification, or whereappropriate, have established reserves in connection with these legalproceedings.

**Item4.   Submission of Matters to a Vote of Security Holders.**

On November 24, 2004, our then-existingstockholders approved by written consent in lieu of a special meeting (1) ouramended and restated certificate of incorporation and bylaws, (2) theinitial public offering of our Class A common stock, (3) the electionof each of our current directors, namely Christopher Clemente, Gregory V.Benson, A. Clayton Perfall, David M. Guernsey, James A. MacCutcheon and Gary L.Martin, (4) the classification of our board of directors, (5) our2004 Long-Term Incentive Compensation Plan, (6) our 2004 Employee StockPurchase Plan, (7) the form of Indemnification Agreement entered into, orto be entered into, with our current and/or future board members and executiveofficers, and (8) the form of Tax Indemnification Agreement entered intowith stockholders of certain of our subsidiaries.

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**PART II**

**Item5.   Market for the Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities**

**Market for Common Stock**

Our Class Acommon stock has been traded on the Nasdaq National Market under the symbol “CHCI”since our initial public offering on December 14, 2004. The followingtable sets forth the high and low sale prices of our Class A common stock,as reported on Nasdaq, for the period indicated:
| ** **                                     | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|----------|------------|---------|------------|
| **2004**                                       |       |     |       |    |       |
| Fourth quarter  (ended December 31, 2004) |       | $        | 22.10      |    | $          | 16.00 |   |
|                                                |            |          |            |         |            |  |  |

 

On March 24, 2005,the last reported sale price of our Class A common stock was $22.18 pershare. On March 24, 2005, there were approximately 16 record holders andapproximately 2,157 beneficial owners of our Class A common stock.

**Dividends**

We have never paid anycash dividends on our common stock. From time to time, our board of directorsevaluates the desirability of paying cash dividends. The future payment andamount of cash dividends will depend upon our financial condition and resultsof operations, applicable loan covenants and other factors deemed relevant byour board of directors.

**Initial Public Offering**

In connection with our initial public offering of our Class Acommon stock, the SEC declared our Registration Statement on Form S-1(No. 333-118193), filed under the Securities Act of 1933, effectiveon December 13, 2004. On December 17, 2004, we closed the sale of3,960,000 shares of our Class A common stock registered under theRegistration Statement. Furthermore, we sold 594,000 shares of our Class Acommon stock on December 28, 2004 pursuant to the exercise in full of theunderwriters’ over-allotment option. BB&T Capital Markets, a Division ofScott and Stringfellow, Inc., Robert W. Baird & Co. and Ferris,Baker Watts Incorporated served as the managing underwriters.

The initial public offering price was $16 per share. Theaggregate sale price for all of the shares sold by us was approximately $72.8million, resulting in net proceeds to us of approximately $64.9 million afterpayment of underwriting discounts and commissions of approximately $5.1 millionand legal, accounting and other fees incurred in connection with the offeringof approximately $2.8 million.

We used approximately $8million from the net proceeds received from our initial public offering toacquire minority membership interests in certain of our subsidiaries,approximately $3 million to repay certain indebtedness, and approximately $8.5million to fund the payment of a portion of certain S corporation distributionsand other amounts owed to stockholders by certain of our subsidiaries inconjunction with our internal consolidation. We have invested the remainder ofthe proceeds from the initial public offering in short-term, interest-bearing,investment-grade securities.

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**Item 6.   Selected Financial Data**

The following tablecontains selected consolidated and combined financial information and issupplemented by the more detailed financial statements and notes thereto includedelsewhere in this report. We derived theselected historical financial data shown below for 2000, 2001, 2002, 2003 and2004 from our audited and unaudited financial statements. You should read thefollowing financial information in conjunction with “Management’s Discussionand Analysis of Financial Condition and Results of Operations,” “Business” andour combined consolidated financial statements and the related notes, includedelsewhere in this report.

**FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA**

**Dollars in thousands (except per share data)**
| ** **                                                                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Revenues                                                                            |       | $                                           | 96,045     |   | $ | 55,521 |   | $ | 34,752 |   | $ | 50,929 |   | $ | 49,439 |   |
| Expenses                                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Cost of sales                                                                       |       | 63,993                                      |       | 41,756 |   | 26,820 |   | 40,853 |   | 43,199 |   |
| Selling, general and  administrative                                                |       | 11,940                                      |       | 5,712 |   | 3,725 |   | 3,900 |   | 1,603 |   |
| Operating income                                                                    |       | 20,112                                      |       | 8,053 |   | 4,207 |   | 6,176 |   | 4,637 |   |
| Other (income) expense,  net                                                        |       | 908                                         |       | (44 | ) | 10 |   | (302 | ) | (62 | ) |
| Income before minority  interest and equity in earnings of real estate partnerships |       | 19,204                                      |       | 8,097 |   | 4,197 |   | 6,478 |   | 4,699 |   |
| Minority interest                                                                   |       | 5,260                                       |       | 2,297 |   | 664 |   | 1965 |   | 1861 |   |
| Income before equity in  earnings of real estate partnerships                       |       | 13,944                                      |       | 5,800 |   | 3,533 |   | 4,513 |   | 2,838 |   |
| Equity in earnings of  real estate partnerships                                     |       | 118                                         |       | 139 |   | 51 |   | 6 |   | 0 |   |
| Income before income  taxes                                                         |       | 14,062                                      |       | 5,939 |   | 3,584 |   | 4,519 |   | 2,838 |   |
| Income tax provision  (benefit)                                                     |       | (241                                        | )          | — |   | — |   | — |   | — |   |
| Net income                                                                          |       | $                                           | 14,303     |   | $ | 5,939 |   | $ | 3,584 |   | $ | 4,519 |   | $ | 2,838 |   |
| Basic earnings per share                                                            |       | $                                           | 1.95       |   | $ | 0.84 |   | $ | 0.59 |   | $ | 0.74 |   | $ | 0.47 |   |
| Basic weighted average  shares outstanding(1)                                       |       | 7,347                                       |       | 7,067 |   | 6,074 |   | 6,074 |   | 6,074 |   |
| Dilutive earnings per  share                                                        |       | $                                           | 1.95       |   | $ | 0.84 |   | $ | 0.59 |   | $ | 0.59 |   | $ | 0.59 |   |
| Dilutive weighted average shares outstanding(1)                                     |       | 7,351                                       |       | 7,067 |   | 6,074 |   | 6,074 |   | 6,074 |   |

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Balance Sheet Data:                       | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                 |       | $                     | 67,559     |   | $ | 17,160 |   | $ | 8,695 |   | $ | 7,086 |   | $ | 6,664 |   |
| Real estate held for development and sale |       | 104,326               |       | 65,272 |   | 20,192 |   | 8,573 |   | 12,889 |   |
| Total assets                              |       | 304,507               |       | 90,184 |   | 33,971 |   | 18,402 |   | 20,959 |   |
| Notes payable                             |       | 76,628                |       | 61,062 |   | 17,203 |   | 9,439 |   | 11,855 |   |
| Total liabilitities                       |       | 239,586               |       | 71,746 |   | 21,574 |   | 13,035 |   | 17,033 |   |
| Minority interest                         |       | 2,695                 |       | 11,413 |   | 8,790 |   | 2,390 |   | 1,318 |   |
|                                           |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)   Sharesoutstanding for prior years have been adjusted to account for shares issued inconnection with the initial public offering of Comstock’s common stock.

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**Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with “Selected Financial and Other Data” and ourconsolidated and combined financial statements and related notes appearingelsewhere in this report***.***Otherthan in the “Overview” below, this discussion and analysis does not incorporatethe financial condition and results of operations of Comstock Service, Inc.,under which entity we previously conducted our Raleigh, North Carolinaoperations before the merger of Comstock Service, Inc. into ComstockHomebuilding Companies, Inc. The merger of Comstock Service, Inc. wastreated as an acquisition for accounting purposes. This discussion and analysiscontains forward-looking statements that involve risks and uncertainties.Please see “Cautionary Notes Regarding Forward-looking Statements” formore information. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of variousfactors including, but not limited to, those discussed below and elsewhere inthis report, particularly under the headings “Business-Risk—Factors” and “CautionaryNotes Regarding Forward-looking Statements.”

**Overview**

We engage in the business of residential landdevelopment, production home building and high-rise condominium development inthe greater Washington, D.C. and Raleigh, North Carolina markets. Our businesswas started in 1985 by Christopher Clemente, our Chief Executive Officer, as aresidential land developer and home builder focused on the luxury home marketin the northern Virginia suburbs of Washington, D.C. In 1992, we repositionedourselves as a production home builder focused on moderately priced homes inareas where we could more readily purchase finished building lots throughoption contracts. In 1997, we entered the Raleigh, North Carolina market.

In the late 1990s, in response to increasingcompetition for finished lots, we diversified our product base to includemultiple product types and home designs, and we rebuilt our in-house landdevelopment department to include significant experience in both landdevelopment operations and land entitlement expertise. Our strategic goal wasto secure and control a pipeline of diversified land inventory at variousstages of entitlement, thus reducing our dependence on other land developersfor finished building lots and improving our ability to control our growth.

In recent years, our financial results have beeninfluenced significantly by the availability of building lots, the timing ofentitlement processes, the mix of products available for sale and the timing ofsettlements.

The amount of time that it takes to bring a newdevelopment to market varies greatly depending on, among other things, thelocation and jurisdiction, governmental zoning and permitting processes, sitedevelopment conditions, weather conditions, and the type of product to beconstructed on the subject site. There can be a six- to 36-monthlag time between the time we contract to purchase a site and the time we begindeveloping and/or delivering homes on the site. For example, a site thatrequires entitlement processing takes longer than a site where we purchasefinished building lots. Additionally, condominium homes take longer toconstruct than townhouses and single-family homes and high-risedevelopments take longer to construct than low-rise developments. As a resultof this lag, it has been our experience that an increasing lot inventory in oneperiod does not necessarily correlate to increasing sales in the immediatelyfollowing periods. Thus, there are both market risks and benefits associatedwith the lag time between controlling a property and realizing revenue from theproperty.

We can experience significant variation from oneperiod to the next with respect to average price per new order and averagesettlement revenue. This variation often results from shifts in the mix ofproducts being sold during the period. While it is most typical that single-familyhomes are priced higher than townhouses or condominiums, it is possible thatduring a given period, orders and deliveries may include townhouses, based onlocation, that price higher than single-family homes. Likewise, in anyproject in any 

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period, condominium unitsmay produce higher average per unit sales prices and/or settlement revenues.Lower average per unit orders or settlements do not necessarily indicate thatmargins have been eroded or that profits have been reduced. Average settlementrevenue can be both higher and lower than average price per new order in theprior period based on the mix of available product for sale.

Forthe 12 month periods ended December 31, the approximate average orderprices for our market rate homes (which excludes county government mandatedaffordable housing program units sold at a discount) were as follows:
| ** **    | ** ** | **12-month period ended December 31,** | ** ** |
|---------------|------------|------------------------------------------------------------|------------|
| **SUMMARY**   | ** ** | **2002**                                                   | ** ** | **2003** | ** ** | **2004** | ** ** |
| Townhouse     |       | $                                                          | 226,700    |   | $ | 271,430 |   | $ | 342,457 |   |
| Single Family |       | $                                                          | 415,150    |   | $ | 443,400 |   | $ | 460,066 |   |
| Condominium   |       | $                                                          | 302,900    |   | $ | 343,560 |   | $ | 380,548 |   |

 

We have made significantinvestments over the past three years to become a fully integrated anddiversified home building operation with a wide spectrum of skills and asubstantial pipeline of building lot inventory. The costs of our expansion anddiversification were most evident in 2002 and 2003 as we experienced delaysdeveloping our inventory of land due to entitlement delays and extreme weatherconditions. In 2002, these delays were principally caused by demand fordevelopment and construction entitlements and permitting at a pace thatexceeded the ability of the local municipalities to respond. Severe weatherexacerbated these delays. The result was a temporary shortage of building lotinventory from which we could sell homes and an increase in our land positionand backlog. Consequently, we posted negative growth in 2002 and slower thanexpected growth in 2003. Towards the end of 2003 we began to realize thebenefits of a replenished and diversified building lot inventory. At December 31,2004, we either owned or controlled under option agreements over 3,750 buildinglots.

**Recent accounting pronouncements**

In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 123 (revised 2004), Share-Based Payments, (“SFAS 123R”).SFAS 123R is a revision of SFAS 123 and supersedes APB No. 25. SFAS 123Rrequires that the cost resulting from all share-based payment transactions berecognized in the financial statements and establishes fair value as themeasurement objective in accounting for share-based payment arrangements. SFAS123R is effective as of the beginning of the first interim or annual reportingperiod that begins after June 15, 2005, and applies to all awards granted,modified, repurchased or cancelled after the effective date, and alloutstanding portions of awards granted prior to the effective date which areunvested as the effective date of the pronouncement. Entities may adopt theprovisions of SFAS 123R using either the modified prospective or modifiedretrospective application. Under the modified prospective method, compensationcost is recognized on or after the required effective date for the portion ofoutstanding awards for which the requisite service has not yet been rendered,based on the grant-date fair value of those awards calculated under SFAS 123for either recognition or pro forma disclosure. For periods before the requiredeffective date, the modified retrospective application may be applied to either(a) all prior years for which SFAS 123 was effective or (b) only toprior interim periods in the year of initial adoption, on a basis consistentwith the pro forma disclosures required for those periods by SFAS 123. TheCompany adopted SFAS 123R on January 1, 2004. Prior to December 17,2004 the Company had no share-based payment transactions.

**CriticalAccounting Policies and Estimates**

Our consolidated and combined financial statements areprepared in accordance with generally accepted accounting principles, whichrequire us to make certain estimates and judgments that affect the 

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reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities at thedate of the financial statements, and the reported amounts of revenues andexpenses during the reporting periods. On an ongoing basis, we evaluate ourestimates, including those related to the consolidation of variable interestentities, revenue recognition, impairment of real estate held for developmentand sale, warranty reserve and our environmental liability exposure. We baseour estimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Actual results may differmaterially from these estimates.

A summary of significantaccounting policies is provided in Note 2 to our audited consolidated andcombined financial statements. The following section is a summary of certainaspects of those accounting policies that require our most difficult,subjective or complex judgments and estimates.

***Consolidation of VariableInterest Entities***

In January 2003, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 46, “Consolidation ofVariable Interest Entities,” or FIN 46. FIN 46 requires the primarybeneficiary of a variable interest entity to consolidate that entity. Avariable interest entity is created when (i) the equity investment at riskis not sufficient to permit the entity from financing its activities withoutadditional subordinated financial support from other parties or (ii) equityholders either (a) lack direct or indirect ability to make decisions aboutthe entity, (b) are not obligated to absorb expected losses of the entityor (c) do not have the right to receive expected residual returns of theentity if they occur. The primary beneficiary of a variable interest entity isthe party that absorbs a majority of the variable interest entity’s expectedlosses, receives a majority of the entity’s expected residual returns, or both,as a result of ownership, contractual or other financial interests in theentity. Expected losses are the expected negative variability of an entity’snet assets exclusive of its variable interests, and expected residual returnsare the expected positive variability in the fair value of an entity’s assets,exclusive of variable interests. Prior to the issuance of FIN 46, an enterprisegenerally consolidated an entity when the enterprise had a controllingfinancial interest in the entity through ownership of a majority votinginterest.

In December 2003, the FASB issued a revision ofFIN 46 (“FIN 46-R”), clarifying certain provisions of FIN 46. We adoptedthe provisions of FIN 46-R on February 1, 2003 to the extent thatthey related to variable interest entities created on or after that date. Forvariable interest entities created before January 31, 2003, FIN 46-Rwas deferred to the end of the first interim or annual period ending after March 15,2004. We fully adopted FIN 46-R effective March 31, 2004. Based onthe provisions of FIN 46-R, we have concluded that whenever weoption land or lots from an entity and pay a significant nonrefundable deposit,a variable interest entity is created under condition (ii) (b) of theprevious paragraph. This is because we have been deemed to have providedsubordinated financial support, which refers to variable interests that willabsorb some or all of an entity’s expected theoretical losses if they occur.Therefore, for each variable interest entity created, we compute the expectedlosses and residual returns based on the probability of future cash flows asoutlined in FIN 46 to determine if we are deemed to be the primary beneficiaryof the variable interest entity.

The methodology used toevaluate our primary beneficiary status requires substantial managementjudgement and estimation. These judgments and estimates involve assigningprobabilities to various estimated cash flow possibilities relative to theselling entity’s expected profits and losses and the cash flows associated withchanges in the fair value of the land under contract. Because we do not haveany ownership interests in the entities with which we contract to buy land(such as LLCs), we may not have the ability to compel these entities to providefinancial or other data to assist us in the performance of the primarybeneficiary evaluation. This lack of direct information from the contractingentities may result in our evaluation being conducted solely based on theaforementioned management judgments and estimates. Further, where we deemourselves to be the primary beneficiary of such an entity created after December 31,2003 and that entity refuses to provide financial statements, we utilizeestimation techniques 

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toperform the consolidation. While management believes that our estimationtechniques provide a reasonable basis for determining the financial conditionof a entity that refuses to provide financial statements, the actual financialcondition of the entity could differ from that reported. In addition, althoughmanagement believes that our accounting policy is designed to properly assessour primary beneficiary status relative to our involvement with the entitiesfrom which we acquire land, changes to the probabilities and the cash flowpossibilities used in our evaluation could produce different conclusionsregarding our primary beneficiary status.

***RevenueRecognition***

We primarily derive ourearned revenues from the sale of residential property. We recognize residentialrevenue and all related costs and expenses when full payment has been received,title and possession of the property has been conveyed and risks and rewards ofownership transfer to the buyer and other sale and profit recognition criteriaare satisfied. Management estimates of future costs to be incurred after thecompletion of each sale are included in cost of sales. A change incircumstances that causes these estimates of future costs to increase orrevenues to decrease would significantly affect the profit recognized on thesesales.

***Impairmentof Real Estate Held for Development and Sale***

Real estate heldfor development and sale includes land, land development costs, interest andother construction costs and is stated at cost or, when circumstances or eventsindicate that the real estate held for development or sale is impaired, atestimated fair value. Circumstances or events we consider important which couldtrigger an impairment review include the following:

·       significantnegative industry or economic trends;

·       asignificant underperformance relative to historical or projected futureoperating results;

·       asignificant change in the manner in which an asset is used; and

·       anaccumulation of costs significantly in excess of the amount originally expectedto construct an asset.

Real estate is stated atthe lower of cost or estimated fair value using the methodology described asfollows. A write-down to estimated fair value is recorded when we determinethat the net book value exceeds the estimated selling prices less cost to sell.These evaluations are made on a property-by-property basis. When we determinethat the net book value of an asset may not be recoverable based upon theestimated undiscounted cash flow, an impairment write-down is recorded. Theevaluation of future cash flows and fair value of individual propertiesrequires significant judgment and assumptions, including estimates regardingexpected sales prices, development absorption and remaining development costs.Significant adverse changes in circumstances affecting these judgments andassumptions in future periods could cause a significant impairment adjustmentto be recorded.

