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

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT RESULTS

The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated interim financial statements and the notes thereto appearing elsewhere in this report and our audited consolidated financial statements and the notes thereto for the year ended December 31, 2007, appearing in our Annual Report on Form 10-K for the year then ended (the "2007 Form 10-K").

This report includes forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as "anticipate," "believe," "estimate," "may," "intend," "expect," "will," "should," "seeks" or other similar expressions. Forward-looking statements are based largely on our expectations and involve inherent risks and uncertainties, many of which are beyond our control. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. Some factors which may affect the accuracy of the forward-looking statements apply generally to the real estate industry, while other factors apply directly to us. Any number of important factors which could cause actual results to differ materially from those in the forward-looking statements include, without limitation: general economic and market conditions, including interest rate levels; our ability to service our substantial debt; inherent risks in investment in real estate; our ability to compete in the Washington, D.C., Raleigh, North Carolina and Atlanta, Georgia real estate and home building markets; regulatory actions; fluctuations in operating results; our anticipated growth strategies; shortages and increased costs of labor or building materials; the availability and cost of land in desirable areas; natural disasters; our ability to raise debt and equity capital and grow our operations on a profitable basis; and our continuing relationships with affiliates. Additional information concerning these and other important risk and uncertainties can be found under the heading "Risk Factors" in our Form 10-K filed for the fiscal year ended December 31, 2007. Our actual results could differ materially from these projected or suggested by the forward-looking statements.

Overview

We are a real estate developer that has substantial experience building a diverse range of products including single-family homes, townhouses, mid-rise condominiums, high-rise multi-family buildings and mixed-use (residential and commercial) developments in suburban communities and high density urban infill areas. We build projects with the intent that they be sold either as fee-simple properties, condominiums, or investment properties. We focus on geographic areas, products and price points where we believe there will be significant demand for new housing and potential for attractive returns. We currently develop and build in the Washington, D.C., Raleigh, North Carolina, and Atlanta, Georgia markets where we target a diverse range of home buyers including first-time, early move-up, secondary move-up, and empty nester move-down buyers. We focus on the "middle-market" meaning that we tend to offer products in the middle price points in each market, avoiding the very low-end and very high-end products. We believe that our middle market strategy positions our products such that they are affordable to a significant segment of potential home buyers in our markets.

Our markets have generally been characterized by strong population and economic growth trends that have led to strong demand for traditional housing. However, the housing industry is currently in a cyclical downturn, suffering the effects of reduced demand brought on by significant increases in existing home inventory, resistance to appreciating prices of new homes, turmoil in the mortgage markets, and concerns about the health of the national economy. We believe that over the past two decades we have gained the experience necessary to manage our business through the current difficult market environment. We believe that we have taken, and are continuing to take, the steps necessary to manage our business until market conditions stabilize and eventually improve.

As a result of deteriorating market conditions we have adjusted certain aspects of our business strategy in 2008. We have continued to focus our energy on repositioning projects, reducing debt, reducing costs, managing liquidity, renegotiating loans with current period maturities, refinancing projects and enhancing our balance sheet. We have cancelled or postponed plans to start several new projects. As a result we have purchased very little new land over the past 18 months. We have sold certain land and other assets and taken steps to significantly reduce our inventory of homes as well. Until market conditions stabilize we will continue to focus on working through the land inventory that we currently own. This will include continuing efforts to sell certain land parcels where we believe it is the best strategy relative to that particular asset. However, the cyclical nature of our industry tends to create opportunities to acquire properties at reduced costs. Under the right circumstances, when our financial condition warrants, we would consider acquiring new development opportunities.

In the second half of 2007 the banking and credit markets experienced severe disruption as a result of a collapse in the sub-prime and securitized debt markets. As a result, commercial banks and other unregulated lenders have experienced liquidity limitations which have made funding for real estate lending more constrained. This has resulted in a substantial tightening of credit available to homebuilders and other real estate oriented businesses. In addition, the tightening of the credit markets has severely reduced the amount of capital available for consumer mortgage financing. This overall tightening of the credit markets has created substantial obstacles to our ability to secure financing for our operations, construction and land development efforts. In addition, the disruption affecting our customers' ability to secure mortgage financing for the purchase of our homes has created significant obstacles to selling our homes. This reduction in available credit is having a negative effect on our sales and revenue in 2008 which is further undermining our ability to generate enough cash to meet our obligations.

