UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K
 
 ý
                  
                  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2008oro
                  
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ____________ to
      ____________
  Commission
file number: 11-2037182
 COLONIAL
COMMERCIAL CORP.
 (Exact
name of registrant as specified in its charter)
 
 New
      York
                  
                  11-2037182(State or other
      jurisdiction of incorporation
      or organization)
                  
                  (I.R.S. Employer
      Identification
      No.)275
      Wagaraw Road, Hawthorne, New Jersey
                  
                  07506(Address
      of principal executive offices)
                  
                  (Zip
      Code)
  Registrant’s telephone
number, including area code973-427-8224
 
 Securities
registered pursuant to Section 12(b) of the Act:
  Title of each class
                
                Name of each exchange on which
      registeredNone
                
                OTC
      Bulletin Board
  Securities
registered pursuant to Section 12(g) of the Act:
 Common
Stock, Par Value $.05 Per Share
 Convertible Preferred Stock,
Par Value $.05 Per Share
 (Title of
Class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes oNo  ý
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
 YesoNoý
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes ýNo  o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ý
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer oAccelerated filer oNon-accelerated filer oSmaller reporting company ý
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes oNo  ý
 
 The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the last reported price at which the
stock was sold on June 30, 2008 (the last business day of the registrant’s most
recently completed second quarter) was $3,024,208.
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 
 Class
              
              Outstanding at March 1,
  2009Common
      Stock, $.05 par value per share
              
              4,654,953
      sharesConvertible
      Preferred Stock, $.05 par value per share
              
              447,891
      shares
  
 
  TABLE OF
CONTENTS
 
 PART
      IPageItem
      1.
                          
                          Business
                          
                          2Item
      1A.
                          
                          Risk Factors
                          
                          4Item
      1B.
                          
                          Unresolved Staff Comments
                          
                          4Item
      2.
                          
                          Properties
                          
                          4Item
      3.
                          
                          Legal Proceedings
                          
                          5Item
      4.
                          
                          Submission of Matters to a Vote of Security
      Holders
                          
                          8PART
      IIItem
      5.
                          
                          Market for the Registrant’s Common Stock, Convertible Preferred
      Stock and Related Stockholder Matters
                          
                          9Item
      6.
                          
                          Selected Financial Data
                          
                          11Item
      7.
                          
                          Management’s Discussion and Analysis of Financial Condition and
      Results of Operations..
                          
                          11Item
      7A.
                          
                          Quantitative and Qualitative Disclosures About Market
      Risk
                          
                          16Item
      8.
                          
                          Financial Statements and Supplementary Data
                          
                          16Item
      9.
                          
                          Changes In and Disagreements With Accountants on Accounting and
      Financial Disclosure
                          
                          16Item
      9A.
                          
                          Controls and Procedures
                          
                          16Item
      9B.
                          
                          Other Information
                          
                          17PART
      IIIItem
      10.
                          
                          Directors, Executive Officers and Corporate
      Governance
                          
                          18Item
      11.
                          
                          Executive Compensation
                          
                          20Item
      12.
                          
                          Security Ownership of Certain Beneficial Owners and
      Management
                          
                          24Item
      13.
                          
                          Certain Relationships and Related Transactions, and Director
      Independence
                          
                          26Item
      14.
                          
                          Principal Accountant Fees and Services
                          
                          27PART
      IVItem
      15.
                          
                          Exhibits and Financial Statements Schedules
                          
                          29
  Table of Contents
  PART
I.
 
 Item1.Business
 
 General
 
 Colonial Commercial Corp. (“Colonial”)
is a New York corporation which was incorporated on October 28,
1964.  Unless otherwise indicated, the term “Company” refers to
Colonial Commercial Corp. and its consolidated subsidiaries.  The
Company’s operations are conducted through its wholly owned subsidiaries,
Universal Supply Group, Inc. (“Universal”), The RAL Supply Group, Inc. (“RAL”),
and S&A Supply, Inc (“S&A”).  We distribute heating,
ventilating and air conditioning equipment (HVAC), parts and accessories,
climate control systems, appliances, and plumbing and electrical fixtures and
supplies, primarily in New Jersey, New York, Massachusetts and portions of
eastern Pennsylvania, Connecticut and Vermont.
 