***WarrantyReserve***

Warranty reserves forhouses sold are established to cover potential costs for materials and laborwith regard to warranty-type claims expected to arise during the one-yearwarranty period provided by us or within the five-year statutorily mandatedstructural warranty period. Since we generally subcontract our home buildingwork, subcontractors are required to provide us with an indemnity and acertificate of insurance prior to receiving payments for their work. Claimsrelating to workmanship and materials are generally the primary responsibilityof the subcontractors and product manufacturers. The warranty reserve isestablished at the time of closing, and is calculated based upon historicalwarranty cost experience and current business factors. Variables used in thecalculation of the reserve, as well as the 

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adequacyof the reserve based on the number of homes still under warranty, are reviewedon a periodic basis. Although management considers the warranty reserve to beadequate, there can be no assurance that this reserve will prove to be adequateover time to cover losses due to increased costs for material and labor, theinability or refusal of manufacturers or subcontractors to financiallyparticipate in corrective action, unanticipated adverse legal settlements, orother unanticipated changes to the assumptions used to estimate the warrantyreserve.

***EnvironmentalLiability Exposure***

Development and sale ofreal property creates a potential for environmental liability on our part asowner and developer, for our own acts as well as the acts of prior owners ofthe subject property or owners or past owners of adjacent parcels. If hazardoussubstances are discovered on or emanating from any of our properties, we andprior owners may be held liable for costs and liabilities relating to thosehazardous substances. We generally undertake environmental studies inconnection with our property acquisitions, when warranted. If we incurenvironmental remediation costs in connection with properties we previouslysold, including clean up costs, consulting fees for environmental studies andinvestigations, monitoring costs, and legal costs relating to clean up,litigation defense and the pursuit of responsible third parties, they areexpensed. We capitalize costs relating to land under development andundeveloped land as part of development costs. Costs incurred for properties tobe sold are deferred and charged to cost of sales when the properties are sold.Should a previously undetected, substantial environmental hazard be found onour properties, significant liquidity could be consumed by the resulting cleanup requirements and a material expense may be recorded. Further, governmentalregulation on environmental matters affecting residential development couldimpose substantial additional expense on us, which could adversely affect ourresults of operations or the value of properties owned under contract, orpurchased by us. For additional information regarding risks associated withenvironmental hazards and environmental regulation, see “Business—RiskFactors—We are Subject to Certain Environmental Laws and the Cost of ComplianceCould Adversely Affect our Business.”

**InternalControl Over Financial Reporting**

Effective internal controls are necessary for us toprovide reliable financial reports and effectively prevent fraud. If we cannotprovide reliable financial reports or prevent fraud, among other materialadverse consequences, our operating results could be misstated and ourreputation may be harmed. Prior to our initial public offering in December 2004,we operated four primary independent privately held S-corporations andsingle purpose limited liability companies (“LLC”). In the past we had producedaudited individual S-corporation and a number of LLC financial statements thatdid not contemplate eliminations for inter-company transactions. Early inthe process of preparing for our initial public offering, we recognized theneed to produce audited combined consolidated financial statements. Afterhaving produced combined consolidated financial statement for the fourS-corporations, it was decided that based on a disparity of ownership betweenthe shareholders (which we determined represented a substantive exchange) wewould, upon consolidation, need to treat Comstock Service, Inc., as anacquired company for accounting purposes and therefore we produced a separateaudit for that company. We then produced combined consolidated financialstatements for the remaining three S-corporations, designated as the ComstockCompanies.

Prior to our initial publicoffering, we had never needed to produce audited combined financial statementsfor the Comstock Companies. As a result, we did not maintain a system ofinternal controls that was adequate for producing a combined consolidatedfinancial statements such as is needed for a public company. In preparing thefinancial statements included in this report we modified several of ourpolicies and procedures and created numerous new policies and procedures toremedy problems identified with our internal control structure that existedprior to December 31, 2003. Subsequent to December 31, 2003, 

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we have,among other things, supplemented our accounting staff with, among others, aChief Financial Officer (promoted from Vice President of Finance), a ChiefAccounting Officer, a Corporate Controller and an Assistant Controller, toattempt to establish an infrastructure appropriate for reporting as a publiccompany.

In connection with theaudit of the combined consolidated financial statements of our three primaryholding companies for the three years ended December 31, 2003, in July 2004our independent registered public accounting firm reported to our Board ofDirectors several matters that are “reportable conditions” and “materialweaknesses” in our internal controls as defined in standards established by theAmerican Institute of Certified Public Accountants. In general, reportableconditions are significant deficiencies in our internal controls that, if notaddressed, could adversely affect our ability to record, process, summarize andreport financial data consistent with the assertions of management in thefinancial statements. A material weakness is a reportable condition in whichinternal controls do not reduce to a low level the risk that undetected misstatementscaused by error or fraud may occur in amounts that are material to auditedfinancial statements.

Theconditions resulting in the material weaknesses gave rise to a number ofadjustments under generally acceptable accounting principles, and adjustmentsrelating to the completeness and accuracy of certain underlying data, whichmaterially changed our financial statements between initial presentation andissued audit. The material weaknesses, as reported in July 2004 to ourBoard of Directors in connection with their audit of our financial statementsfor the three years ended December 31, 2003, are summarized below:

·       Ouraccounting system had significant limitations with respect to the process ofpreparing combined consolidated financial statements. In response to thisrecommendation, as of September 2004, we have designed a tool to work withour existing accounting system which has the ability to generate more detailedreporting for the purpose of producing combined consolidated financialstatements. We have evaluated upgrading our accounting software and havedecided that in light of upcoming Sarbanes-Oxley Act systems andprocedures documentation requirements, we would be better served to postpone aconversion until the beginning of 2006.

·       Ourpolicies and procedures with respect to record retention were deemedinadequate. In addition, we needed to enhance our policies and procedures withrespect to the formal review and documentation by management of businessperformance. In response to this recommendation we have initiated a formalpolicy for records retention and documentation by management of businessperformance. Subsequent to December 31, 2003 we began producing quarterlyfluctuation reports and management discussion of the results of operations. Wehave formed a Disclosure Committee comprised of senior managers and initiatedan internal reporting procedure for senior management that is to be completedprior to the release of financial statements in an effort to assurecompleteness of information with respect to the analyses prepared. The processof internal and external reporting is overseen by our Chief Financial Officer.

·       Weneeded to increase and improve our in-house accounting staff inpreparation for the requirements of financial reporting as a public company.Subsequent to December 31, 2003 we promoted our Vice President of Financeto the position of Chief Financial Officer and hired a Chief Accounting Officerwith extensive public company reporting experience. We reassigned theresponsibility for accounting to our Chief Accounting Officer with day-to-dayoversight by our Chief Financial Officer. In addition we created the positionof Assistant Controller to work closely with the Corporate Controller who hadbeen hired in late November 2003. We believe this additional staff, alongwith additional staff level personnel, provides the resources necessary toremedy the deficiencies in our controls identified by our auditors. We haveretained internal auditors and consultants to work closely with our ChiefAccounting Officer to prepare for compliance under Section 404 of theSarbanes-Oxley Act. We have a timeline which provides us an opportunityto 

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conduct internalaudits of our controls and procedures prior to December 31, 2005 when wewill be subject to an audit of our internal controls and procedures.

·       Ourpolicies and procedures with respect to the capitalization of selling, generaland administrative costs as real estate held for development and sale andreleased into cost of sales at settlement were deemed to be inaccurate. Theresult of the inaccurate capitalization of selling, general and administrativeexpenses was that accurate reporting of expenses was delayed. Since the three-yearaudit presented herein is the first combined consolidated audit of the ComstockCompanies, there was no restatement associated with this change in policy andprocedure. We have adjusted our policy with respect to the capitalization andrecognition of selling, general and administrative expenses. The effect of thischange in policy was on timing of profit recognition and resulted in increasedgross margins from previously reported non-consolidated financialstatements. This change in policy was effected historically throughout ourthree-year audited combined consolidated financial statements for theperiod ending December 31, 2003.

·       Ourpolicies and procedures for accruals with respect to period end cut-offwere deemed to be insufficient to properly present the financial position ofthe company with respect to accrued expenses. The result of the inaccurateaccrual and release of completion expenses was that accurate reporting ofprofits was delayed. This change in policy affected the timing of reportedprofits, not cumulative reported profits. Since the three-year auditpresented herein is the first combined consolidated audit of the ComstockCompanies there was no restatement associated with this change in policy andprocedure. We adjusted our policy with respect to accruals for estimable andprobable expenses associated with unit settlements. We have established formalprocedures for reviewing these estimates on a quarterly basis for completeness.This change in policy was effected retroactively and is reflected in our three-yearaudited combined consolidated financial statements.

·       Ourpolicies and procedures with respect to the approval and documentation ofrelated party transactions needed to be formalized so that we could ensure thefairness of these transactions and proper inclusion of these transactions inour financial statements. We have adopted a new procedure for presenting allrelated party transactions to our Board of Directors for approval by a majorityof the independent members of our Board of Directors. Our procedure requiresthat our Chief Financial Officer, assuming he is not party to the related partytransaction, coordinate with the independent members of our Board of Directorsin evaluating the fairness of related party transactions.

We believe that theremedial measures described above address the material weaknesses identified byour independent registered public accounting firm. We were able to accuratelyreport our financial condition and results of operations for the year ended December 31,2004 without any reportable conditions or material weaknesses having beenreported, and we believe that we will continue to be able to accurately reporton a timely basis our financial condition and results of operations. However,the process of designing and implementing effective internal controls and proceduresis a continuous effort that requires us to anticipate and react to changes inour business and the economic and regulatory environments and to expendsignificant resources to maintain a system of internal controls that isadequate to satisfy our reporting obligations as a public company. We have hadonly limited operating experience with the improvements we have made to date.We cannot be certain that the measures we have taken to date or any futuremeasures will adequately remedy the material weaknesses reported by ourindependent auditors. Our independent registered public accounting firm has notformally evaluated the measures we have taken or plan to take to address anymaterial weaknesses. For a description of risks associated with our internalcontrols, please see “Business—Risk Factors—Being a public company will requireus to significantly enhance our controls over the preparation of financialstatements in order to ensure the detection, in a timely manner, ofmisstatements that could occur in our financial statements in amounts that maybe material.”

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**Results of Operations**

***Yearended December 31, 2004 compared to year ended December 31, 2003***

*Ordersand Backlog*

New orders for the year ended December 31, 2004increased $155 million, or 224.6%, to $224.2 million on 608 homes ascompared to $69.1 million on 208 homes for the year ended December 31,2003. This increase in new orders was primarily attributable to the opening ofour Eclipse at Potomac Yard project during the second half of the year. IncludingComstock Service, which was acquired on December 17, 2004, the value ofnew orders for the year ended December 31, 2004 was $241.0 million on 665units.

The average sale price per new order for the yearended December 31, 2004 increased by $49,000 to $369,000 as compared to$320,000 for the year ended December 31, 2003. This change wasattributable to both a shift in product mix that included a significant numberof higher-priced condominiums sales derived from the opening of ourEclipse at Potomac Yard project during the year ended December 31, 2003and general price appreciation in the Washington, DC area. On average, the saleprice of townhouses increased $90,300 to $361,700 for the year ended December 31,2004 as compared to the year ended December 31, 2003. On average, the saleprice of our single-family homes increased by approximately $65,300during the year ended December 31, 2004 to $508,700 from $443,400 at December 31,2003. The average sale price of our condominiums increased by $37,400 to$381,000 for the period ending December 31, 2004 as compared to $343,600for the period ended December 31, 2003. Including Comstock Service, thechanges for the year ended December 31, 2004 were a $71,000 increase inthe average sale price of a townhouse to approximately $342,500; a $16,700increase in the average sale price of a single family home to approximately$460,100; and a $37,000 increase in the sales price of a condominium toapproximately $380,500.

Our backlog at December 31,2004, which includes Comstock Service, increased $138.2 million, or 438.4%, to $174.6 millionon 329 homes compared to our backlog at December 31, 2003 of$31.5 million on 93 homes. This increase in backlog is primarilyattributable to sales at the Eclipse project in Arlington, Virginia whichrepresented approximately $105 million of the backlog at December 31,2004.

*Revenues.*

The number of homesdelivered in the year ended December 31, 2004 increased by 62.3% to 263from 162 homes in the year ended December 31, 2003. Average per settlementrevenue increased by approximately $25,000 to $328,000 for the year ended December 31,2004 as compared to $303,000 for the year ended December 31, 2003. Homebuilding revenues increased by $37.9 million, or 77.3%, to$87.0 million for the year ended December 31, 2004 as compared to$49.1 million for the year ended December 31, 2003. Total revenueincreased $40.5 million to $96.0 million for the year ended December 31,2004 as compared to $55.5 million in the year ended December 31,2003. The increase in deliveries and revenue from December 31, 2003 to December 31,2004 are in large part attributable to the opening of new communities and therelease of inventory for sale in late 2003 at projects such as Blooms Mill (137deliveries in 2004) and Emerald Farm (20 deliveries in 2004). In addition, thebeginning of deliveries in the first building at Belmont Bay 5 (11 deliveriesin 2004) and the completion of Flynns Crossing (49 deliveries in 2004)contributed to the increase. The $25,000 increase in average per settlementrevenue also contributed to the increase. Total revenue increased in part dueto the delivery of 30 lots at Blooms Mill to another homebuilder during theyear ended December 31, 2004 for $3.9 million of Other Revenue which wasan increase of 13 units and $1.7 million from the year ended December 31,2003.

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*Cost ofsales and selling, general and administrative expenses.*

Cost of sales for the year ended December 31,2004 increased $22.2 million, or 53.3%, to $64.0 million, or 66.6% ofrevenue, as compared to $41.8 million, or 75.2% of revenue, for the yearended December 31, 2003. The increase in cost of goods sold during theyear ended December 31, 2004 as compared to the year ended December 31,2003 is directly attributable to the increase in deliveries. The reduction of8.6 percentage points in cost of goods sold as a percentage of revenue isprimarily attributable to the cost basis in the land which was settled duringthe year ended December 31, 2004 which represented a lower percentage ofrevenue as compared to the cost basis of the land settled during the year endedDecember 31, 2003. For the year ended December 31, 2004, land costsfor units settled represented 17% of total revenue as compared to 20% for theyear ended December 31, 2003. The increase in gross margin was also partiallyattributable to price increases in the market which in general outpacedincreases in costs of goods sold.

Selling, general andadministrative costs for the year ended December 31, 2004 increased$6.2 million to $11.9 million from $5.7 million for the yearended December 31, 2003. This increase was the result of additionalstaffing costs of $3.6 million to support our growth and to provide thestaffing required of a public company, increased marketing expenses of $1.2million, and increased audit fees of $1.4 million associated with historicalperiods presented in our initial public offering. As a percentage of revenue,and as a result of expenses associated with preparation for our initial publicoffering selling, general and administrative expenses increased by 1.1percentage points to 12.4% during the year ended December 31, 2003 from10.3% during the year ended December 31, 2002.

*Operatingincome.*

Our operating income forthe year ended December 31, 2004 increased $12.1 million to$20.1 million as compared to $8.1 million for the year ended December 31,2003. Our operating margin for the year ended December 31, 2004 was 20.9%compared with 14.5% for the year ended December 31, 2003. The increase inoperating margin is attributable to an increased gross margin that outpaced theincrease in sales, general and administrative expenses as a percentage ofrevenue. The increase in margin resulted in large part from reductions in landand house costs as a percentage of revenue.

*Incomebefore minority interest.*

Our income before minorityinterest increased by $11.1 million, or 137.2%, to $19.2 million forthe year ended December 31, 2004 as compared to $8.1 million for theyear ended December 31, 2003. Net margins as a percentage of revenuesincreased by 5.4% to 20.0% for the year ended December 31, 2004 from 14.6%for the year ended December 31, 2003. The increase in net income beforeminority interests was a result of the increase in deliveries (101 units) andcorresponding gross profit generated by those settlements ($18.3 million). Thisincrease was offset by the increase in sales, general and administrativeexpenses ($6.2 million).

*Other(income) expense, net.*

Other (income) expense,net increased by $1.0 million to a net expense of $0.9 million for the yearended December 31, 2004 as compared to net income of $44,000 for the yearended December 31, 2003. The increase in Other (income) expense net isprimarily attributable to interest from a corporate working capital line ofcredit ($0.4 million) and a pre-payment premium associated with the earlyretirement of $2.5 million of the facility ($0.5 million).

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*Minorityinterest.*

Minority interestincreased by $3.0 million, or 129.0%, to $5.3 million for the yearended December 31, 2004 as compared to $2.3 million for the year ended December 31,2003. This increase is primarily the result of increased income earned byComstock Investors, VI a limited partnership in which the minority interestpartners have been subsequently redeemed.

*Income taxes*

On December 17, 2004,the Company  reorganized from an Scorporation to a C corporation. For the period December 17, 2004 to December 31,2004 the Company recorded a net income tax benefit of $241,000. Of this amount,$290,000 represents the current year income tax expense on earnings fromDecember 17, 2004 to December 31, 2004 and $531,000 represents a deferred taxbenefit arising from the reorganization.  The Company’s effective tax rate net ofdeferred income taxes for this period was 38.9% (1.71%). In future periods theCompany expects its effective tax rate to be higher and the Company expectsincome tax expense to be a more significant expense which will have a materialimpact on our net income. We do expect to receive tax rate relief as a resultof the American Jobs Creation Act of 2004.

***Yearended December 31, 2003 compared to year ended December 31, 2002***

*Ordersand backlog.*

New orders for the year ended December 31, 2003increased $40.2 million, or 139%, to $69.1 million on 216 homes ascompared to $28.9 million on 101 homes for the year ended December 31,2002. This increase in new orders was primarily attributable to an increase inthe demand for our products in the Washington, D.C. market and the increasedavailability of lots at our Blooms Mill, Emerald Farm and Flynns Crossingcommunities during the course of the year. Sales for the year ended December 31,2002 were lower due in part to the shortage of inventory of building lotsavailable for sale. This shortage resulted from the inability of themunicipalities in which we operate to keep pace with new development andconstruction permitting requests. While we expect to continue to experiencesuch delays, we do not anticipate such delays having a significant impact on usin the near future. The delays we experienced as a result of time spentprocessing land during 2002 created a natural opportunity for increased ordersin 2003. Increases in saleable inventory during the period are partiallyattributable to the resolution of several infrastructure limitations within thecounties in which we operate that had in the recent past restricted the releaseof development and building permits. For example, the water moratorium weexperienced at our Emerald Farm and Riverside developments resulted in no newpermits being issued for either development during late 2002 and early 2003.

The average sale price per new order for the yearended December 31, 2003 increased by $34,000 to $320,000 as compared to$286,000 for the year ended December 31, 2002. This change wasattributable to a shift in product mix that included a significant number ofhigher-priced townhouse sales derived from the opening of our Blooms Milldevelopment during the year ended December 31, 2003 and higher averageoverall price points than was derived from inventory settled for the year endedDecember 31, 2002. On average, the sale price of townhouses increased$44,730 to $271,430 for the year ended December 31, 2003 as compared tothe year ended December 31, 2002. Our single-family homes increasedby approximately $28,250 during the year ended December 31, 2003 to$443,400 from $415,150 at December 31, 2002. The average sale price of ourcondominiums increased by $40,660 to $343,560 for the period ending December 31,2003 as compared to $302,900 for the period ended December 31, 2002.