The disruption described above significantly worsened during the three months ended September 30, 2008 as the credit markets were essentially frozen and economic difficulties have spread to other sectors. As a result, overall economic conditions continue to remain difficult and have a negative impact on consumer confidence and new orders. In light of these conditions, the Company has continued to execute on its previously announced plans to restructure its debts (further described below) and reduce expenditures related to land development and vertical construction across all markets until economic conditions begin to show signs of improvement.

Our overall borrowing capacity is in part constrained by loan covenants which require maximum loan-to-value ratios, minimum ratios of interest to EBITDA, minimum tangible net worth, and maximum ratios of total liabilities to total equity. Our non-compliance with certain of these covenants have, for the period ending September 30, 2008, created defaults under certain of our loans and loan facilities. There is no assurance that either we will return to compliance in the future or our banks will provide us waivers or loan modifications and extensions of our covenants as they have in the past.

We have both secured and unsecured debt, much of which matured in 2007 and during the first nine months of 2008. A significant amount of our debt which has matured remains unpaid and unresolved. In our industry it has been customary in the past for lenders to renew and extend project facilities until the project is complete provided the loans are kept current. This is no longer the case. Since we are the guarantor of our subsidiaries' debt, any significant failure to negotiate renewals and extensions to this debt would severely compromise our liquidity and could jeopardize our ability to satisfy our capital requirements. Our recently reported loan covenant violations and loan defaults have negatively impacted our ability to renew and extend our debt.

Several of our lenders have issued default and demand notices to the Company and/or its subsidiaries. Haven Trust issued a default notice upon maturity of the loan associated with the Company's Gates at Luberon project. The outstanding balance was approximately $4.8 million. The Company has filed a petition of bankruptcy for the subsidiary entity that is the borrower. As of September 30, 2008 the Company had not submitted a plan of reorganization which allowed foreclosure on the remaining inventory at our Gates of Luberon project. BB&T, as discussed in Note 13 to the accompanying consolidated financial statements, entered into a foreclosure agreement with the Company with respect to approximately $31.4 million of debt secured by properties in Virginia and Atlanta, Georgia. Under the terms of the foreclosure agreement, the Company agreed to cooperate with BB&T with respect to its foreclosure on the Company's real estate assets and BB&T agreed to provide the Company with a full release from its debt obligations. Wachovia issued a notice of default on the approximately $24.9 million outstanding under the Company's revolving borrowing base facility but has not initiated any proceedings. Royal Bank of Canada (RBC) has issued a notice of default to the Company's Comstock Homes of Atlanta subsidiary. Guggenheim Capital Partners has issued a notice of default to the Company regarding its $13.6 million loan at Penderbrook. The Company disputes the Guggenheim notice. M&T Bank has issued a notice of default with respect to $8.5 million outstanding to the Company.

The Company is in violation of other loan covenants under the terms of other facilities but no other default notices have been issued. The Company acts as guarantor of substantially all of its subsidiaries' debt and therefore the failure to extend or amend the terms of the subsidiaries' debt would result in an unmanageable demand for repayment under the guarantees. In the event the Company is unsuccessful in restructuring its debts and the guarantees are called by lenders, the Company may have no other choice but to file a petition of bankruptcy.

In the second quarter of 2008, the Company retained an external consulting firm to act as an advisor in exploring debt restructuring and capital raising alternatives. In connection with the exploration of available debt restructuring alternatives, the Company elected to cease making certain scheduled interest and/or principal curtailment payments while it attempts to negotiate modifications or other satisfactory resolutions from its lenders. While each situation is unique, the Company is pursuing a strategy for restructuring its debt obligations with certain of its lenders which includes the transfer of the deed to certain projects to the lender in exchange for the settlement in full of any debt balance owed to the lender by the Company. This is commonly referred to as a 'deed-in-lieu' or 'friendly foreclosure' transaction. The Company was successful in executing two such agreements during the three months ended September 30, 2008, although only the BB&T transaction is reflected in the three months ended September 30, 2008. Since Regions Bank did not foreclose on the secured assets until November 2008, that transaction will be recognized in the three months ending December 31, 2008.

While we have always preferred to purchase finished building lots that are developed by others we have also been active in entitling and developing land for many of our home building projects. We believe that in a normal real estate market it is important to have the capabilities to manage the entitlement and development of land in order to position us to be able to recognize opportunities to enhance the value of the real estate we develop and to be opportunistic in our approach to acquisitions. Nonetheless, our interest in acquiring new development projects will be focused on finished building lots until market conditions and circumstances warrant otherwise.