 We supply the Amana air conditioning
and heating equipment line in New Jersey (exclusive of Cape May and Cumberland
counties), lower portions of New York State, and Western
Massachusetts.  At all our locations we also supply, on a
non-exclusive basis, the Goodman line of heating and air conditioning equipment,
Fraser-Johnston commercial air conditioning equipment, and Johnson Controls’
Source 1 HVAC Service Parts.  As of October 14, 2008 the Goodman/Amana
residential product line and the Fraser Johnston commercial product line
replaced the American Standard HVAC product line previously distributed by the
Company.  We distribute these products through seven sales locations
in New Jersey, eight in New York State, two in Massachusetts and one location in
Willow Grove, Pennsylvania.  We also have an additional location in
New Jersey that we use for warehousing purposes only. We use showrooms for the
display and sale of kitchen, bathroom and electrical fixtures and accessories at
our locations in Fishkill, Middletown, New Windsor and Suffern, New York and
Great Barrington and Pittsfield, Massachusetts.
 
 We have developed a specialty in the
design and sale of energy conservation control systems and the fabrication of
customized UL listed control panels.  We also supply indoor air
quality components and systems.
 
 Our in-house staff provides technical
assistance and training to customers.  In some cases, we also use
vendors’ representatives and outside services. We do not install any equipment
or systems.
 
 We distribute appliances, such as
washers and dryers, to appliance dealers primarily in New York, New Jersey, and
portions of Connecticut, Delaware and Pennsylvania.
 
 Our business is affected by significant
outdoor temperature swings. Our sales typically increase during peak heating and
cooling demand periods.  Demand related to the residential central air
conditioning replacement market is highest in the second and third quarters,
while demand for heating equipment is usually highest in the fourth
quarter.
 
 In 2008, 2007 and 2006, approximately
85% of our sales were for replacement and/or renovation and the remaining 15% of
sales were for new construction projects.  In the same years,
respectively, sales consisted of approximately 38%, 42% and 40% HVAC equipment;
37%, 39% and 39% parts and accessories; and 14%, 15% and 16% climate control
systems.
 
 We own no patents and have no
intellectual property rights or proprietary technology.
 
 We carry general liability,
comprehensive property damage, workers compensation and product liability
insurance in amounts that we consider adequate for our business.  We
maintain $2,000,000 in the aggregate and $1,000,000 per occurrence general
liability coverage, plus a $15,000,000 umbrella policy.
 
 No material regulatory requirements
apply specifically to our business.
  2
 Table of Contents
  As of December 31, 2008, we had 177
non-union full-time employees.  We believe that our employee relations
are satisfactory.
 
 We have no foreign operations and have
only one operating segment.
 
 Our objective is to become a leading
provider of building products, such as HVAC, plumbing and electrical equipment
and accessories to the professional contractor in the northeastern United States
by expanding our product offerings and increasing our customer technical and
logistical support services.
 
 Distribution, Customers and
Suppliers
 
 We stock inventory in 19 of our
locations and utilize public warehousing, when necessary.  We deliver
products to customers with our fleet of 19 leased and 25 owned trucks and
vans.  We also make products available for pick-up at our
facilities.
 
 We sell primarily to contractors who
purchase and install equipment and systems for residential, commercial and
industrial users.  We had approximately 7,800 customers in
2008.  No customer accounted for more than 2% of consolidated net
sales in 2008.  We believe that the loss of any one customer would not
have a material adverse effect on our business.  We have no long term
agreement with any customer.
 
 We deal with our customers on a
purchase order by purchase order basis.
 
 We purchase inventory from our vendors
and maintain this inventory in our warehouses to meet purchasing requirements
and ensure continuous availability of merchandise to satisfy our customers’
needs.  We occasionally accept the return of merchandise from the
customer when returned in unopened cartons, subject to a restocking
fee.  We do not normally provide extended payment terms to
customers.  We have no material long term agreements with any
supplier.  The Company enters into agreements with vendors which
involve volume rebates, pricing and advertising, all within the standard
practices of the industry.  Additionally, certain supplier agreements
limit the sale of competitive products in designated markets that the Company
serves.  All purchases are made with domestic vendors, some of which,
however, may manufacture products in foreign locations.
 
 Certain
of our supplier agreements limit the sale of competitive products in designated
markets that we serve.
 
 In 2008,
two suppliers accounted for 30% of our purchases.  The loss of one or
both of these suppliers could have a material adverse effect on our business for
at least a short-term period.  We believe that the loss of any one of
our other suppliers would not have a material adverse effect on our
business.
 
