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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Please see "Cautionary Notes Regarding Forward-looking Statements" for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those discussed below and elsewhere in this report, particularly under the headings "Cautionary Notes Regarding Forward-looking Statements."

Overview

We are a multi-faceted real estate development and services company. We have substantial experience with building a diverse range of products including apartments, single-family homes, townhouses, mid-rise condominiums, high-rise multi-family condominiums and mixed-use (residential and commercial) developments. We operate our business through three segments: Homebuilding, Apartment Buildings and Real Estate Services as further discussed in Note 8 of our consolidated financial statements. We are currently focused on the Washington, D.C. market, which is the eighth largest metropolitan statistical area in the United States.

Homebuilding

Our expertise in developing traditional and non-traditional housing products enables us to focus on a wide range of opportunities within our core market. For our homebuilding operations, we develop properties with the intent that they be sold either as fee-simple properties or condominiums to individual unit buyers or as investment properties sold to private or institutional investors. Our for sale products are designed to attract first-time, early move-up, and secondary move-up buyers. We focus on products that we are able to offer for sale in the middle price points within the markets where we operate, avoiding the very low-end and high-end products. We believe our middle market strategy positions our products such that they are affordable to a significant segment of potential home buyers in our market.

Apartment Buildings

Comstock's focus on the apartment sector is on developing projects ranging from approximately 75 to 200 units in locations that are supply constrained with demonstrated demand for stabilized assets. We seek opportunities in the multi-family rental market where our experience and core capabilities can be leveraged. We will either position the asset for sale when completed or operate the asset within our own portfolio. Operating the asset for our own account affords us the flexibility of converting the units to condominiums in the future. When developing rental communities, we design our products to be affordable for tenants that fit one of two groups: (i) young first-time renters, or (ii) renters by choice. The multi-family asset class has benefitted from turmoil in the new home industry, limited access to residential mortgage financing and market conditions that have driven down construction costs during the past few years. Continued favorable economic and employment conditions in the Washington, D.C. market have caused rents to rise while vacancy rates and cap rates have declined.

Real Estate Services

Our management team has significant experience in all aspects of real estate management including strategic planning, land development, entitlement, property management, sales and marketing, workout and turnaround strategies, financing and general construction. We are able to provide a wide range of construction management, general contracting and other real estate related services to other property owners. This business line not only allows us to generate fee income from our highly qualified personnel but also serves as a potential catalyst for joint venture and acquisition opportunities.

We believe that our significant experience over the past 25 years, combined with our ability to navigate through two major housing downturns (early 1990s and late 2000s) have provided us the experience necessary to capitalize on attractive opportunities in our core market of Washington, D.C. and to rebuild shareholder value. We believe that our focus on the Washington, D.C. market, which has historically been characterized by economic conditions less volatile than many other major homebuilding markets, will provide an opportunity to generate attractive returns on investment and for growth.

Recent Developments

Eagle Bank Loan

On May 29, 2012, the Company, through its Comstock Potomac Yard, L.C. and Comstock Penderbrook, L.C. subsidiaries entered into a loan agreement with Eagle Bank pursuant to which the Company secured a $9.96 million loan with a twenty-seven months term to refinance the Company's Eclipse condominium project and Penderbrook Square condominium project. Proceeds from the Eagle Bank Loan were primarily utilized (i) to pay off existing indebtedness of approximately $7.97 million, (ii) set up an interest reserve escrow pursuant to the term of agreement in the amount $0.5 million, (iii) pay approximately $0.1 million in settlement charges and closing costs, and (iv) for general corporate purposes. The interest reserve escrow is held in the name of the bank and if the borrower defaults under the loan agreement, the bank has sole discretion to apply the funds or portion of the funds to pay off the indebtedness. Commencing thirty days after closing the Company is required to make monthly payments of interest only on outstanding principal balance, principal curtailment payments upon settlements at the two subsidiaries and a minimum principal curtailment payment of $4.98 million no later than 12 months following the closing of the Eagle Bank Loan. There is no prepayment penalty associated with the Eagle Bank Loan.

Results of Operations

Six months ended June 30, 2012 compared to six months ended June 30, 2011

Orders, cancellations and backlog

Gross new order revenue for the three months ended June 30, 2012 was $4.0 million on 14 units as compared to $4.0 million on 15 units for the three months ended June 30, 2011. Gross new order revenue for the six months ended June 30, 2012 increased $0.6 million to $7.8 million on 34 units as compared to $7.2 million on 25 units for the six months ended June 30, 2011. Net new order revenue for the three months ended June 30, 2012 increased $0.2 million to $4.0 million on 14 units as compared to $3.8 million on 14 units for the three months ended June 30, 2011. Net new order revenue for the six months ended June 30, 2012 increased $1.0 million to $7.8 million on 34 units as compared to $6.8 million on 23 units for the six months ended June 30, 2011. Average gross new order revenue per unit for three months ended June 30, 2012 increased $20 to $288, as compared to $268 for the three months ended June 30, 2011. Average gross new order revenue per unit for six months ended June 30, 2012 decreased $59 to $230, as compared to $289 for the six months ended June 30, 2011. The decrease is related directly to the unit mix of units settled. For the six months ended June 30, 2012, gross new orders totaled 30 units at Penderbrook and 4 units at Eclipse, as compared to 17 units at Penderbrook and 8 units at Eclipse for the six months ended June 30, 2011.