In addition, our business has included the development, redevelopment (condominium conversions) and construction of residential mid-rise and high-rise condominium complexes. The majority of our multi-family projects are in our core market of the greater Washington, D.C. area. We believe that the demographics and housing trends in the Washington, DC area will continue to produce demand for high density housing and mixed-use developments. In Raleigh, North Carolina and Atlanta, Georgia, we are currently focused on lower density housing such as single family homes and townhomes. In order to reduce the cost associated with carrying our condominium inventory in the Washington, DC region we are temporarily operating certain portions of our multi-family projects as rental properties. This provides us regular cash flow which we use to offset the carry costs associated with the applicable multi-family assets. In addition, we believe the value of the assets will be enhanced when market conditions stabilize or improve.

We operate in the greater Washington, D.C., Raleigh, North Carolina and Atlanta, Georgia markets. We believe that demand for housing (existing homes, new homes, and rental homes) in these markets is driven by job growth and population growth. We also believe that when consumers view the national economy in favorable light that demand for new homes increases and demand for rental homes decreases. Conversely, when consumers are concerned about the health of the economy demand for new homes suffers as consumers opt for rental homes. We believe that current concerns about the health of the national economy are having a negative effect on demand for new homes while also increasing demand for rental homes. Our experience leads us to conclude that over the long term, demand for new homes will improve in our core markets as each of our primary markets continues to experience job growth.

In each of our markets job growth over the past several years has led to population growth. This in turn led to increased demand for new homes and home price appreciation. The double digit pace of price appreciation in some areas led to inflationary pressures on the costs associated with producing homes (increases in cost of land, labor and materials). Appreciating home values also attracted small time investors who were not committed to ownership of the homes and condominiums they sought to purchase. As a result when market conditions cooled, contract cancellations increased which led to an increased inventory of speculative homes held by builders. The number of existing homes available for sale by individuals also increased significantly. This supply/demand imbalance created significant pressure on homebuilders to increase selling concessions and to reduce prices. At the same time turmoil in the mortgage markets created uncertainty regarding the availability of mortgage financing and concerns about the health of the national economy caused prospective home buyers to stay out of the market. Although job growth and population growth has continued in our markets, demand for new homes continues to be soft. We believe that the increased overall occupancy rate of rental apartments over the past several years is a direct result of these factors.

While market conditions continue to be challenging, we believe that the cyclical nature of our industry will again lead to stabilized market conditions and eventually to improved market conditions. By shedding certain assets, and operating certain other assets as rental properties we believe we can weather the downturn in our industry and can be positioned to capitalize on new opportunities when market conditions stabilize.

Our general business strategy is to focus on for-sale residential real estate development opportunities in the southeastern United States that afford us the ability to produce products at price points where we believe there is significant and consistent long-term demand for new housing. Recognizing that the housing industry is cyclical in nature and that current challenging market conditions may take time to stabilize, we have adapted our business plan and strategy with the goal of protecting liquidity, enhancing our balance sheet and positioning us for future growth and profitability when market conditions improve. In connection with this strategy, we have adopted a conservative approach to land acquisition and capital investment, which favors acquisition of finished building lots, and have postponed previous plans for continued market expansion. We remain committed to disposing of assets that do not allow for adequate return on invested capital. We believe that this approach enhances our ability to manage through challenging market conditions and better positions us to take advantage of attractive opportunities in our core markets as market conditions improve. In today's real estate market our general operating business strategy has the following key elements:

• Attract and retain experienced personnel at all levels

• Focus on our core markets in the Mid-Atlantic and Southeast region of the United States.

• Focus on our current land inventory in our core markets

• Focus on a broad segment of the home buying market, aka the "middle market"

• Create opportunities in areas overlooked by our competitors

• Position our inventory for the growing move-down markets

• Maximize our economies of scale.

In light of current depressed market conditions in the homebuilding industry we have adopted the following additional business strategies which we will focus on throughout 2008 and into 2009:

• Maximize the realized value of our real estate owned;

• Protect liquidity and maximize capital availability by focusing on investments in Washington, D.C. and Raleigh, N.C.;

• Negotiate friendly foreclosures and/or deed-in-lieu transactions with lenders to reduce residual unsecured deficiency claims to zero if possible;

• Be prepared to petition for court protection if necessary to protect the value of assets and maximize enterprise value;

• Create a highly qualified sales force capable of closing sales in difficult times;

• Utilize technology to streamline operations, reduce costs, enhance customer communications and facilitate sales.