Our backlog at December 31,2003 increased $20.0 million, or 175%, to $31.5 million on 93 homescompared to our backlog at December 31, 2002 of $11.5 million on 39homes. This increase in backlog is attributable to increases in orders duringthe second half of the year resulting from the increased demand for ourproducts in the Washington, D.C. market and due to the increased availabilityof saleable building 

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lots inour developments. Several projects that were in the approval review process atthe beginning of the period received approvals necessary for initiation ofdevelopment or construction during the second half of 2003, increasing inventoryof building lots available for sale. As a result of the timing of sales and ayear that experienced record rainfall, inventory under construction could notbe converted into settlements by the end of 2003. Increased undeliveredinventory increased our backlog at December 31, 2003.

*Revenues.*

The number of homesdelivered in the year ended December 31, 2003 increased by 30.6% to 162from 124 homes in the year ended December 31, 2002. Average per settlementrevenue increased by approximately $66,000 to $303,000 for the year ended December 31,2003 as compared to $237,000 for the year ended December 31, 2002. Homebuilding revenues increased by $19.7 million, or 67.0%, to$49.0 million for the year ended December 31, 2003 as compared to$29.4 million for the year ended December 31, 2002. Total revenueincreased $20.8 million to $55.5 million for the year ended December 31,2003 as compared to $34.8 million in the year ended December 31,2002. The increase in deliveries and revenue from December 31, 2002 to December 31,2003 are in large part attributable to the delivery in the quarter ended December 31,2003 of homes sold during the quarters ended June 30, 2003 and September 30,2003. Significant price appreciation in the Washington, D.C. market also led toincreases in revenues during the year ended December 31, 2003. Theaddition of single-family homes at Blooms Mill and the conversion intorevenue of the increases in order prices at Wescott Ridge Condominiums, whereaverage settlement revenue increased approximately $25,660, increasedsettlement revenue during the year ended December 31, 2003 as compared tothe year ended December 31, 2002.

*Cost ofsales and selling, general and administrative expenses.*

Cost of sales for the year ended December 31,2003 increased $15.0 million, or 55.7%, to $41.8 million, or 75.2% ofrevenue, as compared to $26.8 million, or 77.2% of revenue, for the yearended December 31, 2002. The two percentage point change in cost of salesas a percentage of home building revenues is attributable to the sale offinished lots during 2003. Increases in total cost of sales are primarilyattributable to an increase in settlements during the year ended December 31,2003 and the associated capitalized costs of sales of those settlements thatwere expensed during the year ended December 31, 2003 as cost of sales.Since costs associated with development and construction are capitalized intoreal estate held for development and resale as incurred and released pro rataas units and/or finished lots settle, cost of sales is directly related torevenue. As such, higher settlement revenues for the year ended December 31,2003 resulted in an increased cost of sales. Extended construction anddevelopment periods resulting from severe weather during the second half of theyear ended December 31, 2003 contributed to increased carrying costs onthe homes and lots that were settled during the year ended December 31,2003. In addition, the competition for skilled labor and subcontractorsincreased during the year ended December 31, 2003 causing an increase inper unit labor costs. Price appreciation in the market was sufficient, however,to offset these increases.

Selling, general andadministrative costs for the year ended December 31, 2003 increased$2.0 million to $5.7 million from $3.7 million for the yearended December 31, 2002. This increase was the result of additionalstaffing costs of $300,000 to support our growth, increased marketing expensesof $800,000, and general inflation with respect to the goods and services of$900,000. As a percentage of revenue, selling, general and administrativeexpenses decreased to 10.3% during the year ended December 31, 2003 from10.7% during the year ended December 31, 2002.

*Operatingincome.*

Our operating income forthe year ended December 31, 2003 increased $3.8 million to$8.1 million as compared to $4.2 million for the year ended December 31,2002. Our operating margin for the year ended 

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December 31,2003 was 14.6% compared with 12.1% for the year ended December 31, 2002.The increase in operating margin in spite of increased cost of sales isattributable to selling, general and administrative expenses that did notexperience a similar increase as a percentage of revenue during the year ended December 31,2003. The increase in margin resulted in large part from leverage gains in ourfixed cost structure, increased deliveries and price appreciation.

*Incomebefore minority interest.*

Our income before minorityinterest increased by $3.9 million, or 93.0%, to $8.1 million for theyear ended December 31, 2003 as compared to $4.2 million for the yearended December 31, 2002. Net margins as a percentage of revenues increasedby 2.5% to 14.6% for the year ended December 31, 2003 from 12.1% for theyear ended December 31, 2002. This increase is primarily attributable tothe selling, general and administrative expenses that increased but did notincrease pro rata to revenue growth during the year ended December 31,2003. As a result, income increased due to leverage gains in our fixed pricestructure, increased deliveries and price appreciation.

*Other(income) expense, net.*

Other (income) expense,net increased by $54,000 to a net income of $44,000 for the year ended December 31,2003 as compared to a net expense of $10,000 for the year ended December 31,2002. Other (income) expense net is primarily comprised of miscellaneous itemsincluding financing fees and fees from the rental of model homes to mortgagebrokers.

*Minorityinterest.*

Minority interestincreased by $1.6 million, or 250%, to $2.3 million for the yearended December 31, 2003 as compared to $664,000 for the year ended December 31,2002. This increase is primarily the result of increased income to the minorityshareholders in Comstock Investors VI, L.C. of $1.0 million andComstock Investors V, L.C. of $400,000.

**Liquidityand Capital Resources**

We require capital to postdeposits on new deals, to purchase and develop land, to construct homes, tofund related carrying costs and overhead and to fund various advertising andmarketing 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 andamenities. Our sources of capital include, and will continue to include, fundsderived from various secured and unsecured borrowings, operations which includethe sale of constructed homes and finished lots, and the sale of equitysecurities. Our currently owned and controlled inventory of home sites willrequire substantial capital to develop and construct.

In production homebuilding, it is common for builders such as us to employ revolving creditfacilities whereby the maximum funding available under the facility exceeds themaximum outstanding balance allowed at any given time. Our overall borrowingcapacity may be constrained by loan covenants which limit the ratio of ourtotal liabilities to our total equity. This revolving debt will typicallyprovide for funding of an amount up to a pre-determined percentage of thecost of each asset funded. The balance of the funding for that asset isprovided for by us as equity. The efficiency of revolving debt in productionhome building allows us to operate with less overall debt capital than would berequired if we built each project with long-term amortizing debt. At December 31,2004, we had approximately $64.5 million of equity financing, $89.3 million ofdebt financing (including our distribution payable to our pre-initial publicoffering stockholders) and $75.1 million of cash. As discussed in more detailbelow, we believe that funds generated from the sale of our equity securities,operations and borrowings under our credit facilities will provide us withsufficient capital to meet our existing and expected capital needs.

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***Limited Liability Companies and Minority InterestMembers***

Since 1999, we haveformed several LLCs in which there were minority interests to fund one or moredevelopments. At December 31, 2004, we were the managing member of twoactive minority-interest LLCs (Comstock North Carolina, LLC and ComstockInvestors V, L.C.) that had provided significant capital to our operation.These two active minority-interest LLCs have collectively generatedapproximately $2.5 million of equity financing for us. The terms of theoperating agreements of our minority-interest LLCs vary by LLC but theygenerally include the following characteristics:

·       Weare the managing member;

·       Prioritymembers (the minority members) receive priority with respect to cashdistributions until such time as they have received a pre-determined return,which ranges from 20% to 30%;

·       Afterthe return has been achieved we share in the profits of the partnership withinterests ranging from 67% to 87%;

·       Themanaging member may not use the funds of the LLC for developments other thanthose stipulated in the operating agreement without the approval of a majorityof the members;

·       Wehave the right, triggered by a restructuring of our operational structure, torepurchase the minority interest in the LLC at a pre-determined rate of return,which ranges from 25% to 30%;

·       Otherthan as allowed in the operating agreement, funds may not be loaned to otherentities; and

·       TheseLLCs are consolidated within our financial statements for reporting purposes.

As of December 31,2004, we have paid approximately $8 million out of the proceeds of ourinitial public offering to purchase all of the outstanding minority membershipinterests in these minority-interest LLCs.

***Credit Facilities***

At December 31, 2004, we had approximately $137million available under existing secured revolving development and constructionloans for planned construction and development expenditures. A majority of ourdebt is variable rate, based on LIBOR or the prime rate plus a specified numberof basis points, typically ranging from 300 to 600 basis points over the LIBORrate and 50 to 100 basis points over the prime rate. As a result, we areexposed to market risk in the area of interest rate changes. At December 31,2004, the one-month LIBOR and prime rates of interest were 2.39% and 5.25%,respectively, and the interest rates in effect under our existing securedrevolving development and construction credit facilities ranged from 4.95% to7.25%. For information regarding risks associated with our level of debt andchanges in interest rates, see “Business-Risk Factors” and “Quantitative andQualitative Disclosures About Market Risk.”

We have generallyfinanced our development and construction activities on a project basis sothat, for each project we develop and build, we have a separate creditfacility. Accordingly, we have numerous credit facilities. While the loanagreements relating to these various facilities contain certain covenants, theygenerally contain few, if any, material financial covenants. Typically, ourloan agreements contain covenants requiring us to:

·       obtainagreements of sale for a specified number of homes within a specified timeperiod, with the number of homes and time period varying by project;

·       inthe case of facilities entered into directly by our project-basedsubsidiaries, maintain minimum equity levels, typically in the range of 10% to20% of the project’s cost;

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·       inthe case of facilities entered into directly by us, maintain minimum tangiblenet worth levels, typically in the range of $3.0 million to$5.0 million, and minimum leverage ratios, typically of five-to-oneor less;

·       maintaincontrol of any subsidiary that is a party to the applicable loan agreement;

·       completeany construction which is the subject of the loan agreement without significantdelay and in accordance with the approved plan;

·       notifythe lender immediately if we receive a claim of material lien with respect toany services, labor or material furnished in connection with applicableconstruction, and to remove any such lien within a specified number of daysafter the date the lien was filed;

·       maintaincertain minimum levels of insurance;

·       provideinventory status reports and financial statements and other inventory andfinancial information periodically and as reasonably requested by the lender;

·       furnishthe lender with copies of all notices received by us claiming any breach orpotential breach of any contracts related to the construction, claiming orasserting a right to a lien for work performed or materials provided inconnection with construction, or from any governmental authority asserting thatthe land or construction which is the subject of the loan agreements may ordoes violate any law or regulations;

·       notenter into leases affecting the land or the construction which is the subjectof the applicable loan agreements without the prior written consent of thelender;

·       notobtain subordinate financing on the land, construction or other propertygranted as security under applicable loan agreements without the prior approvalof the lender; and

·       notsell or otherwise dispose of any of the land or the construction other than inthe normal course of the business of the project subject to applicable loanagreements.

As of December 31, 2004, we were in compliancewith the financial covenants set forth in our loan agreements.

In order to obtain some of our current creditfacilities, which were entered into in some cases by us and in other cases byour project-based subsidiaries, we were generally required to obtainguaranties by one or more of the now-consolidated primary holding companies aswell as Christopher Clemente, our Chief Executive Officer, and Gregory Benson,our President and Chief Operating Officer, in their personal capacities. At December 31,2004, such parties guaranteed approximately $63.1 million under our creditfacilities. In connection with the consolidation of our operations, we intendto replace the guarantees provided by Messrs. Clemente and Benson withguarantees provided by the Company.

From time to time, we employ subordinated andunsecured credit facilities to supplement our capital resources or a particularproject or group of projects. Our lenders under these credit facilities willtypically charge interest rates that are substantially higher than thosecharged by the lenders under our senior and secured credit facilities. Thesecredit facilities will vary with respect to terms and costs. As of December 31,2004, the annual rate of interest on these facilities ranged from 12% to 14%.At December 31, 2004, we had approximately $13.6 million outstanding underthese subordinate and unsecured facilities. We intend to continue to use thesetypes of facilities on a selected basis to supplement our capital resources.

We are consideringreplacing our credit facilities with one or more larger facilities, which mayreduce our aggregate debt financing costs. We would be the borrower and primaryobligor under this larger facility or facilities, and we anticipate theindebtedness will be secured, nonrecourse and based on an available borrowingbase.

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***Cash Flow***

Net cash provided by/(used in) operating activitieswas $11.1 million for the year ended December 31, 2004, $(32.4 million)for the year ended December 31, 2003 and $(7.9 million) for the year endedDecember 31, 2002. In 2004, the primary source of the increase in cashfrom operating activities was attributable to increases in net income andaccounts payable which were only partially offset by increased investments inreal estate held for development and sale. In 2003, the primary source of thedecrease in cash from operating activities was attributable to increasedinvestment in real estate held for development and sale which was offset byminority interest investment and an increase in accounts payable and accruedliabilities. In 2002, the primary source of the decrease in cash from operatingactivities was attributable to increased investment in real estate held fordevelopment and sale which was offset by minority interest investment and anincrease in accounts payable and accrued liabilities.

Net cash provided by/(used in) investing activitieswas $1.0 million for the year ended December 31, 2004, $67,000 for theyear ended December 31, 2003 and $(1.1 million) for the year ended December 31,2002. In 2004, the primary source of the increase in cash from investingactivities was attributable cash received from the acquisition of ComstockService (as discussed in Note 2 and Note 4 of the accompanying consolidatedfinancial statements). In 2003, the primary source of the increase in cash frominvesting activities was attributable distributions from real estatepartnerships. In 2002 the primary source of the decrease in cash from investingactivities was attributable to an investment in a real estate partnership.

Net cash provided by/(usedin) by financing activities was $38.3 million for the year ended December 31,2004, $40.8 million for the year ended December 31, 2003 and $10.6million for the year ended December 31, 2002. The primary source of theincreases in cash from financing activities for the period ended December 31,2004 was attributable to net proceeds received from the Company’s initialpublic offering which were partially offset by distributions paid tostockholders. The primary source of the increases in cash from financingactivities for the periods ended December 31, 2003 and December 31,2002 were the proceeds from notes payable and contributions from minorityinterest shareholders.

***Material Acquisitions***

In December 2003, we purchased approximately 4.5acres of unimproved land in Arlington, Virginia, which is expected to yieldapproximately 470 condominium units and 80,000 square feet of retail space. Ourpurchase price was approximately $21.5 million. The estimated project costfor this development is $160 million. We entered into a new seniorconstruction credit facility for this project in the estimated amount of$119.3 million and a mezzanine credit facility of approximately$28.2 million.

In November 2004 we entered into an optioncontract to purchase 424 completed rental apartments in Fairfax, Virginia forthe purpose of converting them to for-sale condominiums. Our purchaseprice is approximately $75 million with anticipated construction costs forupgrades of approximately $12 million. Upon closing in February 2005 we enteredinto a new senior acquisition and construction facility for this project.

In December 2004 weentered into an option contract to purchase 103 completed rental apartments inLoudon County, Virginia for the purpose of converting them to for-salecondominiums. Our purchase price is approximately $17 million withanticipated construction costs for upgrades of approximately $5 million. Uponclosing in March 2005 we intend to enter into a new senior acquisition andconstruction facility for this project.

**ContractualObligations and Commercial Commitments**

Inaddition to the above financing arrangements, we have commitments under certaincontractual arrangements to make future payments for goods and services. Thesecommitments secure the future 

48

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rights to various assets and services to be used inthe normal course of operations. For example, we are contractually committed tomake certain minimum lease payments for the use of property under operatinglease agreements. In accordance with current accounting rules, the futurerights and obligations pertaining to such firm commitments are not reflected asassets or liabilities on the consolidated balance sheet. The following tablesummarizes our contractual and other obligations at December 31, 2004, andthe effect such obligations are expected to have on liquidity and cash flow infuture periods:
| ** **       | ** ** | **Payments due by period** | ** ** |
|------------------|------------|-------------------------------------------|------------|
| ** **       | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More  than 5  years** | ** ** |
| ** **       | ** ** | **(in thousands)**                   | ** ** |
| Notes payable    |       | $                                         | 80,523     |   |   | $ | 33,430 |   |   | $ | 47,093 |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating leases |       | $                                         | 3,142      |   |   | $ | 647 |   |   | $ | 1,938 |   |   | $ | 557 |   |   |   | $ | — |   |   |
| Total            |       | $                                         | 83,665     |   |   | $ | 34,077 |   |   | $ | 49,031 |   |   | $ | 557 |   |   |   | $ | — |   |   |

 

Notes payable have an undefined repayment due date andare typically due and payable as homes are settled.

We are not an obligor under, or guarantor of, anyindebtedness of any party other than for obligations entered into by thesubsidiaries of one of the now-consolidated primary holding companies.

We have no off-balance sheet arrangements except forthe operating leases described above.

As discussed in Note 3 inthe accompanying consolidated financial statements as of December 31, 2004, theCompany has posted aggregate non-refundable deposits of $4.2 million on $119million worth of land purchase options.

**Seasonality and Weather**

Our business is affectedby seasonality with respect to orders and deliveries. In the markets in whichwe operate, the primary selling seasons are from January through May aswell as September and October. Orders in other months typically are lower.In addition, the markets in which we operate are four-season markets thatexperience significant periods of rain and snow. Construction cycles andefforts are often adversely affected by severe weather.

**Inflation**

Inflation can have asignificant impact on our business performance and the home building industryin general. Rising costs of land, transportation costs, utility costs,materials, labor, overhead, administrative costs and interest rates on floatingcredit facilities can adversely affect our business performance. In addition,rising costs of certain items, such as lumber, can adversely affect theexpected profitability of our backlog. Generally, we have been able to recoverany increases in costs through increased selling prices. However, there is noassurance we will be able to increase selling prices in the future to cover theeffects of inflation and other cost increases.

**New Accounting Pronouncements**

*Consolidation ofvariable interest entities.*

We typically acquire landfor development at market prices from various entities under fixed pricepurchase agreements. The purchase agreements require deposits that may beforfeited if we fail to perform under the agreement. The deposits requiredunder the purchase agreements are in the form of cash or letters of credit invarying amounts. We may, at our option, choose for any reason and at any timenot to perform under these purchase agreements by delivering notice of itsintent not to acquire the land under 

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contract.Our sole legal obligation and economic loss for failure to perform under thesepurchase agreements is typically limited to the amount of the deposit pursuantto the liquidating damage provision contained within the purchase agreement. Asa result, none of the creditors of any of the entities with which we enter intoforward fixed price purchase agreements have recourse to the general credit ofthe Company. We also do not share in an allocation of either the profit earnedor loss incurred by any of these entities with which we enter fixed pricepurchase agreements.