We have two Washington, D.C. condominium projects where we have units available for sale and for rent: Penderbrook Square in Fairfax, VA and the Eclipse at Potomac Yard in Arlington, VA. Therefore, we were only able to generate orders and backlog at the two condominium projects in the first six months of 2012. Because our unit sales are generated from completed inventory we do not need to construct units after a sales contract is executed with a unit purchaser. As a result we are able to quickly execute on a sales contract and deliver the unit to the purchaser. Typically, unit deliveries are made within thirty days of contract execution. As a result, we do not tend to generate significant order backlog. At June 30, 2012, we had 8 units in backlog to generate revenue of $1.5 million.

Revenue - homebuilding

The number of homes delivered for the three months ended June 30, 2012 was 12 as compared to 13 homes for the three months ended June 30, 2011. The number of homes delivered for the six months ended June 30, 2012 increased to 29 as compared to 20 homes for the six months ended June 30, 2011. Average revenue per home delivered increased by approximately $74 to $314 for the three months ended June 30, 2012 as compared to $240 for the three months ended June 30, 2011. Average revenue per home delivered decreased by approximately $67 to $240 for the six months ended June 30, 2012 as compared to $307 for the six months ended June 30, 2011. Revenue from homebuilding increased by $0.7 million to $3.8 million for the three months ended June 30, 2012 as compared to $3.1 million for the three months ended June 30, 2011. Revenue from homebuilding increased by $0.9 million to $7.0 million for the six months ended June 30, 2012 as compared to $6.1 million for the six months ended June 30, 2011. The increase was as a result of the increase in the number of homes settled, offset by the unit mix of units sold. For the three months ended June 30, 2012, 9 units were settled at Penderbrook and 3 units at Eclipse, as compared to 11 units at Penderbrook and 2 units at Eclipse for the three months ended June 30, 2011. For the six months ended June 30, 2012, 25 units were settled at Penderbrook and 4 units at Eclipse, as compared to 13 units at Penderbrook and 7 units at Eclipse for the six months ended June 30, 2011.

Revenue - other

Revenue-other decreased approximately $2.3 million to $0.5 million during the three months ended June 30, 2012, as compared to $2.8 million for the three months ended June 30, 2011. Revenue-other decreased approximately $3.2 million to $1.2 million during the six months ended June 30, 2012, as compared to $4.4 million for the six months ended June 30, 2011. These decreases are directly attributable to the completion of several general contracting projects in the latter quarters of 2011 and Q1 2012, as well as from the reduction in rental operations at the Penderbrook and Eclipse developments due to absorption of the units. The Company has two ongoing general contracting projects and continues to pursue opportunities within the Real Estate Services segment.

Cost of sales - homebuilding

Cost of sales - homebuilding for the three months ended June 30, 2012 increased by $0.6 million, to $3.3 million as compared to $2.7 million for the three months ended June 30, 2011. Cost of sales - homebuilding for the six months ended June 30, 2012 increased by $0.6 million, to $6.1 million as compared to $5.5 million for the six months ended June 30, 2011. The unit mix of homes settled during the quarter accounted for the increase in the aggregate cost of sales figure. Included in cost of sales for the three months ended June 30, 2012, costs and gross profits (losses) totaled $382 and ($269), respectively, related to rental operations at Penderbrook and Eclipse. Included in cost of sale for the six months ended June 30, 2012, costs and gross profits (losses) totaled $937 and ($664), respectively, related to rental operations at Penderbrook and Eclipse. As a result of the continued absorption of the condominium units at Penderbrook and Eclipse, the number of units has been reduced to 14 and 23 respectively as of June 30, 2012. For the same period in 2011, rental units remaining for Penderbrook and Eclipse were 39 and 37 respectively. Consequently, rental revenues have declined and the impact of fixed costs on gross profit has been more significant. Additionally, an increase in repairs and maintenance costs of $302, net of decreases related to home owners' association fees and other costs has contributed to the increase in costs and gross profit decline. The Company expects this trend to continue as the final units within the two remaining condominium projects are absorbed.