At September 30, 2008, we either owned or controlled under option agreements approximately 2,000 building lots. The following table summarizes certain information related to new orders, settlements, and backlog for the three and nine month period ended September 30, 2008 and 2007:

             COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

                             RESULTS OF OPERATIONS



                                                      Three months ended September 30, 2008
                                             Washington
                                             Metro Area       North Carolina    Georgia        Total
Gross new orders                                      19                   19          4            42
Cancellations                                          5                    4          3            12
Net new orders                                        14                   15          1            30
Gross new order revenue                     $      6,129      $         2,767   $  1,060     $   9,956
Cancellation revenue                        $      1,561      $           794   $  1,163     $   3,518
Net new order revenue                       $      4,568      $         1,973   $   (103 )   $   6,438
Average gross new order price               $        323      $           146   $    265     $     237
Settlements                                           19                   19          6            44
Settlement revenue - homebuilding           $      6,248      $         4,256   $  1,766     $  12,270
Average settlement price                    $        329      $           224   $    294     $     279
Backlog units                                          5                   16          4            25
Backlog revenue                             $      1,273      $         4,449   $  1,315     $   7,037
Average backlog price                       $        255      $           278   $    329     $     281

                                                      Three months ended September 30, 2007
                                             Washington
                                             Metro Area       North Carolina    Georgia        Total
Gross new orders                                      32                   25         24            81
Cancellations                                         70                    5          3            78
Net new orders                                       (38 )                 20         21             3
Gross new order revenue                     $     10,481      $         6,566   $  7,462     $  24,509
Cancellation revenue                        $     33,411      $         1,411   $  1,173     $  35,995
Net new order revenue                       $    (22,930 )    $         5,155   $  6,289     $ (11,486 )
Average gross new order price               $        328      $           263   $    311     $     303
Settlements                                           95                   34         12           141
Settlement revenue - homebuilding           $     35,636      $         8,416   $  3,717     $  47,769
Average settlement price                    $        375      $           248   $    310     $     339
Backlog units                                         23                   50         27           100
Backlog revenue (1)                         $      7,809      $        15,843   $  9,131     $  32,783
Average backlog price                       $        340      $           317   $    338     $     328

             COMSTOCK HOMEBUILDING COMPANIES, INC. AND SUBSIDIARIES

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

                             RESULTS OF OPERATIONS



                                             Nine months ended September 30, 2008
                                     Washington
                                     Metro Area     North Carolina    Georgia      Total
 Gross new orders                             61                 49         17         127
 Cancellations                                17                 15         10          42
 Net new orders                               44                 34          7          85
 Gross new order revenue             $    20,194    $        10,483   $  5,260   $  35,937
 Cancellation revenue                $     4,701    $         4,419   $  3,093   $  12,213
 Net new order revenue               $    15,493    $         6,064   $  2,167   $  23,724
 Average gross new order price       $       331    $           214   $    309   $     283
 Settlements                                  52                 56         22         130
 Settlement revenue - homebuilding   $    17,994    $        14,554   $  7,097   $  39,645
 Average settlement price            $       346    $           260   $    323   $     305
 Backlog units                                 5                 16          4          25
 Backlog revenue                     $     1,273    $         4,449   $  1,315   $   7,037
 Average backlog price               $       255    $           278   $    329   $     281

                                             Nine months ended September 30, 2007
                                     Washington
                                     Metro Area     North Carolina    Georgia      Total
 Gross new orders                            521                109         87         717
 Cancellations                               150                 17         18         185
 Net new orders                              371                 92         69         532
 Gross new order revenue             $   111,828    $        27,573   $ 27,287   $ 166,688
 Cancellation revenue                $    66,248    $         5,161   $  5,600   $  77,009
 Net new order revenue               $    45,580    $        22,412   $ 21,687   $  89,679
 Average gross new order price       $       215    $           253   $    314   $     232
 Settlements                                 633                 88         56         777
 Settlement revenue - homebuilding   $   162,528    $        21,286   $ 17,292   $ 201,106
 Average settlement price            $       257    $           242   $    309   $     259
 Backlog units                                23                 50         27         100
 Backlog revenue (1)                 $     7,809    $        15,843   $  9,131   $  32,783
 Average backlog price               $       340    $           317   $    338   $     328

(1) Does not include $14.5 million of backlog revenue from the Eclipse at Potomac Yard retail.

We currently have communities under development in multiple counties throughout the markets we serve. The following table summarizes certain information for our current and planned communities as of September 30, 2008:

                                                                      As of September 30, 2008
                                                                                                 Lots under
                                                       Estimated                         Lots      Option
                                            Product     Units at     Units    Backlog   Owned    Agreement     Average New Order
Project                             State   Type (2)   Completion   Settled     (3)     Unsold     Unsold       Revenue to Date
Status: Active (1)
Allen Creek                          GA        SF              26        23        -         3           -    $           204,987
Arcanum                              GA        SF              34        24        -        10           -    $           376,173
. . .