We have concluded thatwhenever we option land or lots from an entity and pay a significantnonrefundable deposit as described above, a variable interest entity is createdunder the provisions of FIN 46-R. This is because we have beendeemed to have provided subordinated financial support, which refers tovariable interest that will absorb some or all of an entity’s expected theoreticallosses if they occur. We therefore examine the entities with which we enterinto fixed price purchase agreements, for possible consolidation by us underFIN 46-R. This requires us to compute expected losses and expectedresidual returns based on the probability of future cash flows as outlined inFIN 46-R. This calculation requires substantial management judgments andestimates. In addition, because we do not have any contractual or ownershipinterests in the entities with which we contract to buy the land, we do nothave the ability to compel these development entities to provide financial orother data to assist us in the performance of the primary beneficiaryevaluation.

**Item7A.   Quantitative and Qualitative Disclosures about Market Risk**

Market risk represents therisk of loss that may impact our financial position, results of operations orcash flows, due to adverse changes in financial and commodity market prices andinterest rates. We are exposed to market risk in the area of interest ratechanges. 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 currentoperations, as of December 31, 2004, an increase/decrease in interestrates of 100 basis points on our variable rate debt would have resulted in acorresponding increase/decrease in interest actually incurred by us ofapproximately $680,000 in a fiscal year, a significant portion of which wouldbe capitalized and included in cost of sales as homes are delivered. As aresult, the effect on net income would be deferred until the underlying unitssettled and the interest was released to cost of goods sold. Changes in theprices of commodities that are a significant component of home constructioncosts, particularly lumber, may result in unexpected short-term increases inconstruction costs. Because the sales price of our homes is fixed at the time abuyer enters into a contract to acquire a home and we generally contract tosell our homes before construction begins, any increase in costs in excess ofthose anticipated at the time of each sale may result in lower consolidatedoperating income for the homes in our backlog. We attempt to mitigate themarket risks of the price fluctuation of commodities by entering into fixedprice option contracts with our subcontractors and material suppliers for aspecified period of time, generally commensurate with the building cycle. Thesecontracts afford us the option to purchase materials at fixed prices but do notobligate us to any specified level of purchasing.

**Item8.   Financial Statements and Supplementary Data**

Reference is made to thefinancial statements, the notes thereto, and the report thereon, commencing on page F-1of this report, which financial statements, notes, and report are incorporatedherein by reference.

**Item9.   Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure**

Not applicable.

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**Item 9A.   Controls and Procedures**

**Evaluationof Disclosure Controls and Procedures**

We have evaluated, withthe participation of our Chief Executive Officer, Chief Financial Officer andChief Accounting Officer, the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31,2004. Based on this evaluation, our Chief Executive Officer, Chief FinancialOfficer and Chief Accounting Officer have each concluded that our disclosurecontrols and procedures are effective to ensure that we record, process,summarize, and report information required to be disclosed by us in ourquarterly reports filed under the Exchange Act within the time periodsspecified by the Securities and Exchange Commission’s rules and forms.During the fiscal year covered by this report, there have not been any changesin our internal control over financial reporting that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

**Changes in Internal Controls**

Subsequent to the date ofthat evaluation, there have not been any significant changes in our internalcontrols or in other facts that could significantly affect these controls, includingany corrective action with regard to significant deficiencies and materialweaknesses. As part of our upcoming compliance obligation under Section 404 ofthe Sarbanes-Oxley Act we are in the process of evaluating and documenting ourinternal control structure. We expect to introduce changes to our controlstructures but we do not expect these changes to have a significant impact onour financial statements.

**Limitationson the Effectiveness of Controls**

We do not expect that our disclosure controls andinternal controls will prevent all error and all fraud. A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, with the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people or by management override of thecontrols.

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

**Item 9B.   Other Information.**

Not applicable.

**PARTIII**

**Item 10.**                 Directors andExecutive Officers of the Registrant

The information requiredby this Item relating to our directors is incorporated herein by reference tothe definitive Proxy Statement to be filed pursuant to Regulation 14A of theExchange Act for our 2005 

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AnnualMeeting of Stockholders. The information required by this Item relating to ourexecutive officers is included in Item 1, “Business—Executive Officers” ofthis report.

**Item 11.**                 ExecutiveCompensation

The information requiredby this Item is incorporated herein by reference to the definitive ProxyStatement to be filed pursuant to Regulation 14A of the Exchange Act for our2005 Annual Meeting of Stockholders.

**Item12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

The information requiredby this Item is incorporated herein by reference to the definitive ProxyStatement to be filed pursuant to Regulation 14A of the Exchange Act for our2005 Annual Meeting of Stockholders.

**Item13.**                 CertainRelationships and Related Transactions

The information requiredby this Item is incorporated herein by reference to the definitive ProxyStatement to be filed pursuant to Regulation 14A of the Exchange Act for our2005 Annual Meeting of Stockholders.

**Item14.**                 PrincipalAccountant Fees and Services

The information requiredby this Item is incorporated herein by reference to the definitive ProxyStatement to be filed pursuant to Regulation 14A of the Exchange Act for our2005 Annual Meeting of Stockholders.

**PART IV**

**Item15.**                 Exhibitand Financial Statement Schedules

**(a)**    Financial Statements

(1)          FinancialStatements are listed in the Index to Financial Statements on page F-1 of thisreport.

(2)   Schedules have been omitted because they are not applicable orbecause the information required to be set forth therein is included in theconsolidated and combined financial statements or notes thereto.

**(b)**    Exhibits
| Exhibit   Number | ** ** | **Exhibit**                                                                                                                                                                                          |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*             |       | Amended  and Restated Certificate of Incorporation                                                                                                                                                   |
| 3.2*             |       | Amended  and Restated Bylaws.                                                                                                                                                                        |
| 4.1(4)           |       | Specimen  Stock Certificate                                                                                                                                                                          |
| 10.1(1)          |       | Lease  Agreement, dated as of April 30, 2002, with Comstock Partners, L.C.                                                                                                                      |
| 10.2(1)          |       | Lease  Agreement, dated as of January 31, 2004, with Comstock Partners, L.C.                                                                                                                    |
| 10.3(3)          |       | Agreement  of Sublease, dated as of October 1, 2004, with Comstock Asset  Management, L.C.                                                                                                      |
| 10.4(2)          |       | Loan  Agreement, dated December 17, 1997, as amended, with Bank of America,  N.A.                                                                                                               |
| 10.5(3)          |       | Partial  Assignment of Note, dated December 15, 2003, with Kasprowicz Family,  LLC.                                                                                                             |
| 10.6(3)          |       | Promissory  Note, dated April 30, 2004, with Kasprowicz Family, LLC.                                                                                                                            |
| 10.7(1)          |       | Disbursement  and Construction Loan Agreement and Disbursement and Development Loan  Agreement, each dated October 10, 2002 and as amended, with Branch  Banking and Trust Company of Virginia. |

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| 10.8(1)  |   | Disbursement  and Construction Loan Agreement and Acquisition, Disbursement and Development  Loan Agreement, each dated July 25, 2003, with Branch Banking and Trust  Company of Virginia.                                                                                                         |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9(1)  |   | Purchase  Money Deed of Trust and Security Agreement, dated December 15, 2003,  with Crescent Potomac Yard Development, LLC.                                                                                                                                                                       |
| 10.10*   |   | Loan  Agreement, dated January 25, 2005, with Corus Bank, N.A.                                                                                                                                                                                                                                     |
| 10.11*   |   | Completion  Guaranty, dated January 25, 2005 in favor of Corus Bank, N.A.                                                                                                                                                                                                                          |
| 10.12*   |   | Carve-Out  Guaranty, dated January 25, 2005, in favor of Corus Bank, N.A.                                                                                                                                                                                                                          |
| 10.13(3) |   | Form of  Indemnification Agreement.                                                                                                                                                                                                                                                                |
| 10.14(3) |   | Form of  Promissory Note to be issued to each of Christopher Clemente, Gregory Benson,  James Keena and Lawrence Golub by each of Comstock Holding  Company, Inc., Comstock Homes, Inc., Sunset Investment  Corp., Inc. and Comstock Service Corp., Inc.                       |
| 10.15(3) |   | Form of  Tax Indemnification Agreement to be entered into by each of Christopher  Clemente, Gregory Benson, James Keena and Lawrence Golub with each of  Comstock Holding Company, Inc., Comstock Homes, Inc., Sunset  Investment Corp., Inc. and Comstock Service Corp., Inc. |
| 10.16(3) |   | 2004  Long-Term Incentive Compensation Plan.                                                                                                                                                                                                                                                            |
| 10.17(3) |   | Form of  Stock Option Agreement under the 2004 Long-Term Incentive Compensation  Plan.                                                                                                                                                                                                             |
| 10.18*   |   | Form of  Restircted Stock Grant Agreement under the 2004 Long-Term Incentive  Compensation Plan                                                                                                                                                                                                    |
| 10.19(3) |   | Employee  Stock Purchase Plan.                                                                                                                                                                                                                                                                          |
| 10.20(2) |   | Purchase  and Sale Agreement, dated as of April 25, 2003, as amended, with  Crescent Potomac Yard Development, LLC.                                                                                                                                                                                |
| 10.21*   |   | Purchase  and Sale Agreement, dated as of November 9, 2004, as amended, with Fair  Oaks Penderbrook Apartments L.L.C.                                                                                                                                                                              |
| 10.22*   |   | Real  Estate Purchase Contract, dated as of February 4, 2005, with Westwick  Apartments LLC                                                                                                                                                                                                        |
| 10.23*   |   | Services  Agreement, dated March 4, 2005, with Comstock Asset Management, L.C.                                                                                                                                                                                                                     |
| 10.24(3) |   | Employment  Agreement with Christopher Clemente.                                                                                                                                                                                                                                                        |
| 10.25(3) |   | Employment  Agreement with Gregory Benson.                                                                                                                                                                                                                                                              |
| 10.26(3) |   | Employment  Agreement with Bruce Labovitz.                                                                                                                                                                                                                                                              |
| 10.27(3) |   | Confidentiality  and Non-Competition Agreement with Christopher Clemente.                                                                                                                                                                                                                               |
| 10.28(3) |   | Confidentiality  and Non-Competition Agreement with Gregory Benson.                                                                                                                                                                                                                                     |
| 10.29(3) |   | Confidentiality  and Non-Competition Agreement with Bruce Labovitz.                                                                                                                                                                                                                                     |
| 10.30*   |   | Description  of Arrangements with William Bensten                                                                                                                                                                                                                                                       |
| 10.31*   |   | Description  of Arrangements with David Howell                                                                                                                                                                                                                                                          |
| 10.32(3) |   | Trademark  License Agreement.                                                                                                                                                                                                                                                                           |
| 10.33*   |   | Purchase  Agreement, dated November 12, 2004, with Comstock Asset Management, L.C.                                                                                                                                                                                                                      |

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| 14.1* |   | Code of Ethics                                                                                                                                         |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1* |   | List of subsidiaries.                                                                                                                                  |
| 24.1* |   | Power of Attorney                                                                                                                                      |
| 31.1* |   | Certification of  Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of  2002.                                                      |
| 31.2* |   | Certification of  Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of  2002.                                                      |
| 31.3* |   | Certification of  Chief Accounting Officer pursuant to Section 302 of Sarbanes-Oxley Act of  2002.                                                     |
| 32.1* |   | Certification of  Chief Executive Officer, Chief Financial Officer and Chief Financial Officer pursuant  to Section 906 of Sarbanes-Oxley Act of 2002. |

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*                    Filedherewith.

(1)          Incorporatedby reference to an exhibit to the Registrant’s Registration Statement on Form S-1filed with the Commission on August 13, 2004 (No. 333-118193).

(2)          Incorporatedby reference to an exhibit to the Registrant’s Amendment No. 1 to theRegistration Statement on Form S-1 filed with the Commission on October 1,2004 (No. 333-118193).

(3)          Incorporatedby reference to an exhibit to the Registrant’s Amendment No. 5 to theRegistration Statement on Form S-1 filed with the Commission on December 7,2004 (No. 333-118193).

(4)   Incorporatedby reference to an exhibit to the Registrant’s Amendment No. 6 to theRegistration Statement on Form S-1 filed with the Commission on December 9,2004 (No. 333-118193).

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|                       | ** ** | **COMSTOCK  HOMEBUILDING COMPANIES, INC.** |
|-----------------------|------------|--------------------------------------------|
| Date:  March 31, 2005 |       | By:                                        |   | /s/ CHRISTOPHER  CLEMENTE |
|                  |       |                                       |   | Christopher Clemente |
|                  |       |                                       |   | Chairman and Chief Executive  Officer |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the date indicated.
| Signature                      | ** ** | **Capacity**                                                                                   | ** ** | **Date**             |
|--------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------|
| /s/ CHRISTOPHER  CLEMENTE |       | Chairman  of the Board of Directors and Chief Executive Officer (Principal Executive  Officer) |       | March 31,  2005 |
| Christopher Clemente           |       |                                                                                           |       |
| /s/ GREGORY  V. BENSON    |       | President,  Chief Operating Officer and Director                                               |       | March 31,  2005 |
| Gregory V. Benson              |       |                                                                                           |       |
| /s/ BRUCE  J. LABOVITZ    |       | Chief  Financial Officer (Principal Financial Officer)                                         |       | March 31,  2005 |
| Bruce J. Labovitz              |       |                                                                                           |       |
| /s/ JASON  PARIKH         |       | Chief  Accounting Officer (Principal Accounting Officer)                                       |       | March 31,  2005 |
| Jason Parikh                   |       |                                                                                           |       |
| /s/ BRUCE  J. LABOVITZ *  |       | Director                                                                                       |       | March 31,  2005 |
| A. Clayton Perfall             |       |                                                                                           |       |                 |
| /s/ BRUCE  J. LABOVITZ *  |       | Director                                                                                       |       | March 31,  2005 |
| David M. Guernsey              |       |                                                                                           |       |                 |
| /s/ BRUCE  J. LABOVITZ *  |       | Director                                                                                       |       | March 31,  2005 |
| James A. MacCutcheon           |       |                                                                                           |       |                 |
| /s/ BRUCE  J. LABOVITZ *  |       | Director                                                                                       |       | March 31,  2005 |
| Gary L. Martin                 |       |                                                                                           |       |                 |

 

*Pursuant to a power of attorney executed by thedirector.

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**INDEX TO FINANCIALSTATEMENTS**
|                                                                                                                                           | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| COMSTOCK HOMEBUILDING  COMPANIES, INC.                                                                                                    |       |     |
| Report  of Independent Registered Public Accounting Firm                                                                                  |       | F-2      |
| Consolidated and Combined  Balance Sheets as of December 31, 2004 and 2003                                                           |       | F-3      |
| Consolidated and Combined  Statements of Operations for the Years Ended December 31, 2004, 2003 and  2002                            |       | F-4      |
| Consolidated and Combined  Statements of Changes in Shareholders’ Equity for the Years Ended  December 31, 2004, 2003, and 2002 |       | F-5      |
| Consolidated and Combined Statements  of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002                             |       | F-6      |
| Notes to Consolidated and  Combined Financial Statements                                                                                  |       | F-7      |

 

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**Report**of Independent Registered Public Accounting Firm

To the Board of Directorsand Shareholders of Comstock Homebuilding Companies, Inc.:

In our opinion, the accompanying consolidated andcombined balance sheets and the related consolidated and combined statements ofincome, shareholders’ equity, and cash flows present fairly, in all materialrespects, the financial position of Comstock Homebuilding Companies, Inc.(the “Company”) and the Comstock Companies (as defined in Note 1) at December 31,2004 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

As discussed in Note 2,the Company adopted FIN 46-R, “Variable Interest Entities” and SFAS 123R,“Share Based Payment” on January 1, 2004.
| /s/ PricewaterhouseCoopers LLP |
|--------------------------------|
|                           |
| McLean, Virginia               |
| March 25, 2005            |

 

F-2

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIESCONSOLIDATED AND COMBINED BALANCESHEETS(Amounts in thousands, except share data)**
| ** **                                                                                                       | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **2004**               | ** ** | **2003** | ** ** |
| ** **                                                                                                       | ** ** | ** **             | ** ** | **Predecessor** | ** ** |
| ASSETS                                                                                                           |       |                   |       |   |   |   |   |
| Cash and cash  equivalents                                                                                       |       | $                      | 67,559     |   |   | $ | 17,160 |   |   |
| Restricted cash                                                                                                  |       | 7,500                  |       |   | — |   |   |
| Receivables                                                                                                      |       | 239                    |       |   | 1,938 |   |   |
| Due from related parties                                                                                         |       | 1,447                  |       |   | 3,140 |   |   |
| Real estate held for  development and sale                                                                       |       | 104,326                |       |   | 65,272 |   |   |
| Inventory not owned—variable  interest entities                                                             |       | 118,558                |       |   | — |   |   |
| Property, plant and  equipment                                                                                   |       | 488                    |       |   | 223 |   |   |
| Investment in real  estate partnerships                                                                          |       | 1,029                  |       |   | 1,139 |   |   |
| Deferred income tax                                                                                              |       | 821                    |       |   | — |   |   |
| Other assets                                                                                                     |       | 2,540                  |       |   | 1,312 |   |   |
| TOTAL ASSETS                                                                                                     |       | $                      | 304,507    |   |   | $ | 90,184 |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                        |       |                   |       |   |   |   |   |
| Accounts payable and  accrued liabilities                                                                        |       | $                      | 35,532     |   |   | $ | 10,454 |   |   |
| Income taxes payable                                                                                             |       | 290                    |       |   | — |   |   |
| Due to related parties                                                                                           |       | 148                    |       |   | 230 |   |   |
| Obligations related to  inventory not owned                                                                      |       | 114,333                |       |   | — |   |   |
| Notes payable                                                                                                    |       | 65,684                 |       |   | 51,923 |   |   |
| Notes payable—related  parties                                                                              |       | 10,944                 |       |   | 9,139 |   |   |
| Distribution payable                                                                                             |       | 12,655                 |       |   | — |   |   |
| TOTAL LIABILITIES                                                                                                |       | 239,586                |       |   | 71,746 |   |   |
| Commitments and contingencies (Note 13)                                                                          |       |                   |       |   |   |   |   |
| Minority interest                                                                                                |       | 2,695                  |       |   | 11,413 |   |   |
| SHAREHOLDERS’ EQUITY                                                                                        |       |                   |       |   |   |   |   |
| Comstock Holding Company, Inc.                                                                              |       |                   |       |   |   |   |   |
| Common stock, $1 par  value; 2,000 shares authorized, 1,279 shares issued and outstanding                        |       | —                 |       |   | 1 |   |   |
| Comstock Homes, Inc.                                                                                        |       |                   |       |   |   |   |   |
| Common stock, $1 par  value; 2,000 shares authorized, 1,279 shares issued and outstanding                        |       | —                 |       |   | 1 |   |   |
| Sunset Investment Corp., Inc.                                                                               |       |                   |       |   |   |   |   |
| Common stock, $1 par  value; 1,000 shares authorized, issued and outstanding                                     |       | —                 |       |   | 1 |   |   |
| Comstock Homebuilding Companies Inc.                                                                             |       |                   |       |   |   |   |   |
| Class A common  stock, $0.01 par value, 77,266,500 shares authorized, 9,162,484 issued and  outstanding     |       | 92                     |       |   | — |   |   |
| Class B common  stock, $0.01 par value, 2,733,500 shares authorized, 2,733,500 issued  and outstanding |       | 27                     |       |   | — |   |   |
| Additional paid-in  capital                                                                                      |       | 75,510                 |       |   | 1,493 |   |   |
| Unearned compensation                                                                                            |       | (4,314                 | )          |   | — |   |   |
| Retained earnings  (accumulated deficit)                                                                         |       | (9,089                 | )          |   | 5,529 |   |   |
| TOTAL SHAREHOLDERS’  EQUITY                                                                                 |       | 62,226                 |       |   | 7,025 |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                  |       | $                      | 304,507    |   |   | $ | 90,184 |   |   |