Cost of sales - other

Cost of sales - other decreased approximately $1.9 million to $0.7 million during the three months ended June 30, 2012 as compared to $2.6 million in the three months ended June 30, 2011. Cost of sales - other decreased approximately $2.1 million to $1.8 million during the six months ended June 30, 2012 as compared to $3.9 million in the six months ended June 30, 2011. For the three months ended June 30, 2012, costs and gross profit (loss) totaled approximately $697 and ($219), respectively as compared to the three months ended June 30, 2011, costs and gross profit totaled approximately $2,258 and $171, respectively. The loss for the three months ended June 30, 2012 is directly attributable to the decline in rental revenues related to the Penderbrook and Eclipse developments. The decline in revenues generated and the impact relative to the fixed costs on gross profit has been significant.

For the three months ended June 30, 2012, costs and gross profits totaled approximately $317 and $46, respectively related to our aforementioned general contracting projects as compared to the three months ended June 30, 2011, costs and gross profit totaled approximately $2,663 and $150, respectively. For the six months ended June 30, 2012, costs and gross profits totaled approximately $826 and $126, respectively related to our aforementioned general contracting projects as compared to the six months ended June 30, 2011, costs and gross profit totaled approximately $3,905 and $445, respectively. These decreases are directly related to the decrease in the number of ongoing general contracting projects. Consequently, the decline in revenues generated within the Real Estate Services segment and the impact relative to the fixed costs on gross profit has been more significant. The Company has two ongoing projects and continues to pursue opportunities to expand the Real Estate Services segment.

Selling, general and administrative

Selling, general and administrative expenses for the three months ended June 30, 2012 increased $0.2 million to $2.1 million, as compared to $1.9 million for the three months ended June 30, 2011. Selling, general and administrative expenses for the six months ended June 30, 2012 increased $0.7 million to $4.0 million, as compared to $3.3 million for the six months ended June 30, 2011. The increase in expenses over the six month period is attributable to increases in compensation of $0.5 million, and consulting expenses of $0.2 million. The increase in expenses is also attributable to labor and costs related to the Company's pursuit of new business opportunities.

Interest, real estate taxes and indirect costs related to inactive projects

Interest and real estate taxes incurred relating to the development of lots and parcels are capitalized to real estate held for development and sale during the active development period, which generally commences when development and construction activities begin and ends when the properties are substantially complete or the property becomes inactive which means that development and construction activities have been suspended indefinitely. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest and real estate taxes capitalized to real estate held for development and sale are expensed as a component of cost of sales as related units are sold.

When a project becomes inactive, its interest, real estate taxes and indirect overhead costs are no longer capitalized but rather expensed in the period in which they are incurred. During the six months ended June 30, 2012 and 2011, several of our projects were determined to be inactive for accounting purposes. The following is a breakdown of the interest, real estate taxes and indirect costs related to inactive projects reported on the consolidated statement of operations related to the inactivation of certain real estate projects held for development and sale:

                                                  Three Months Ended             Six Months Ended
                                                       June 30,                      June 30,
                                                   2012           2011           2012          2011
Total interest incurred and expensed for
inactive projects                               $     1,088       $ 328       $    1,743       $ 528
Total real estate taxes incurred and
expensed for inactive projects                           47          75               95         187
Total production overhead incurred and
expensed for inactive projects                           57          48              108         105

                                                      1,192         451            1,946         820
Amounts reclassified to discontinued
operations                                                0         (12 )           (154 )       (36 )

                                                $     1,192       $ 439       $    1,792       $ 784

Discontinued operations

As described in Note 13 to the Consolidated Financial Statements, on March 7, 2012, the Company's subsidiary sold the Cascades Apartments for $19.35 million. Because the sale of the Cascades Apartments represents a component of the Company, generally accepted accounting principles require the results of operations associated with the Cascades Apartments to be included in Discontinued Operations. Accordingly, the net gain from the sale of the project of $6.5 million is reflected within Discontinued Operations in the accompanying financial statements. Although the sale of the Cascades project is presented in the accompanying financial statements under Discontinued Operations, developing apartments for the purpose of selling is a component of the Company's ongoing strategy and operating activities. The Company continues to pursue such projects within its Apartment Buildings segment and anticipates that sales of similar operating projects will be reflected in this manner.