 

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

F-3

----

**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIESCONSOLIDATED AND COMBINED STATEMENTOF OPERATIONS(Amounts in thousands, except share data)**
| ** **                                                                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                          | ** ** | ** **                                  | ** ** | **PREDECESSOR** | ** ** |
| Revenues                                                                            |       |                                        |       |   |   |   |   |   |   |
| Sale of real estate—homes                                                      |       |                                        | $          | 87,003 |   |   | $ | 49,081 |   | $ | 29,397 |   |
| Other revenue                                                                       |       |                                        | 9,042      |   |   | 6,440 |   | 5,355 |   |
| Total revenue                                                                       |       |                                        | 96,045     |   |   | 55,521 |   | 34,752 |   |
| Expenses                                                                            |       |                                        |       |   |   |   |   |   |   |
| Cost of sales of real estate                                                        |       |                                        | 57,339     |   |   | 36,620 |   | 22,102 |   |
| Cost of sales of other                                                              |       |                                        | 6,654      |   |   | 5,136 |   | 4,718 |   |
| Selling, general and administrative                                                 |       |                                        | 11,940     |   |   | 5,712 |   | 3,725 |   |
| Operating income                                                                    |       |                                        | 20,112     |   |   | 8,053 |   | 4,207 |   |
| Other expense (income),  net                                                        |       |                                        | 908        |   |   | (44 | ) | 10 |   |
| Income before minority interest and equity in  earnings of real estate partnerships |       |                                        | 19,204     |   |   | 8,097 |   | 4,197 |   |
| Minority interest                                                                   |       |                                        | 5,260      |   |   | 2,297 |   | 664 |   |
| Income before equity in earnings of real estate  partnerships                       |       |                                        | 13,944     |   |   | 5,800 |   | 3,533 |   |
| Equity in  earnings of real estate partnerships                                     |       |                                        | 118        |   |   | 139 |   | 51 |   |
| Income before income taxes                                                          |       |                                        | 14,062     |   |   | 5,939 |   | 3,584 |   |
| Income tax  provision (benefit)                                                     |       |                                        | (241       | ) |   | — |   | — |   |
| Net income                                                                          |       |                                        | $          | 14,303 |   |   | $ | 5,939 |   | $ | 3,584 |   |
| Basic earnings per share                                                            |       |                                        | $          | 1.95 |   |   | $ | 0.84 |   | $ | 0.59 |   |
| Basic weighted  average shares outstanding                                          |       |                                        | 7,347      |   |   | 7,067 |   | 6,074 |   |
| Dilutive earnings per share                                                         |       |                                        | $          | 1.95 |   |   | $ | 0.84 |   | $ | 0.59 |   |
| Dilutive weighted  average shares outstanding                                       |       |                                        | 7,351      |   |   | 7,067 |   | 6,074 |   |

 

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

F-4

----

 

**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIESCONSOLIDATED AND COMBINED STATEMENTOF CHANGES IN SHAREHOLDERS’ EQUITY(Amounts in thousands, except share data)**
| ** **                                                                                   | ** ** | **Common stock**                                      | ** ** | ** **                                                 | ** ** | ** **                         | ** **        | ** **                         | ** ** | ** **                         | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------|-------------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                   | ** ** | **PREDECESSOR**                                            | ** ** | **Comstock Homebuilding Companies, Inc.**   | ** ** | **Additional**                     | ** **        | ** **                         | ** ** | **Retained**                       | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | **The Comstock Companies**                       | ** ** | **Class A**                                           | ** ** | **Class B**                   | ** **        | **paid-in**                        | ** ** | **Unearned**                       | ** ** | **earnings** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | **    Shares    ** | ** ** | **    Amount    ** | ** ** | **  Shares  ** | ** **        | **  Amount  ** | ** ** | **  Shares  ** | ** ** | **  Amount  ** | ** ** | **capital** | ** ** | **compensation** | ** ** | **(deficit)** | ** ** | **Total** | ** ** |
| **Balance at December 31, 2001**                                                        |       |                                                       | **2,558**  |                                                       |       |                               | **$ 2**      | ** **                         |       |                               | ** ** | ** ** |   |   | **$  ** | ** ** |   |   | ** ** | ** ** |   |   | **$  ** | ** ** |   |   | **$   307** | ** ** |   |   | **$        ** | ** ** |   | **$  2,627** | ** ** | **$ 2,936** | ** ** |
| Repurchase of shares                                                                         |       |                                                       | (68        | )                                                          |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   | — |   | — |   |
| Stock compensation                                                                           |       |                                                       | 68         |                                                       |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 77 |   |   |   |   |   |   | — |   | 77 |   |
| Contributions                                                                                |       |                                                       | 1,000      |                                                       |       |                               | 1                 |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,109 |   |   |   |   |   |   | — |   | 1,110 |   |
| Distributions                                                                                |       |                                                       | —     |                                                       |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   | (4,100 | ) | (4,100 | ) |
| Net income                                                                                   |       |                                                       | —     |                                                       |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   | 3,584 |   | 3,584 |   |
| **Balance at December 31, 2002**                                                        |       |                                                       | **3,558**  |                                                       |       |                               | **3**             | ** **                         |       |                               | **—** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   |   | **1,493** | ** ** |   |   | ** ** | ** ** |   | **2,111** | ** ** | **3,607** | ** ** |
| Distributions                                                                                |       |                                                       | —     |                                                       |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   | (2,521 | ) | (2,521 | ) |
| Net income                                                                                   |       |                                                       | —     |                                                       |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   | 5,939 |   | 5,939 |   |
| **Balance at December 31, 2003**                                                        |       |                                                       | **3,558**  |                                                       |       |                               | **3**             | ** **                         |       |                               | **—** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   |   | **—** | ** ** |   |   | **1,493** | ** ** |   |   | **—** | ** ** |   | **5,529** | ** ** | **7,025** | ** ** |
| Distributions                                                                                |       |                                                       | —     |                                                       |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   | (5,668 | ) | (5,668 | ) |
| Issuance of common stock in Homebuilding on  June 7, 2004                               |       |                                                       |       |                                                       |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |
| Recapitalization by virtue of merger                                                         |       |                                                       | (3,558     | )                                                          |       |                               | (3                | )                                  |       |                               | 4,333      |   |   |   | 43 |   |   |   | 2,733 |   |   |   | 27 |   |   |   | 4 |   |   |   |   |   |   |   |   | 71 |   |
| Acquisition of Service on December 17, 2004                                             |       |                                                       |       |                                                       |       |                               |              |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,756 |   |   |   |   |   |   |   |   | 4,756 |   |
| Issuance of common stock of Homebuilding on  December 17, 2004 (less transaction costs) |       |                                                       |       |                                                       |       |                               |              |                               |       |                               | 3,960      |   |   |   | 40 |   |   |   |   |   |   |   |   |   |   |   | 56,012 |   |   |   |   |   |   |   |   | 56,052 |   |
| Issuance of common stock—overallotment                                                  |       |                                                       |       |                                                       |       |                               |              |                               |       |                               | 594        |   |   |   | 6 |   |   |   |   |   |   |   |   |   |   |   | 8,833 |   |   |   |   |   |   |   |   | 8,839 |   |
| Distribution following IPO                                                                   |       |                                                       |       |                                                       |       |                               |              |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (23,253 | ) | (23,253 | ) |
| Issuance of restricted common stock                                                          |       |                                                       |       |                                                       |       |                               |              |                               |       |                               | 275        |   |   |   | 3 |   |   |   |   |   |   |   |   |   |   |   | 4,402 |   |   |   | (4,405 | ) |   |   |   | — |   |
| Stock-based compensation—restricted stock grants                                        |       |                                                       |       |                                                       |       |                               |              |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 91 |   |   |   |   | 91 |   |
| Stock-based compensation—stock options                                                  |       |                                                       |       |                                                       |       |                               |              |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 10 |   |   |   |   |   |   |   |   | 10 |   |
| Net income                                                                                   |       |                                                       | —     |                                                       |       |                               | —            |                               |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |   |   |   |   | 14,303 |   | 14,303 |   |
| **Balance  at December 31, 2004**                                                       |       |                                                       | **—** |                                                       |       |                               | **$ —** | ** **                         |       |                               | **9,162**  | ** ** |   |   | **$ 92** | ** ** |   |   | **2,733** | ** ** |   |   | **$ 27** | ** ** |   |   | **$ 75,510** | ** ** |   |   | **$ (4,314** | **)** |   | **$ (9,089** | **)** | **$ 62,226** | ** ** |

 

The accompanying notes arean integral part of these combined consolidated financial statements.

F-5

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIESCONSOLIDATED AND COMBINEDSTATEMENT OF CASH FLOWS(Amounts in thousands, except share data)**
| ** **                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                        | ** ** | ** **                                  | ** ** | **PREDECESSOR** | ** ** |
| Cash flows from operating activities:                                             |       |                                        |       |   |   |   |   |   |   |
| Net income                                                                        |       |                                        | $          | 14,303 |   |   | $ | 5,939 |   | $ | 3,584 |   |
| Adjustment to reconcile  net income to net cash provided by operating activities  |       |                                        |       |   |   |   |   |   |   |
| Depreciation                                                                      |       |                                        | 106        |   |   | 67 |   | 61 |   |
| Loss on disposal  of assets                                                       |       |                                        | 1          |   |   |   |   |   |   |
| Minority interest                                                                 |       |                                        | 5,260      |   |   | 2,297 |   | 664 |   |
| Equity in earnings  of real estate partnerships                                   |       |                                        | (118       | ) |   | (139 | ) | (51 | ) |
| Stock compensation                                                                |       |                                        | 101        |   |   | — |   | 77 |   |
| Deferred income  tax                                                              |       |                                        | (531       | ) |   | — |   | — |   |
| Changes in operating  assets and liabilities:                                     |       |                                        |       |   |   |   |   |   |   |
| Restricted cash                                                                   |       |                                        | (7,500     | ) |   | — |   | — |   |
| Receivables                                                                       |       |                                        | 2,107      |   |   | (1,736 | ) | 402 |   |
| Due from related  parties                                                         |       |                                        | 1,693      |   |   | (1,832 | ) | (564 | ) |
| Real estate held  for development and sale                                        |       |                                        | (23,081    | ) |   | (44,260 | ) | (11,757 | ) |
| Other assets                                                                      |       |                                        | (5,428     | ) |   | 1,005 |   | (1,057 | ) |
| Accounts payable  and accrued liabilities                                         |       |                                        | 24,025     |   |   | 6,237 |   | 825 |   |
| Income tax payable                                                                |       |                                        | 290        |   |   |   |   |   |   |
| Due to related  parties                                                           |       |                                        | (82        | ) |   | (24 | ) | (50 | ) |
| Net cash provided  by (used in) operating activities                              |       |                                        | 11,146     |   |   | (32,446 | ) | (7,866 | ) |
| Cash flows from investing activities:                                             |       |                                        |       |   |   |   |   |   |   |
| Purchase of  property, plant, and equipment                                       |       |                                        | (372       | ) |   | (90 | ) | (132 | ) |
| Distributions from  Investments in real estate partnerships                       |       |                                        | 120        |   |   | 157 |   | — |   |
| Investment in real  estate partnerships                                           |       |                                        | —     |   |   | — |   | (1,000 | ) |
| Acquisition of  Service                                                           |       |                                        | 1,215      |   |   | — |   | — |   |
| Net cash provided (used  in) by investing activities                              |       |                                        | 963        |   |   | 67 |   | (1,132 | ) |
| Cash flows from financing activities:                                             |       |                                        |       |   |   |   |   |   |   |
| Proceeds from  notes payable                                                      |       |                                        | 81,747     |   |   | 74,521 |   | 26,240 |   |
| Proceeds from  related party notes payable                                        |       |                                        | 4,646      |   |   | 6,300 |   | 2,839 |   |
| Payments on notes  payable                                                        |       |                                        | (78,716    | ) |   | (37,782 | ) | (21,218 | ) |
| Payments on  related party notes payable                                          |       |                                        | (6,000     | ) |   | — |   | — |   |
| Contribution from  minority shareholders                                          |       |                                        | —     |   |   | 2,000 |   | 7,592 |   |
| Contributions  received from shareholders                                         |       |                                        | —     |   |   | — |   | 1,110 |   |
| Distributions paid  to minority shareholders                                      |       |                                        | (14,181    | ) |   | (1,674 | ) | (1,856 | ) |
| Distributions paid  to shareholders                                               |       |                                        | (14,168    | ) |   | (2,521 | ) | (4,100 | ) |
| Proceeds from  offering                                                           |       |                                        | 64,962     |   |   |   |   |   |   |
| Net cash provided  by financing activities                                        |       |                                        | 38,290     |   |   | 40,844 |   | 10,607 |   |
| Net increase in  cash and cash equivalents                                        |       |                                        | 50,399     |   |   | 8,465 |   | 1,609 |   |
| Cash and cash  equivalents, beginning of period                                   |       |                                        | 17,160     |   |   | 8,695 |   | 7,086 |   |
| Cash and cash  equivalents, end of period                                         |       |                                        | $          | 67,559 |   |   | $ | 17,160 |   | $ | 8,695 |   |
| **Supplemental information of noncash activites**                                 |       |                                        |       |   |   |   |   |   |   |
| Amounts owed for  real estate acquired via deferred purchase agreements (Note 10) |       |                                        | $          | 873 |   |   | $ | 1,128 |   | $ | 308 |   |
| **Supplemental Cash Flow Data**                                                   |       |                                        |       |   |   |   |   |   |   |
| Interest paid (net  of amounts capitalized)                                       |       |                                        | $          | 378 |   |   | $ | 8 |   | $ | 12 |   |

 

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

F-6

----

**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Amounts in thousands)**

**1.**   ORGANIZATION

Comstock Companies, Inc. (the “Company”) wasincorporated on May 24, 2004 as a Delaware corporation. On June 30,2004, the Company changed its name to Comstock Homebuilding Companies, Inc.

On December 17, 2004 as a result of completingits initial public offering (“IPO”) of its Class A Common Stock, theCompany acquired 100% of the outstanding capital stock of Comstock HoldingCompany, Inc. and subsidiaries (“Comstock Holdings”) by merger, whichfollowed a consolidation that took place immediately prior to the closing ofthe IPO (the “Consolidation”). The Consolidation was effected through themergers of Sunset Investment Corp., Inc. and subsidiaries and ComstockHomes, Inc. and subsidiaries and Comstock Service Corp., Inc andsubsidiaries (“Comstock service”) with and into Comstock Holdings. Pursuant tothe terms of the merger agreement, shares of Comstock Holdings were canceledand replaced by 4,333 and 2,734 shares Class A and B Common Stock of the Companyrespectively. Both Class A and B Common Stock shares bear the same economicrights. However for voting purposes, Class A stock holders are entitled to onevote for each share held while Class B stock holders are entitled to fifteenvotes for each share held.

The mergers of Sunset Investment Corp., Inc. andsubsidiaries and Comstock Homes, Inc. and subsidiaries with and intoComstock Holdings (collectively “The Comstock Companies” or “Predecessor”) andthe Company’s acquisition of Comstock Holdings was accounted for using theComstock Companies’ historical carrying values of accounting as these mergerswere not deemed to be substantive exchanges. The merger of Comstock Service wasaccounted using the purchase method of accounting (see Note 2) as this wasdeemed to be a substantive exchange due to the disparity in ownership.

The Predecessor is not a legal entity but rather acombination of entities that have a high degree of common ownership, commonmanagement, and common corporate governance that resulted in substantially thesame ownership as the Comstock Companies before and after the transaction, and thereforethese combined financial statements present the combined historical operationsof the Company.

As a result of the IPO, the Company sold 3,960 Class ACommon Shares at $16.00 per share, raising proceeds net of the underwritingdiscount, of approximately $56.0 million.

On December 28, 2004, pursuant to theunderwriters’ exercise of their over-allotment option, the Company sold anadditional 594 shares resulting in additional proceeds net of underwritingdiscount, of approximately $8.8 million. As of December 31, 2004, the Companyhad used approximately $19 million of the $64.9 million in net proceedsfrom the IPO to (i) repay certain indebtedness (approximately$2.5 million); (ii) pay our stockholders, prior to the offering,amounts owed for undistributed tax partnership profits (approximately$8.5 million); and (iii) purchase outstanding minority membershipinterests in certain of our subsidiaries (approximately $8.0 million).

Our common stock is traded on the NASDAQ Nationalmarket under the symbol “CHCI”. We have no public trading history prior to December 14,2004.

For purposes of identification and description, we arereferred to as the “Predecessor” for the period prior to the IPO, the Companyfor the period subsequent to the IPO, and “we,” “us,” and “our” for bothperiods.

F-7

----

**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

The Company develops,builds and markets single-family homes, townhouses and condominiums in theWashington D.C. and North Carolina metropolitan markets. The Company alsoprovides certain management and administrative support services to certain relatedparties.

**2.    SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

Asummary of the significant accounting principles and practices used in thepreparation of the consolidated and combined financial statements is asfollows:

**Basis ofPresentation**

As discussed in Note 1, the Company and thePredecessor effected the Consolidation on December 17, 2004. The Companyand the Predecessor were entities that had a high degree of common ownership,common management, and common corporate governance as they were owned by thesame individuals each holding substantially the same ownership. As a result,the Company has determined that, based on the high degree of common ownershipthat resulted in substantially the same ownership interests before and afterthe transaction, the common nature of the businesses, the long-term businessrelationships between the companies and other related factors, the exchangelacked substance and therefore, they accounted for the Consolidation on ahistorical cost basis in accordance with FASB Technical Bulletin (FTB 85-5, “IssuesRelated to Accounting of Business Combination.”) Further,  SFAS 141 “Business Combinations” states that,in transactions between parties under common control, the receiving entityshould account for the assets and liabilities received at their historicalcarrying values. Additionally, such transfers should be accounted for by thereceiving entity as of the beginning of the period in which the transactionoccurs. Accordingly, the Company has reflected the assets and liabilitiesacquired in the transaction at their historical carrying values and the resultsof operations are presented as if the transaction occurred on January 1, 2004. Theaccompanying combined balance sheet as of December 31, 2003 and the combined statementsof operations, changes in stockholders’ equity and cash flows for the yearsended December 31, 2003 and 2002 are those of the Predecessor. 

As further discussed inNote 4, the Predecessor merged with Comstock Service on December 17, 2004. Dueto a disparity in ownership as compared to the other entities which comprisedthe Predecessor, Comstock Service was not under common control with the Predecessorand as such the consolidation transaction was considered a substantive exchange.Accordingly, the Company has accounted for the consolidation of ComstockService as an acquisition using the purchase method of accounting as requiredby SFAS 141. As a result, the assets and liabilities acquired have beenrecorded at the fair values in the accompanying financial statements on thedate of the transaction. No goodwill was recognized in connection with thistransaction.

**Principles ofconsolidation**

The consolidated andcombined financial statements include all controlled subsidiaries. In addition,the Company reviews its relationships with other entities to assess if theCompany is the primary beneficiary of a variable interest entity. If thedetermination is made that the Company is the primary beneficiary, then thatentity is consolidated. See the “Recent accounting pronouncements” section ofthis Note and Note 3 for additional discussion on the consolidation ofvariable interest entities. All material inter-company balances andtransactions are eliminated in consolidation.

F-8

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

**Cash and cashequivalents**

Cash and cash equivalentsare comprised of cash and short-term investments with maturities when purchasedof three months or less. At times, the Company may have deposits withinstitutions in excess of federally insured limits. Banking institutions withwhich the Company does business are considered credit worthy; therefore, creditrisk associated with cash and cash equivalents is considered low. AtDecember 31, 2004, the Company had restrictedcash of $7,500, which primarilyincludes certain customer deposits related to home sales.

**Receivables**

Receivables includeamounts in transit or due from title and settlement companies for residentialproperty closings. The Company has determined that no allowance foruncollectibility is required at December 31, 2004 and 2003 based on areview of the individual accounts.

**Real estate heldfor development and sale**

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

Land, land development and indirect land developmentcosts are accumulated by specific area and allocated to various lots or housingunits using specific identification and allocation based upon the relativesales value, unit or area methods. Direct construction costs are assigned tohousing units based on specific identification. Construction costs primarilyinclude direct construction costs and capitalized field overhead. Other costsare comprised of prepaid local government fees and capitalized interest andreal estate taxes. Selling costs are expensed as incurred.

Estimated fair value isbased on comparable sales of real estate in the normal course of business underexisting and anticipated market conditions. The evaluation takes intoconsideration the current status of the property, various restrictions,carrying costs, costs of disposition and any other circumstances, which mayaffect fair value including management’s plans for the property. Due to thelarge acreage of certain land holdings, disposition in the normal course ofbusiness is expected to extend over a number of years. A write-down toestimated fair value is recorded when the carrying value of the propertyexceeds its estimated fair value. These evaluations are made on aproperty-by-property basis. The Company assesses the impairment of real estateassets whenever events or changes in circumstances indicate that the net bookvalue may not be recoverable.

**Capitalizedinterest and real estate taxes**

Interest and real estate taxes incurred relating tothe development of lots and parcels are capitalized to real estate held fordevelopment and sale during the active development period, which generallycommences when borrowings are used to acquire real estate assets and ends whenthe properties are substantially complete. Interest is capitalized based on theinterest rate applicable to specific borrowings or the weighted average of therates applicable to other borrowings during the period. Interest and realestate taxes capitalized to real estate held for development and sale areexpensed as a component of cost of sales as related units are sold.

F-9

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

Thefollowing table is a summary of interest incurred and capitalized:
| ** **                                               | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Total interest  incurred                                 |       | $                                           | 4,686      |   | $ | 1,944 |   | $ | 739 |   |
| Beginning interest capitalized                           |       | $                                           | 1,428      |   | $ | 586 |   | $ | 468 |   |
| Plus: Interest  incurred on notes payable                |       | 2,847                                       |       | 1,782 |   | 550 |   |
| Plus: Interest  incurred on related party notes payable  |       | 1,461                                       |       | 154 |   | 177 |   |
| Less: Interest  expensed as a component of cost of sales |       | (1,212                                      | )          | (1,094 | ) | (609 | ) |
| Ending interest  capitalized                             |       | $                                           | 4,524      |   | $ | 1,428 |   | $ | 586 |   |

 

**Environmentalremediation costs**

Development and sale ofreal estate property creates a potential for environmental liability.Environmental costs relating to land and properties under development arecapitalized and charged to cost of sales when sold. Environmental costsincurred in connection with properties previously sold are expensed in the periodwhen identified.

**Property, plant,and equipment**

Property,plant, and equipment are carried at cost less accumulated depreciation and aredepreciated on the straight-line method over their estimated useful lives asfollows:
| Furniture and  equipment |   | 7 years |   |
|--------------------------|--------|---------|--------|
| Computer  equipment      |   | 3 years |   |
| Office equipment         |   | 7 years |   |

 

Provisions for impairmentare recorded when estimated future cash flows from operations and projectedsales proceeds are less than the net carrying value. When assets are retired orotherwise disposed of, the cost and accumulated depreciation are removed fromtheir separate accounts and any gain or loss on sale is reflected inoperations. Expenditures for maintenance and repairs are charged to expense asincurred.

**Investment in realestate partnerships**

Real estate partnershipsin which the Company has significant influence and is not the primarybeneficiary under FIN 46, but less than a controlling interest, areaccounted for under the equity method. Under the equity method, the Company’sinitial investment is recorded at cost and is subsequently adjusted torecognize its share of earnings and losses. Distributions received reduce thecarrying amount of the investment.

**Warranty reserve**

Warranty reservesfor houses sold are established to cover potential costs for materials andlabor with regard to warranty-type claims expected to arise during the one-yearwarranty period provided by the Company or within the five-year statutorilymandated structural warranty period. Since the Company 

F-10

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

subcontractsits homebuilding work, subcontractors are required to provide the Company withan indemnity and a certificate of insurance prior to receiving payments fortheir work. Claims relating to workmanship and materials are generally theprimary responsibility of the subcontractors and product manufacturers. Thewarranty reserve is established at the time of closing, and is calculated basedupon historical warranty cost experience and current business factors.Variables used in the calculation of the reserve, as well as the adequacy ofthe reserve based on the number of homes still under warranty, are reviewed ona periodic basis. Warranty claims are directly charged to the reserve as theyarise. The following table is a summary of warranty reserve activity which isincluded in accounts payable and accrued liabilities:
| ** **                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance at  beginning of period   |       | $                                           | 541        |   | $ | 460 |   | $ | 615 |   |
| Additions(1)                      |       | 823                                         |       | 344 |   | 214 |   |
| Releases and/or  charges incurred |       | (448                                        | )          | (263 | ) | (369 | ) |
| Balance at end of period          |       | $                                           | 916        |   | $ | 541 |   | $ | 460 |   |

----

(1)   Includes $147 in net additions as a result of the acquisition of ComstockService as previously discussed in Note 1.

**Minority interest**

Minority interest reflectsthird parties’ ownership interest in entities the Company has consolidated.Also included in minority interest is the estimated fair value of allthird-party interests in our consolidated variable interest entities, which aredescribed in Note 3.

**Revenue recognition**

The Company recognizes revenues and related profitsfrom the sale of residential properties and finished lots when closing hasoccurred, full payment has been received, title and possession of the propertytransfer to the buyer and the Company has no significant continuing involvementin the property.

Other revenues are derivedfrom management and administrative support services provided to relatedparties, which are recognized as the services are provided.

**Advertising costs**

The total amount ofadvertising costs charged to general, selling and administrative expense was$863, $391, and $413 for the years ended December 31, 2004, 2003 and 2002,respectively.

**Stock compensation**

As discussed in Note 14,the Company currently sponsors stock option plans and restricted stock awardplans. Prior to December 14, 2004, the Company did not sponsor any suchplans. Effective January 1, 2004, the Company adopted SFAS No. 123R(revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFASNo. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) andsupercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”

F-11

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

SFAS 123Rrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements over the vestingperiod based on their fair values at the date of grant.

**Income taxes**

Prior to December 17,2004 the Predecessor Company had elected to be treated as an S corporationunder Subchapter S of the Internal Revenue Code and therefore was not subjectto income taxes. Taxable income or loss was passed through and reported by theindividual shareholders. Subsequent to the Consolidation the company wasreorganized as a C corporation under which income taxes are accounted for underthe asset and liability method in accordance with SFAS 109 “Accounting forIncome Taxes”. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax basis. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton the deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

**Earnings per share**

Thefollowing weighted average shares and share equivalents are used to calculatebasic and diluted EPS for the years ended December 31, 2004, 2003 and2002:
| ** **                                    | ** ** | **Year Ended December 31** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Basic earnings per share                      | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                                    |       | $                                         | 14,303     |   | $ | 5,939 |   | $ | 3,584 |   |
| Basic weighted-average  shares outstanding    |       | 7,347                                     |       | 7,067 |   | 6,074 |   |
| Per share amounts                             |       | $                                         | 1.95       |   | $ | 0.84 |   | $ | 0.59 |   |
| Dilutive Earnings Per Share                   |       |                                      |       |   |   |   |   |
| Net Income                                    |       | $                                         | 14,303     |   | $ | 5,939 |   | $ | 3,584 |   |
| Basic weighted-average  shares outstanding    |       | 7,347                                     |       | 7,067 |   | 6,074 |   |
| Stock options and restricted  stock grants    |       | 4                                         |       | — |   | — |   |
| Dilutive  weighted-average shares outstanding |       | 7,351                                     |       | 7,067 |   | 6,074 |   |
| Per share amounts                             |       | $                                         | 1.95       |   | $ | 0.84 |   | $ | 0.59 |   |

 

Shares issued to theowners of the Predecessor in exchange for their interests in connection withthe Consolidation have been reflected in weighted average shares as of thebeginning of the earliest period presented.

**Comprehensive income**

For the years endedDecember 31, 2004, 2003, and 2002, comprehensive income equaled netincome; therefore, a separate statement of comprehensive income is not includedin the accompanying combined consolidated financial statements.

F-12

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

**Segment reporting**

Since the Company operatesprimarily in a single extended geographical market with similar products at itsvarious development projects, it is considered to represent a single reportablesegment for financial reporting purposes.

**Use of estimates**

The preparation of thefinancial statements, in conformity with accounting principles generallyaccepted in the United States of America, requires management to make estimatesand assumptions that affect the reported amounts in the financial statementsand accompanying notes amounts. Actual results could differ from thoseestimates. Material estimates are utilized in the valuation of real estate heldfor development and sale, capitalization of costs, consolidation of variableinterest entities and warranty reserves.

**Recent accounting pronouncements**

In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 123 (revised 2004), Share-Based Payments, (“SFAS 123R”).SFAS 123R is a revision of SFAS 123 and supersedes APB No. 25. SFAS 123Rrequires that the cost resulting from all share-based payment transactions berecognized in the financial statements and establishes fair value as themeasurement objective in accounting for share-based payment arrangements. SFAS123R is effective as of the beginning of the first interim or annual reportingperiod that begins after June 15, 2005, and applies to all awards granted,modified, repurchased or cancelled after the effective date, and alloutstanding portions of awards granted prior to the effective date which areunvested as the effective date of the pronouncement. Entities may adopt theprovisions of SFAS 123R using either the modified prospective or modifiedretrospective application. Under the modified prospective method, compensationcost is recognized on or after the required effective date for the portion ofoutstanding awards for which the requisite service has not yet been rendered,based on the grant-date fair value of those awards calculated under SFAS 123for either recognition or pro forma disclosure. For periods before the requiredeffective date, the modified retrospective application may be applied to either(a) all prior years for which SFAS 123 was effective or (b) only toprior interim periods in the year of initial adoption, on a basis consistentwith the pro forma disclosures required for those periods by SFAS 123. TheCompany adopted SFAS 123R prospectively on January 1, 2004. Prior toDecember 17, 2004 the Company had no share based payment transaction.

In January 2003, theFinancial Accounting Standards Board (“FASB”) issued InterpretationNo. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46requires the primary beneficiary of a variable interest entity to consolidatethat entity. A variable interest entity is created when (i) the equityinvestment at risk is not sufficient to permit the entity from financing itsactivities without additional subordinated financial support from other partiesor (ii) equity holders either (a) lack direct or indirect ability tomake decisions about the entity, (b) are not obligated to absorb expectedlosses of the entity or (c) do not have the right to receive expectedresidual returns of the entity if they occur. The primary beneficiary of avariable interest entity is the party that absorbs a majority of the variableinterest entity’s expected losses, receives a majority of the entity’s expectedresidual returns, or both, as a result of ownership, contractual or otherfinancial interests in the entity. Expected losses are the expected negative 

F-13

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

variabilityof an entity’s net assets exclusive of its variable interests, and expectedresidual returns are the expected positive variability in the fair value of anentity’s assets, exclusive of variable interests. Prior to the issuance of FIN46, an enterprise generally consolidated an entity when the enterprise had acontrolling financial interest in the entity through ownership of a majorityvoting interest.

In December 2003, theFASB issued a revision of FIN 46 (“FIN 46-R”), clarifying certain provisions ofFIN 46. The Company adopted the provisions of FIN 46-R on February 1, 2003to the extent that they related to variable interest entities created on orafter that date. For variable interest entities created before January 31,2003, FIN46-R was deferred to the end of the first interim or annual periodending after March 15, 2004. The Company fully adopted FIN 46-R effectiveMarch 31, 2004. Based on the provisions of FIN 46-R, the Company hasconcluded that whenever it options land or lots from an entity and pays asignificant non-refundable deposit, a variable interest entity is created undercondition (ii) (b) of the previous paragraph. The Company has beendeemed to have provided subordinated financial support, which refers tovariable interests that will absorb some or all of an entity’s expectedtheoretical losses if they occur. For each variable interest entity created theCompany will compute expected losses and residual returns based on theprobability of future cash flows as outlined in FIN 46-R. If the Company isdeemed to be the primary beneficiary of the variable interest entity it willconsolidate the variable interest entity on its balance sheet. See Note 3.

In December 2004, theFASB issued Staff Position SFAS 109-1, Application of FASB Statement No. 109,*Accounting for Income Taxes, to the Tax Deductionon Qualified Production Activities Provided by the American Jobs Creation Actof 2004* (“FSP SFAS 109-1”). The American Jobs CreationAct of 2004 (the “Act”), which was signed into law on October 22, 2004,provides a deduction for income from qualified domestic production activities,which will be phased in from 2005 through 2010. The Company does not expect thephase in of this new deduction to result in a significant impact in theeffective tax rate for fiscal years 2005 and 2006 based on current earningslevels. However, due to the lack of clarification regarding certain aspects ofthe Act, the Company is still evaluating the overall impact of the Act on theCompany’s earnings forecast**.** Underthe guidance in FSP SFAS 109-1, the deduction will be treated as a “specialdeduction” as described in SFAS No. 109. As such, the special deductionhas no effect on deferred tax assets and liabilities existing at the enactmentdate. Rather, the impact of this deduction will be reported in the period inwhich the deduction is claimed on the Company’s tax return.

**3.**   CONSOLIDATION OF VARIABLE INTERESTENTITIES

The Company typicallyacquires land for development at market prices from various entities underfixed price purchase agreements. The purchase agreements require deposits thatmay be forfeited if the Company fails to perform under the agreement. Thedeposits required under the purchase agreements are in the form of cash orletters of credit in varying amounts. The Company may, at its option, choosefor any reason and at any time not to perform under these purchase agreementsby delivering notice of its intent not to acquire the land under contract. TheCompany’s sole legal obligation and economic loss for failure to perform underthese purchase agreements is typically limited to the amount of the depositpursuant to the liquidated damages provision contained within the purchaseagreement. As a result, none of the creditors of any of the entities with whichthe Company enters into forward fixed price purchase agreements have recourseto the general credit of the Company. The Company also does not share in anallocation of either the profit earned or loss incurred by any of theseentities with which the Company enters fixed price purchase agreements.

F-14

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

The Company has concluded that whenever it optionsland or lots from an entity and pays a significant non-refundable deposit asdescribed above, a variable interest entity is created under the provisions ofFIN 46-R (see recent accounting pronouncement in Note 2). This isbecause the Company has been deemed to have provided subordinated financialsupport, which refers to variable interest that will absorb some or all of anentity’s expected theoretical losses if they occur. The Company thereforeexamines the entities with which the Company enters into fixed price purchaseagreements, for possible consolidation by the Company under FIN 46-R. Thisrequires the Company to compute expected losses and expected residual returnsbased on the probability of future cash flows as outlined in FIN 46-R. Thiscalculation requires substantial management judgments and estimates. Inaddition, because the Company does not have any contractual or ownershipinterests in the entities with which it contracts to buy the land, the Companydoes not have the ability to compel these development entities to providefinancial or other data to assist the Company in the performance of the primarybeneficiary evaluation.

The Company has evaluatedall of its fixed price purchase agreements and has determined that it is theprimary beneficiary of five of those entities. As a result, at December 31,2004, the Company has consolidated these entities in the accompanying combined andconsolidated balance sheet. The effect of the consolidation at December 31,2004 was the inclusion of $118,558 in “Inventory not owned—Variable InterestEntities” with a corresponding inclusion of $114,333 (net of land deposits paidof $4,225) to “Obligations related to inventory not owned.” Creditors, if any,of these Variable Interest Entities have no recourse against the Company.

**4.**   ACQUISITIONS

As discussed in Note 1, the Company onDecember 17, 2004, merged Comstock Service into Comstock Holdings. Theacquisition was accounted for under the purchase method and, accordingly, thepurchase price was allocated to assets acquired and liabilities assumed basedon their estimated fair value on the acquisition date.

Pursuant to the terms of the purchase agreement,shares of Comstock Service were canceled and replaced by shares of ComstockHolding. (As discussed in Note 1)

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of acquisition.
| Cash                                       |   | 1,216   |   |
|--------------------------------------------|--------|---------|--------|
| Notes receivable                           |   | 2,506   |   |
| Real estate held  for development and sale |   | 19,338  |   |
| Other assets                               |   | 25      |   |
| Total assets acquired                      |   | 23,085  |   |
| Less: Accounts  payable                    |   | (1,052  | )      |
| Less: Notes  payable                       |   | (13,889 | )      |
| Less: Minority interest                    |   | (2,717  | )      |
| Less: Other liabilities                    |   | (671    | )      |
| Net assets acquired                        |   | $       | 4,756  |   |
|                                            |        |         |        |  |

 

F-15

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

Additionally,in 2004, the Company purchased certain noncontrolling minority interests in itsconsolidated subsidiaries for a total of $900. The net excess of the fair valueover the book value of $226 was allocated to the related subsidiary’s assets,primarily work in process.

Theselected unaudited pro forma consolidated information for the years ended December 31,2004 and 2003, determined as if the acquisition, described above, had occurredon January 1, of each year as follows:
| ** **                                                                          | ** ** | **Proforma (unaudited)  Years ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                                           | ** ** | **2003** | ** ** |
| Revenues                                                                            |       | $                                                                  | 102,135    |   | $ | 62,359 |   |
| Operating income                                                                    |       | 19,456                                                             |       | 8,695 |   |
| Other (income)  expense, net                                                        |       | 1,018                                                              |       | (70 | ) |
| Income before  minority interest and equity in earnings of real estate partnerships |       | 18,438                                                             |       | 8,765 |   |
| Minority interest                                                                   |       | 5,157                                                              |       | 3,713 |   |
| Income before  equity in earnings of real estate partnerships                       |       | 13,281                                                             |       | 5,052 |   |
| Equity in  earnings of real estate partnerships                                     |       | 118                                                                |       | 139 |   |
| Net Income before income  taxes                                                     |       | $                                                                  | 13,399     |   | $ | 5,191 |   |

 

The selected unaudited proforma information is presented for illustrative purposes only and is notnecessarily indicative of results of operations in future periods or resultsthat would have been achieved had the Company and the acquired business beencombined during the specified periods.