Summarized financial information for the Cascades Apartments, contained within the Apartments segment, is set forth below:

                                                  Three Months Ended             Six Months Ended
                                                       June 30,                      June 30,
                                                  2012            2011          2012           2011
Revenue                                        $         4        $  -        $     171       $   -
Cost of sales                                           (6 )         -              123           -
Selling, general and administrative                     -            40              10           60
Interest, real estate taxes and indirect
costs related to inactive projects                      -            12             154           36
Other (income) expenses, net                            (6 )         -              (10 )          6

Income (loss) from discontinued operations
before gain on sale of real estate and
income tax expense                                      16          (52 )          (106 )       (102 )
Net (loss) gain on sale of real estate                 (50 )         -            6,466           -

Net (loss) income from discontinued
operations before income tax expense                   (34 )        (52 )         6,360         (102 )
Income tax expense                                  (1,202 )         -           (2,114 )         -

Net (loss) income from discontinued
operations                                     $    (1,236 )      $ (52 )     $   4,246       $ (102 )

Income taxes

Income taxes are accounted for under the asset and liability method in accordance with ASC 740, "Accounting for Income Taxes," ("ASC 740"). Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The effective tax rate for the six months ended June 30, 2012 and 2011 was 0%, respectively. This results in a zero income tax expense for the six months ended June 30, 2012 and 2011.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded valuation allowances for certain tax attributes and other deferred tax assets. At this time, sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income or carry back opportunities. If, in the future, the Company believes that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances will be reversed. With a full valuation allowance, any change in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance. This results in a zero deferred tax benefit or expense for the three and six months ended June 30, 2012 and 2011.

We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2009 through 2011 tax years generally remain subject to examination by federal and most state tax authorities.

Liquidity and Capital Resources

We require capital to operate, to post deposits on new deals, to purchase and develop land, to construct homes, to fund related carrying costs and overhead and to fund various advertising and marketing programs to generate sales. These expenditures include payroll, community engineering, entitlement, architecture, advertising, utilities and interest as well as the construction costs of our homes. Our sources of capital include, and will continue to include, funds derived from various secured and unsecured borrowings, cash flow from operations, which includes the sale and delivery of constructed homes, rental apartment projects, finished and raw building lots and the sale of equity and debt securities.

The Company is involved in ongoing discussions with lenders and potential equity investors in an effort to provide additional growth capital to fund various new business opportunities. We are anticipating that through a combination of current available cash on hand, the additional cash from settlement proceeds, and the cash generated from settlements at our new communities currently under development that the Company will have sufficient financial resources to sustain our operations through the next 12 months, though no assurances can be made that we will be successful in our capital raising efforts.

Credit Facilities

We have outstanding borrowings with various financial institutions and other lenders that have been used to finance the acquisition, development and construction of real estate property.

As of June 30, 2012, maturities and/or curtailment obligations of all of our borrowings are as follows:

                          2012                       558
                          2013                     7,678
                          2014                     4,980
                          2015                       263
                          2016 and thereafter      3,354


                          Total                 $ 16,833

In the past, the Company has generally financed its development and construction activities on a single or multiple project basis so it is not uncommon for each project or collection of projects the Company develops and builds to have a separate credit facility. Accordingly, the Company typically has had numerous credit facilities and lenders.

As described in more detail below, at June 30, 2012 and December 31, 2011 our outstanding debt by lender was as follows:

                                             Balance as of            Balance as of
Bank                                         June 30, 2012          December 31, 2011          Recourse
Eagle Bank                                  $         7,550        $                 0            Secured
SunBridge                                                 0                     10,178            Secured
Cardinal Bank                                             0                      9,957            Secured
Bank of America                                       3,354                      3,751          Unsecured
Cornerstone (Haven Trust)                               400                        400          Unsecured
Branch Banking & Trust                                  263                        263            Secured
Wachovia                                                133                        133          Unsecured
Seller - Emerald Farm                                   100                        100            Secured
Fifth Third                                              25                         25          Unsecured


                                                     11,825                     24,807
Due to affiliates - Stonehenge Funding                5,008                      5,008          Unsecured


Total                                       $        16,833        $            29,815

Cash Flow

Net cash used in operating activities was $1.0 million for the six months ended June 30, 2012. This represents a decline from the net cash provided by operating activities of $2.8 million for the six months ended 2011. However, the 2012 cash flows do not reflect the net cash flows from the sale of the Cascades Apartment of approximately $4.7 million. Although the construction, development and sale of this and potentially future projects are an ongoing component of the Company's operations, the sale of the project is required to be presented as Discontinued Operations. Accordingly, the net cash flows are presented within the investing and financing section of the accompanying consolidated statement of cash flows. Additionally, for 2012, other significant outflows relate to a $709 reduction in accrued interest payable for debt service payments made to lenders and a $1,572 reduction in payables related to payments made to vendors and compensation paid to employees, reflective of the improved cash position of the Company.

Net cash provided by investing activities was $18.4 million for the six months ended June 30, 2012, primarily attributable to the sale of the Cascades Apartments. Net cash used in investing activities was $6.0 million for the six months ended June 30, 2011, primarily attributable to the development activities of the Cascades Apartments.

Net cash used in financing activities was $16.0 million for the six months ended June 30, 2012, primarily attributable to the extinguishment of debt and retirement of the non-controlling interests, including preferred returns, in . . .