**5.   REALESTATE HELD FOR DEVELOPMENT AND SALE**

Realestate held for development and sale consists of the following:
| ** **                                                                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Land and land  development costs                                             |       | $                     | 65,545     |   | $ | 48,459 |   |
| Cost of  construction (including capitalized interest and real estate taxes) |       | 38,781                |       | 16,261 |   |
| Homes held for  resale (model homes)                                         |       | —                |       | 552 |   |
|                                                                         |       | $                     | 104,326    |   | $ | 65,272 |   |

 

**6.**   PROPERTY,PLANT, AND EQUIPMENT, NET

Property,plant, and equipment consist of the following:
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Computer  equipment             |       | $                     | 498        |   | $ | 318 |   |
| Furniture and  fixtures         |       | 152                   |       | 89 |   |
| Office equipment                |       | 271                   |       | 165 |   |
|                            |       | 921                   |       | 572 |   |
| Less: accumulated  depreciation |       | 433                   |       | 349 |   |
|                            |       | $                     | 488        |   | $ | 223 |   |

 

F-16

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

Depreciation expense,included in “Selling, general, and administrative” in the consolidated andcombined financial statements of operations, amounted to $106, $67 and $61 forthe years ended December 31, 2004, 2003 and 2002, respectively.

**7.   INVESTMENTSIN REAL ESTATE PARTNERSHIPS**

Investmentsin real estate partnerships accounted for using the equity method are comprisedof the following:
| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2004**              | ** ** | **2003** | ** ** |
| TCG Fund I, L.C.(1)                 |       | $                     | 1,029      |   | $ | 1,029 |   |
| Comstock North  Carolina, L.L.C.(2) |       | —                |       | 110 |   |
| North Shore  Investors, LLC (3)     |       | —                |       | — |   |
|                                |       | $                     | 1,029      |   | $ | 1,139 |   |

----

(1)          TCG Fund I, L.C. (“FundI”)—During 2002, the Predecessor made a $1,000 investment in Fund I. Under theterms of the investment, the Company has a 9.58% member interest in Fund I anda 33.18% interest in the Loan Class of Fund I. Fund I provides funds forreal estate projects being developed, managed or built by entities in which theCompany has an interest. For the years ended December 31, 2004, 2003, and2002 the Company recorded earnings of $120, $120, $65 respectively. The Companyreceived distributions of $120, $156 and $0 during the year ended December 31,2004, 2003, 2002, respectively.

(2)          Comstock North Carolina,L.L.C. (“Comstock North Carolina”)—Prior to the acquisition of Comstock Serviceon December 17, 2004 as discussed in Note 1, the Predecessor had a 1.35%member interest in Comstock North Carolina, an entity formed to acquiredeveloped residential lots and constructed single-family and townhouse unitsthrough subsidiary entities. The remaining 98.65% of member interests are heldby 18 individual investors, including Comstock Service acting as generalpartner and owning a 75% member interest. For the years ended December 31,2004, 2003 and 2002 the Company recorded earnings (losses) of $2, $19, and$(14), respectively. The Company has not received any distributions during theyears ended December 31, 2004 and 2003. On December 17, 2004 as aresult of the acquisition of Comstock Service, the Company acquired thecontroling interest in Comstock North Carolina and accordingly now consolidatesthis investee.

(3)          Prior to the Company’sacquisition of Comstock Service as discussed in Note 1, Comstock Service in2001, had invested $41 in North Shore Investors, LLC for a 50% ownershipinterest. North Shore Investors, LLC was formed to acquire and developresidential lots and construct single family and townhouse units. In 2002, as aresult of recognizing its share of net losses incurred by North ShoreInvestors, LLC, the Comstock Service reduced its investment in North ShoreInvestors, LLC, to $0. As of December 31, 2004 the Company had notreceived dividends from North Shore Investors, LLC.

F-17

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

Thecondensed combined balance sheets and the statements of operations for the realestate property partnerships accounted for using the equity method are asfollows:

**CondensedCombined Balance Sheets (unaudited)**
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Real estate held for  development and sale   |       | $                     | 10,556     |   | $ | 8,575 |   |
| Other assets                                 |       | 4,037                 |       | 11,780 |   |
| Total assets                                 |       | $                     | 14,593     |   | $ | 20,355 |   |
| Mortgage notes payable                       |       | $                     | 10,659     |   | $ | 5,577 |   |
| Notes payable to related  parties            |       | 1,432                 |       | 606 |   |
| Other liabilities                            |       | 181                   |       | 1,330 |   |
| Total liabilities                            |       | 12,272                |       | 7,513 |   |
| Partners’ capital                       |       | 2,321                 |       | 12,842 |   |
| Total liabilities and partners’ capital |       | $                     | 14,593     |   | $ | 20,355 |   |

 

**CondensedCombined Statements of Operations (unaudited)**
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues                                  |       | $                                           | 22,157     |   | $ | 11,349 |   | $ | 12,225 |   |
| Operating income (loss)                   |       | 4,573                                       |       | 1,691 |   | (832 | ) |
| Other (income) and  expense               |       | 99                                          |       | 21 |   | 32 |   |
| Net income (loss)                         |       | 4,474                                       |       | 1,670 |   | (864 | ) |
| Company’s share of net income (loss) |       | $                                           | 118        |   | $ | 139 |   | $ | 51 |   |

 

**8.   OTHERASSETS**

Otherassets consist of the following:
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Contract land deposits      |       | $                     | 630        |   | $ | 380 |   |
| Restricted escrow  deposits |       | 776                   |       | 431 |   |
| Other                       |       | 1,134                 |       | 501 |   |
|                        |       | $                     | 2,540      |   | $ | 1,312 |   |

 

**9.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**

Accounts payable andaccrued liabilities consist of the following:
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Trade payables    |       | $                     | 15,317     |   | $ | 7,418 |   |
| Warranty          |       | 916                   |       | 541 |   |
| Customer deposits |       | 16,678                |       | 1,263 |   |
| Other             |       | 2,620                 |       | 1,232 |   |
|              |       | $                     | 35,531     |   | $ | 10,454 |   |

 

F-18

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

**10.   NOTESPAYABLE**

TheCompany has outstanding borrowings with various financial institutions andother lenders which have been used to finance the acquisition, development, andconstruction of real estate property. Notes payable consist of the following:
| ** **                                                                                                                                                                                                                                                                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Notes payable to non-related  parties**                                                                                                                                                                                                                                                                     |       |     |       |     |       |
| Shared construction and development loans with  approximately $136,760 available to be drawn for planned development  expenditures, with monthly interest payments ranging from prime + 0.5% to  prime +2% (5.75% to 7.25% and 4.50% to 6.58% for years ended  December 31, 2004 and 2003, respectively) |       | $        | 63,071     |     | $          | 33,567 |   |
| Interest bearing deferred purchase money deed of  trust note issued in exchange for land, with interest at a rate of 5.39%.  The note matures in December 2005                                                                                                                                      |       | 1,512    |       | —   |       |
| Acquisition loan facility of $16,000 with monthly  interest only payments at the 30 day LIBOR rate + 3% (4.12% and 4.95% at  December 31, 2003 and November 2004 maturity)                                                                                                                     |       | —   |       | 16,000   |       |
| Subordinated second trust loans of $1,000 and $228  with monthly interest only payments of 18% and 14%, respectively. The  remaining note matures in February 2007                                                                                                                             |       | 228      |       | 1,228    |       |
| Non-interest bearing deferred purchase money notes  issued in exchange for land                                                                                                                                                                                                                               |       | 873      |       | 1,128    |       |
|                                                                                                                                                                                                                                                                                                          |       | 65,684   |       | 51,923   |       |
| **Notes payable to related  parties**                                                                                                                                                                                                                                                                         |       |     |       |     |       |
| Subordinated second trust loans of $300 with monthly  interest and $6,000 with quarterly interest only payments of 14% and 18%  respectively. The notes mature in October 2004 and  February 2007, respectively                                                                           |       | 300      |       | 6,300    |       |
| Note payable of up to $5,000 with quarterly interest  only payments of 12% per annum maturing in April 2007                                                                                                                                                                                         |       | 2,500    |       | —   |       |
| Note payable of $2,400 with monthly interest only  payments of 12% per annum maturing in July 2005                                                                                                                                                                                                  |       | 2,400    |       | —   |       |
| Note payable to TCG Fund I LC, an equity method  investee for a loan up to $4,000 with interest only payments at 12% per  annum maturing in June 2006. At December 31, 2002, 2003 and 2004  the accrued interest on the note is $185, $90 and $106, respectively                               |       | 3,323    |       | 2,839    |       |
| Note payable to TCG Debt Fund II LC, a related party  due to common ownership, for a loan up to $2,600 with interest only payments  at 12% per annum maturing in September 2007. At December 31, 2004  the accrued interest on the note is $49                                                      |       | 2,421    |       | —   |       |
|                                                                                                                                                                                                                                                                                                          |       | $        | 76,628     |     | $          | 61,062 |   |

 

F-19

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

Maturities withrespect to all notes payable as of December 31, 2004 are as follows:
| **Years ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| 2005                                         |       | $          | 30,976     |       |
| 2006                                         |       | $          | 17,566     |       |
| 2007                                         |       | $          | 28,086     |       |
|                                         |       | $          | 76,628     |       |

 

For the years ended December 31, 2004, 2003 and2002, aggregate debt had a weighted average annual effective interest rate of 6.9%,6.6%, and 6.0% respectively.

Uponsettlement of each home or lot, principal is curtailed based upon a specificrelease payment to the lender. The loans are collateralized by first liens onthe land held for development and the construction in progress of therespective developments. In addition, borrowings at the project entity levelare guaranteed by the Company and in most cases some of its shareholders. TheCompany must comply with certain restrictive covenants, which includemaintenance of a total debt-to-tangible net worth ratio and a minimum tangiblenet worth level. As of December 31, 2004 and 2003, the Company andPredecessor was in compliance with all covenants as required.

Thesecond trust loans are collateralized by subordinate liens on the land held fordevelopment and the construction in progress of the respective developments.These subordinate liens are subject to inter-creditor agreements with thesenior lenders and are used by the Company to satisfy all or a portion of theequity requirements of the senior lenders. As such, these subordinatedfacilities are considered higher risk investments and as a result they commandpremium interest rates.

During May 2000, the Predecessor entered into anon-interest bearing deferred purchase money note agreement in exchange to holdtitle to and develop certain land. Under the terms of the note, the Company ispermitted to develop lots on the underlying land, and upon settlement isobligated to pay a specific release payment. During April 2003, the notewas increased by $820 as a result of additional land commitments. From May 2000to September 30, 2003, the Company, as a result of settled lots, has paida total of $724.

**11.   COMMONSTOCK**

In June 2002,Sunset issued 1,000 shares of its $1 par value common stock upon formation inconsideration of $1,110.

During 2002, the Predecessor repurchased 68 shares, ofits $1 par value common stock for $5 per share from one of the shareholdersunder the terms of agreements entered into by the shareholders of ComstockHoldings and Comstock Homes. During 2002, 68 shares, respectively, were issuedto certain shareholders of Comstock Holdings and Comstock Homes inconsideration for services rendered. The Company recorded compensation expenseof $77, in consideration for such services rendered.

As discussed in Note 1, the Company immediately priorto the IPO as a result of its merger with Comstock Holdings, had 4,333 and2,734 shares Class A and B Common Stock outstanding.  Class A and B Common Stock shares bear thesame economic rights.  However for votingpurposes, Class A stock holders are entitled to one vote for each share heldwhile Class B stock holders are entitled to fifteen votes for each share held.

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

As aresult of the IPO, the Company sold 3,960 Class A shares of Common Stock.  The Company also sold an additional 594shares of Class A Common Stock pursuant to the underwriters’ exercise oftheir over-allotment option.

In connection with the IPO, the Company recorded adistribution payable of $23,253 with its common stockholders immediately priorto the offering. The distribution payable represents undistributed taxpartnership profits and other amounts owed to the stockholders. Thedistribution payable bears interest at a rate of 3% and is expected to be paidover a one year period. At December 31, 2004 the balance of the distribution payablewas $12,655.

**12.**   RELATED PARTY TRANSACTIONS

InJune 2002, the Predecessor entered into a promissory note agreement with TCGFund I, LC to fund development projects. TCG Fund I, LC, is a related party inwhich the Company has an equity investment (Note 7). The promissory noteagreement allows the Company to borrow up to $4 million. The note bearsinterest at 12% per annum and is due on June 15, 2006. The Predecessorborrowed $2.8 million in December 2002 and $0.2 million in May 2004 underthis promissory agreement. As of December 31, 2004, 2003 and 2002, theamount owed to TCG Fund I amounted to approximately $3.3 million. Accruedinterests on this note totaled $106, $90 and $185 at December 31, 2004,2003 and 2002, respectively.

InSeptember 2004, the Predecessor entered into a promissory note agreement withTCG Fund II, LC to fund development projects. TCG Fund II, LC is a related partywhich the company manages. The promissory note agreement allows the Company toborrow up to $10 million. The note bears interest at 12% per annum and is dueon September 7, 2007. As of December 31, 2004 the Company owed $2.4 millionunder this promissory agreement. Accrued interest on this note totaled $49 atDecember 31, 2004.

InApril 2002 and January 2004, the Predecessor entered into lease agreements for7,703 and 8,797 square feet, respectively, for its corporate headquarters at11465 Sunset Hills Road, Reston, Virginia from Comstock Partners, L.C., anaffiliate 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 controlledby Christopher Clemente’s father-in-law, Dwight Schar, owns a 45% interest, andan unrelated third party owns a 5% interest in Comstock Partners. For the ninemonths ended September 30, 2004 and the years ended December 31, 2003and 2002, total payments made under this lease agreement were $231, $221, and$114, respectively. These leases ended on September 30, 2004. On October 1,2004, we entered into a lease with Comstock Asset Management, L.C., an entityowned by Christopher Clemente, for 20,609 square feet for our corporateheadquarters. Total payments made under this lease agreement were $142 as ofDecember 31, 2004.

InMay 2003, the Predecessor hired a construction company, in which ChristopherClemente’s brother, Louis Clemente, serves as the President and is asignificant shareholder, to provide construction services and act as a generalcontractor at one of the Company’s developments. The Predecessor paid $4,352,and $829 to this construction company during the year ended December 31,2004 and 2003, respectively, to this company.

InMay 2003, the Predecessor entered into a lot purchase agreement to sell 47developed lots to an entity in which Christopher Clemente’s father-in-law,Dwight Schar, serves as the chief executive officer 

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

and chairman of the board of directors and is ashareholder. During the year ended December 31, 2004 and 2003, the Companydelivered 30 and 17 lots, respectively, to this entity for $3,910 and $2,193,respectively.

InDecember 2003, the Predecessor entered into a $7,000 second trust loanagreement, accruing interest at 18% per annum, with Comstock Capital Partners,L.C., a related entity equally owned by Christopher Clemente and GregoryBenson. Immediately upon execution, Comstock Capital Partners assigned 100% ofthe second trust loan to other parties. An assignment was made covering $6million of the principal under the second trust loan to an entity owned orcontrolled by Christopher Clemente’s father-in-law, Dwight Schar, at 15% perannum. At December 31, 2003 the principal owed was $7,000. Accruedinterest at December 31, 2003 amounted to $55. The remaining $1 million ofprincipal under the loan was assigned to an entity controlled by ScottKasprowicz who became a related party on June 1, 2004 upon the hiring of hisson, Reid Kasprowicz. This $7,000 second trust loan matured in November 2004and was paid in full.

InApril 2004, the Predecessor entered into an additional three year $5,000promissory note agreement, with an entity controlled by Scott Kasprowicz,bearing interest at a rate of 12%. Under the terms of the note, the Predecessorwas advanced $2,500 in April 2004 and additional $2,500 in June 2004. In theevent of a consolidation of The Comstock Companies, the lender is entitled to apremium of up to 10% of the outstanding principal balance. As ofDecember 31, 2004 the amount owed to Scott Kasprowicz was $2,500. Accruedinterest and premium at December 31, 2004 totaled $598.

Duringthe years ended December 31, 2004 and 2003, the Company and thePredecessor paid $128 and $500, respectively, to Investors Management, LLC forconsulting services provided. Investors Management, LLC is a related party,which is owned by Christopher Clemente, Gregory Benson, Bruce Labovitz,Lawrence Golub and James Keena (executive officers and/or shareholders of theCompany). In addition, at December 31, 2003 the Company had an outstandingnote receivable from Investors Management, LLC of $14, which accrues interestat a rate of 10% per annum. The Note was paid in June of 2004. In August 2004the Predecessor entered into a new note agreement in the amount of $163, whichaccrues interest at a rate of 12% per annum. At December 31, 2004 accruedinterest on this note totaled $5.

ChristopherClemente’s mother-in-law, Janice Schar, and Gary Martin each invested $100 asminority shareholders in one of our subsidiaries, respectively, and Judah andDeborah Labovitz, the parents of Bruce Labovitz, loaned approximately $300 toanother of our subsidiaries.

During2003, the Predecessor entered into agreements with I-Connect, L.C., a companyin which Investors Management, LLC holds a 25% interest, for informationtechnology consulting services and the right to use certain customizedenterprise software developed with input from the Company. The intellectualproperty rights associated with the software solution that was developed byI-Connect along with any improvements made thereto by the Company remained theproperty of I-Connect. During the years ended December 31, 2004 and 2003,the Predecessor paid $434 and $471, respectively, to I-Connect. Also, in March2003, the Predecessor entered into a space sharing agreement with I-Connect,L.C. to occupy and use 3,342 square feet of office space subleased byI-Connect, L.C. from a third party in Reston, Virginia. The Predecessor paid $4and $40, respectively, under this agreement for the years endedDecember 31, 2004 and 2003. On June 24, 2003, the I-Connect, L.C. subleasewas assigned to Comstock Partners, L.C. (as landlord). The space sharingagreement with I-Connect ended on September 30, 2004.

F-22

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

Atthe end of December 31, 2004, 2003 and 2002, the Predecessor receivedrevenue of approximately $3,280, $2,908, and $4,348, respectively, by providingadministrative and sales support to Comstock Service Corp., Inc., a relatedparty owned by Christopher Clemente, Gregory Benson, James Keena and LawrenceGolub. At December 31, 2003 and 2002 the Company had a receivable of approximately$2,690 and $365, respectively, from this entity.

Forthe years ended December 31, 2004, 2003 and 2002, the Predecessor receivedrevenue of approximately $1,619, $926 and $634, respectively, by providingadministrative and sales support to other related parties in which ChristopherClemente, Gregory Benson, Jim Keena, Lawrence Golub and Christopher Clemente’sfather-in-law, Dwight Schar, are shareholders.

FromOctober 31, 2003 to December 31, 2003, the Predecessor granted interest-freeloans totaling $38 to an employee of the Company. As of December 31, 2003and June 30, 2004 the employee owed the Company $38 and $39, respectively. Theloan was repaid in July of 2004.

InOctober 2004, the Predecessor entered into an agreement with Comstock AssetManagement Inc. to provide (management services) for a fee of $20 a month.Comstock Asset Management Inc is a related party wholly owned by ChristopherClemente. As of December 31, 2004 the Predecessor earned $60 in revenueand recorded a receivable for $60 from this entity. Also, in November 2004, theCompany entered into an agreement with Comstock Asset Management to sell retailcondo units #1 through #5 at Potomac Yard for $14,500. In connection with thissale, the Company received a deposit of $8,000 upon execution of thisagreement.

Duringthe course of the years ended December 31, 2004, 2003 and 2002, theCompany provided bookkeeping services to related party entities at no charge.

InAugust 2004, the Predecessor entered into a $2,400 promissory note agreementwith Belmont Models I, L.C., an affiliate managed by Investors Management.The note bears an interest rate of 12%, which is payable monthly and matures inJuly 2005. Accrued interest on this note totals $49 as of December 31,2004.

In July 2003, the Predecessor loaned William Bensten,an officer of the Company, $70. The loan was repaid in August 2003 with nointerest.

During 2004, 2003, 2002 the Predecessor has enteredinto sales contracts to sell homes to certain employees of the Company.  The Company, in order to attract, retain, andmotivate employees maintains a homes ownership benefit program.  Under the home ownership benefits, anemployee receives certain cost benefits provided by us when purchasing a homeor having one built by us.  Sales ofhomes to employees for investment purposes are conducted at market prices.

**13.   RETIREMENTPLAN**

The Company maintains a defined contributionretirement savings plan pursuant to Section 401(k) of the InternalRevenue Code (the “Code”). Eligible participants may contribute a portion oftheir compensation to their respective retirement accounts in an amount not toexceed the maximum allowed under the Code. The plan provides for matchingCompany contributions at the sole discretion of the board of directors. TheCompany and the Predecessor made no contributions to the plan during the yearsended December 31, 2004, 2003 and 2002.

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

**14.   RESTRICTED STOCK, STOCK OPTIONS AND OTHERSTOCK PLANS**

Effective January 1, 2004, the Companyadopted the fair value recognition provisions of SFAS No. 123(R). Inaccordance with the provisions of SFAS No. 123(R) and SFAS No. 148,$10 was recorded for total stock-based compensation expense for the yearended December 31, 2004. Prior to December 14, 2004 the Company did notsponsor any stock based plans. Accordingly, no stock based compensation wasincluded for the years ended December 2003 and 2002.

On December 14, 2004 the Company adopted the 2004Long-Term Compensation Plan. The plan provides for the issuance of stockoptions, 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. The plan provided for aninitial authorization of 1,550 shares of Class A Common stock for issuancethereunder, plus an additional annual authorization equal to 10% of theauthorized shares of common stock under the Long-Term Compensation Plan.

On December 14, 2004 the Company issued 275shares of restricted stock grants to certain directors, officers and employees.Of the 275 shares of restricted stock issued, 1 shares vest in full on April15, 2005 and the remainder of the shares vest on December 31, 2006.Unearned compensation arising from the restricted stock grants is shown as areduction in stockholders’ equity in the consolidated balance sheets and isamortized to expense over the vesting period. The company also issued 107options to the Company’s Chief Financial Officer at an exercise price of $16.00per share. At December 31, 2004 the company had 107 options outstanding.The expense recognized in the consolidated income statement for the year endedDecember 31, 2004 for restricted stock grants and options was $91 and $10,respectively.

The fair value of eachoption award is calculated on the date of grant using the Black-Scholes optionpricing model that uses the assumptions noted in the following table. Becausethe Company does not have sufficient trading history, expected volatilities arebased historical volatilities of comparable companies within our industry. Thecompany estimates the expected life of the option based on the estimatedvolatility and the vesting terms of the underlying options. The risk-free ratefor periods is based on the U.S. Treasury rates in effect at the time of grant.
| Weighted-average fair  value of options granted | ** ** | **$**            | **13.49**  | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------|
| Dividend yields                                 | ** ** | **N/A**          | ** ** |
| Expected volatility                             | ** ** | **48%**          | ** ** |
| Risk-free interest rates                        | ** ** | **3.5**          | ** ** |
| Expected lives                                  | ** ** | **4 years** | ** ** |

 

On December 31,2004 the following amounts were available for issuance:
| Shares Available for  issuance at December 14, 2004 |   | 1,550  |   |
|----------------------------------------------------------|--------|--------|--------|
| Less:                                                    |   |   |   |
| Restricted Stock Grants                                  |   | 3      |   |
| Stock Option Grants                                      |   | 78     |   |
| Shares Available for issuance at December 31,  2004 |   | 1,469  |   |

 

F-24

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

**15.    COMMITMENTSAND CONTINGENCIES**

**Litigation**

In the normal course ofits business, the Company and/or its subsidiaries are named as defendants incertain legal actions arising from its normal business activities. Managementbelieves that none of the litigation matters in which the Company or anysubsidiary is involved would have a material adverse effect on the consolidatedfinancial condition or operations of the Company.

**Lot purchase agreements**

On December 26, 2001,the Predecessor entered into a purchase commitment agreement to purchasedeveloped residential lots. The purchase commitment agreement provides forfixed purchase prices per lot subject to escalation throughout the build-outperiod for each project. At December 31, 2004, the Company had commitmentsto purchase fifty-six lots at an average minimum purchase price ofapproximately $65 per lot, under non-specific performance agreements.

**Lettersof credit and performance bonds**

The Company hascommitments as a result of contracts entered into with certain third parties tomeet certain performance criteria as outlined in such contracts. The Company isrequired to issue letters of credit and performance bonds to these thirdparties as a way of ensuring that such commitments entered into are met by theCompany. At December 31, 2004, the Company has issued $8,777 in letters ofcredit and $7,306 in performance and payment bonds to these third parties. Noamounts have been drawn against these letters of credit and performance bonds.

**Operating leases**

TheCompany leases office space under non-cancelable operating leases. Minimumannual lease payments under these leases at December 31, 2004 approximate:
| **Year Ended:** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2005                 |       | $          | 647        |       |
| 2006                 |       | 629        |       |
| 2007                 |       | 642        |       |
| 2008                 |       | 667        |       |
| 2009                 |       | 547        |       |
| Thereafter           |       | 10         |       |
| Total                |       | $          | 3,142      |       |

 

Operating lease rentalexpense aggregated $234, $304 and $205, respectively, for years ended December31, 2004, 2003 and 2002.

**16.   SUBSEQUENT EVENTS**

In February 2005 the Company completed a purchase of a424 unit condo conversion project located in Fairfax, VA for a total purchaseprice of $75,000. To finance this transaction, the Company entered into 

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

a $67,000 promissory noteagreement bearing interest at a rate equal to the greater of: (A) 5.50% or(B) 3.50% + the three month LIBOR rate.

In March 2005 the Company completed the purchase ofthree real estate projects totaling approximately $27,000. The company enteredinto an aggregate $8,700 in promissory note agreements bearing an weighted averageinterest rate of interest rate of approximately 6.0% to finance this transaction.

In March 2005 the Companybought out the interests of certain holders of minority interests in certain ofthe Company’s project-level investment entities for a total purchase price of$2,014.

**17.   FAIRVALUE OF FINANCIAL INSTRUMENTS**

The carrying amounts reported in the combinedconsolidated balance sheets for cash and cash equivalents, accounts receivable,accounts payable, accrued liabilities and floating rate debt approximate fairvalue.

Thecarrying amount and fair value of fixed rate debt at December 31, 2004 and2003 were as follows:
| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|
| ** **      | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Carrying amount |       | $                     | 11,172     |   | $ | 10,367 |   |
| Fair value      |       | $                     | 12,789     |   | $ | 11,672 |   |

 

Fair value estimates aremade at a specific point in time, based on relevant market information aboutthe financial instruments. These estimates are subjective in nature and involveuncertainties and matters of significant judgment and therefore, cannot bedetermined with precision. Changes in assumptions could significantly affectthe estimates.

**18.**   INCOME TAXES

Prior to December 17, 2004 the Predecessor Companyhad elected to be treated as an S corporation under Subchapter S of theInternal Revenue Code and therefore was not subject to income taxes. Taxableincome or loss was passed through and reported by the individual shareholders.Subsequent to the Consolidation the company was reorganized as a C corporationunder which income taxes are accounted for under the asset and liability methodin accordance with SFAS 109 “Accounting for Income Taxes”.

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

IncomeTax provision consists of the following as of December 31, 2004 and the yearended:
| Current:                 |   |   |   |   |   |
|--------------------------|--------|--------|--------|--------|--------|
| Federal                  |   |   | 242    |   |   |
| State                    |   |   | 48     |   |   |
|                     |   |   | 290    |   |   |
| Deferred:                |   |   |   |   |   |
| Federal                  |   |   | (472   | )      |   |
| State                    |   |   | (59    | )      |   |
|                     |   |   | (531   | )      |   |
| Total Income Tax Expense |   |   | (241   | )      |   |

 

Incometaxes payable consist of the following:
| Current:              |   |   |   |   |   |
|-----------------------|--------|--------|--------|--------|--------|
| Federal               |   |   | 242    |   |   |
| State                 |   |   | 48     |   |   |
| Income taxes  payable |   |   | 290    |   |   |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Components of the Company’s deferredtax assets and liabilities at December 31, 2004 were as follows:
| ** **                    | ** ** | **December 31,  2004** | ** ** |
|-------------------------------|------------|-----------------------------|------------|
| Deferred tax assets:          |       |                        |       |   |   |
| Inventory                     |       |                        | 2,067      |   |   |
| Warranty                      |       |                        | 293        |   |   |
| Deferred rent                 |       |                        | 8          |   |   |
| Accrued expenses              |       |                        | 96         |   |   |
| Stock-based compensation      |       |                        | 39         |   |   |
|                          |       |                        | 2,503      |   |   |
| Less—valuation allowance |       |                        | (1,508     | ) |   |
| Net deferred tax assets       |       |                        | 995        |   |   |
| Deferred tax liabilities:     |       |                        |       |   |   |
| Depreciation and amortization |       |                        | (174       | ) |   |
| Net deferred tax liabilities  |       |                        | (174       | ) |   |
| Net deferred tax  assets      |       |                        | 821        |   |   |

 

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**COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued) (Amounts in thousands)**

The Company has adequately provided for contingenciesrelated to income taxes in accordance with SFAS No. 5. At December 31, 2004,the Company recorded a $68 income tax reserve which is included in otheraccrued expenses on the balance sheet. This tax reserve relates predominatelyto a potential dispute by taxing authorities over tax benefits resulting fromadditional income tax basis in certain residential housing developmentprojects. The Company has also determined that a valuation allowance of approximately$1,508 as of December 31, 2004 related to a deferred tax asset ofapproximately $1,508 resulting from additional tax basis in residential realestate development projects. In analyzing the need for the provision of taxcontingency reserves and the valuation allowance, management reviewedapplicable statutes, rules, regulations and interpretations and establishedthese reserves based on past experiences and judgments about potential actionsby taxing jurisdictions.

Areconciliation of the statutory rate and the effective tax rate follows:
| ** **                                                                                              | ** ** | **Effective** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                                                              | ** ** | **rate**      | ** ** |
| Statutory Rate                                                                                          |       | 34.00         | %          |
| Income  attributable to period during which  the Predecessor was under S Corporation  status. | ** ** | (37.19        | )%         |
| State income  taxes—net  of federal benefit                                                        |       | 4.26          | %          |
| Permanent differences                                                                                   |       | 0.02          | %          |
| Tax reserve                                                                                             |       | 0.35          | %          |
| Deferred tax  assets resulting from a change in tax status, net                                         |       | (10.96        | )%         |
| Change in  valuation allowance                                                                          |       | 7.81          | %          |
|                                                                                                    |       | (1.71         | )%         |

                                                                                                                                                

OnOctober 22, 2004, the President of the U.S. signed into law the American JobsCreation Act of 2004. The Company is currently evaluating the impact of thisnew law on its operations and effective tax rate. In particular, the Company isevaluating the law’s provisions relating to the phased-in deduction associatedwith pre-tax income from domestic production activities. This special deductionis 3% of qualifying income for years 2004 and 2005, 6% in years 2006 through2009 and 9% thereafter.

F-28

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| Exhibit   Number | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                             |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*             |       | Amended and Restated Certificate of Incorporation                                                                                                                                                                                                                                                       |
| 3.2*             |       | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                            |
| 4.1(4)           |       | Specimen Stock Certificate                                                                                                                                                                                                                                                                              |
| 10.1(1)          |       | Lease Agreement, dated as of April 30, 2002,  with Comstock Partners, L.C.                                                                                                                                                                                                                         |
| 10.2(1)          |       | Lease Agreement, dated as of January 31, 2004,  with Comstock Partners, L.C.                                                                                                                                                                                                                       |
| 10.3(3)          |       | Agreement of Sublease, dated as of October 1,  2004, with Comstock Asset Management, L.C.                                                                                                                                                                                                          |
| 10.4(2)          |       | Loan Agreement, dated December 17, 1997, as  amended, with Bank of America, N.A.                                                                                                                                                                                                                   |
| 10.5(3)          |       | Partial Assignment of Note, dated December 15,  2003, with Kasprowicz Family, LLC.                                                                                                                                                                                                                 |
| 10.6(3)          |       | Promissory Note, dated April 30, 2004, with  Kasprowicz Family, LLC.                                                                                                                                                                                                                               |
| 10.7(1)          |       | Disbursement and Construction Loan Agreement and Disbursement  and Development Loan Agreement, each dated October 10, 2002 and as  amended, with Branch Banking and Trust Company of Virginia.                                                                                                     |
| 10.8(1)          |       | Disbursement and Construction Loan Agreement and  Acquisition, Disbursement and Development Loan Agreement, each dated  July 25, 2003, with Branch Banking and Trust Company of Virginia.                                                                                                          |
| 10.9(1)          |       | Purchase Money Deed of Trust and Security Agreement,  dated December 15, 2003, with Crescent Potomac Yard Development, LLC.                                                                                                                                                                        |
| 10.10*           |       | Loan Agreement, dated January 25, 2005, with  Corus Bank, N.A.                                                                                                                                                                                                                                     |
| 10.11*           |       | Completion Guaranty, dated January 25, 2005 in  favor of Corus Bank, N.A.                                                                                                                                                                                                                          |
| 10.12*           |       | Carve-Out Guaranty, dated January 25, 2005, in  favor of Corus Bank, N.A.                                                                                                                                                                                                                          |
| 10.13(3)         |       | Form of Indemnification Agreement.                                                                                                                                                                                                                                                                 |
| 10.14(3)         |       | Form of Promissory Note to be issued to each of  Christopher Clemente, Gregory Benson, James Keena and Lawrence Golub by each  of Comstock Holding Company, Inc., Comstock Homes, Inc., Sunset  Investment Corp., Inc. and Comstock Service Corp., Inc.                        |
| 10.15(3)         |       | Form of Tax Indemnification Agreement to be  entered into by each of Christopher Clemente, Gregory Benson, James Keena and  Lawrence Golub with each of Comstock Holding Company, Inc., Comstock  Homes, Inc., Sunset Investment Corp., Inc. and Comstock Service  Corp., Inc. |
| 10.16(3)         |       | 2004 Long-Term Incentive Compensation Plan.                                                                                                                                                                                                                                                             |
| 10.17(3)         |       | Form of Stock Option Agreement under the 2004  Long-Term Incentive Compensation Plan.                                                                                                                                                                                                              |
| 10.18*           |       | Form of Restircted Stock Grant Agreement under  the 2004 Long-Term Incentive Compensation Plan                                                                                                                                                                                                     |
| 10.19(3)         |       | Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                           |
| 10.20(2)         |       | Purchase and Sale Agreement, dated as of  April 25, 2003, as amended, with Crescent Potomac Yard Development, LLC.                                                                                                                                                                                 |
| 10.21*           |       | Purchase and Sale Agreement, dated as of  November 9, 2004, as amended, with Fair Oaks Penderbrook Apartments  L.L.C.                                                                                                                                                                              |
| 10.22*           |       | Real Estate Purchase Contract, dated as of  February 4, 2005, with Westwick Apartments LLC                                                                                                                                                                                                         |
| 10.23*           |       | Services Agreement, dated March 4, 2005, with  Comstock Asset Management, L.C.                                                                                                                                                                                                                     |
| 10.24(3)         |       | Employment Agreement with Christopher Clemente.                                                                                                                                                                                                                                                         |
| 10.25(3)         |       | Employment Agreement with Gregory Benson.                                                                                                                                                                                                                                                               |
| 10.26(3)         |       | Employment Agreement with Bruce Labovitz.                                                                                                                                                                                                                                                               |
| 10.27(3)         |       | Confidentiality and Non-Competition Agreement  with Christopher Clemente.                                                                                                                                                                                                                               |
| 10.28(3)         |       | Confidentiality and Non-Competition Agreement  with Gregory Benson.                                                                                                                                                                                                                                     |
| 10.29(3)         |       | Confidentiality and Non-Competition Agreement  with Bruce Labovitz.                                                                                                                                                                                                                                     |
| 10.30*           |       | Description of Arrangements with William Bensten                                                                                                                                                                                                                                                        |
| 10.31*           |       | Description of Arrangements with David Howell                                                                                                                                                                                                                                                           |

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| 10.32(3) |   | Trademark License Agreement.                                                                                                                           |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33*   |   | Purchase Agreement, dated November 12, 2004, with Comstock  Asset Management, L.C.                                                                     |
| 14.1*    |   | Code of Ethics                                                                                                                                         |
| 21.1*    |   | List of subsidiaries.                                                                                                                                  |
| 24.1*    |   | Power of Attorney                                                                                                                                      |
| 31.1*    |   | Certification of Chief Executive Officer pursuant to Section  302 of Sarbanes-Oxley Act of 2002.                                                       |
| 31.2*    |   | Certification of Chief Financial Officer pursuant to Section  302 of Sarbanes-Oxley Act of 2002.                                                       |
| 31.3*    |   | Certification of Chief Accounting Officer pursuant to Section  302 of Sarbanes-Oxley Act of 2002.                                                      |
| 32.1*    |   | Certification of Chief Executive Officer, Chief Financial  Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley  Act of 2002. |

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*                    Filedherewith.

(1)          Incorporated byreference to an exhibit to the Registrant’s Registration Statement on Form S-1filed with the Commission on August 13, 2004 (No. 333-118193).

(2)          Incorporated byreference to an exhibit to the Registrant’s Amendment No. 1 to theRegistration Statement on Form S-1 filed with the Commission on October 1,2004 (No. 333-118193).

(3)          Incorporated byreference to an exhibit to the Registrant’s Amendment No. 5 to theRegistration Statement on Form S-1 filed with the Commission on December 7,2004 (No. 333-118193).

(4)          Incorporated byreference to an exhibit to the Registrant’s Amendment No. 6 to theRegistration Statement on Form S-1 filed with the Commission on December 9,2004 (No. 333-118193).

 

 

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