 Competition
 
 We compete with a number of
distributors, national chains and national home centers, and also with several
air conditioning and heating equipment manufacturers that distribute a
significant portion of their products through their own distribution
organizations.  There is no single manufacturer, distributor or
national chain or home center that dominates our market.  Competition
is based on product availability, customer service, price and quality. We work
to maintain a competitive edge by providing in-house training, technical sales
support to our customers and by employing experienced personnel at our
point-of-sale locations.
  3
 Table of Contents
  Government Regulations,
Environmental and Health and Safety Matters
 
 Our Company is subject to federal,
state and local laws and regulations relating to the generation, storage,
handling, emission, transportation and discharge of materials into the
environment.  These include laws and regulations implementing the Clean Air
Act, relating to minimum energy efficiency standards of HVAC systems and the
production, servicing and disposal of certain ozone-depleting refrigerants used
in such systems, as well as the phase out of certain refrigerants for use in
equipment manufactured after January 1, 2010.  We are also subject to
regulations concerning the transport of hazardous materials, including
regulations adopted pursuant to the Motor Carrier Safety Act of 1990.  Our
operations are also subject to health and safety requirements including the
Occupational, Safety and Health Act (OSHA).  Management believes that the
business is operated in substantial compliance with all applicable federal,
state and local provisions relating to the protection of the environment,
transport of hazardous materials and health and safety
requirements.
 
 Item1A.Risk
Factors
 
 Not applicable.
 
 Item1B.
Unresolved Staff Comments
 
 Not applicable.
 
 Item2.Properties
 
 Our principal executive offices are
located at 275 Wagaraw Road, Hawthorne, New Jersey 07506 and are consolidated
with the administrative offices of our subsidiary, Universal Supply Group,
Inc.
 
 The Company maintains 18 combination
sales and warehouse locations in Hawthorne, Bogota, Augusta, North Brunswick,
Cedar Knolls, Wharton and Westville, New Jersey; Elmsford, Middletown, Fishkill,
New Windsor, Peekskill, Poughkeepsie, Suffern, and Half Moon, New York; Willow
Grove, Pennsylvania; and Great Barrington and Pittsfield,
Massachusetts.  Additionally, the Company maintains three separate
warehouse locations in Cedar Knolls, New Jersey and Hicksville and New Hampton,
New York.  The Company has a month-to-month lease for a portion of the
New Windsor, New York location consisting of 11,000 square feet and a
month-to-month lease for a portion of the Peekskill, New York location
consisting of 1,000 square feet.  These locations consist of
approximately 433,000 square feet under leases expiring between 2009 and 2018
with current aggregate annual rents of approximately $3,067,604.
 
 The Company had a month-to-month lease
for a location in North Adams, Massachusetts, consisting of 6,000 square feet.
On April 4, 2008, the Company closed its North Adams, Massachusetts location of
S&A.
 
 On October 14, 2008, the Company
announced that it closed the sales office in its Hicksville, New York facility
and will continue to use this facility for warehousing and shipping purposes
only.
 
 The premises located at Middletown,
Fishkill, New Windsor and Suffern, New York and Great Barrington and Pittsfield,
Massachusetts also include showrooms of kitchen, bathroom and electrical
fixtures and accessories.
 
 Our premises are suitable and adequate
for their intended use and are adequately covered by insurance.  As of
December 31, 2008, we leased all our facilities.
  4
 Table of Contents
  Item3.Legal
Proceedings
 
 (a)           Universal Supply Group,
Inc.
 
 Universal Supply Group, Inc., a wholly
owned subsidiary of the Company, is a New York corporation
(“Universal”).  On June 25, 1999, Universal acquired substantially all
of the assets of Universal Supply Group, Inc., a New Jersey corporation,
including its name, pursuant to the terms of a purchase
agreement.  The Company filed a copy of the purchase agreement with
the Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g) on
Form 10KSB, and the Company filed a copy of an amendment to the purchase
agreement on July 9, 1999 as Exhibit 10(a)(ii) on Form
8-K.  Subsequent to the sale, Universal Supply Group, Inc. (the
selling corporation) formerly known as Universal Engineering Co., Inc., changed
its name to Hilco, Inc.  Hilco, Inc. acquired the assets of Amber
Supply Co., Inc., formerly known as Amber Oil Burner Supply Co., Inc., in 1998,
prior to Hilco’s sale of assets to Universal.  Hilco, Inc. is
hereinafter referred to as the “Universal Predecessor.”  The majority
shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
Hildebrandt.
 
 The Company understands that the
Universal Predecessor and many other companies have been sued in the Superior
Court of New Jersey (Middlesex County) by plaintiffs filing lawsuits alleging
injury due to asbestos. As of December 31, 2008, there exist 37 plaintiffs in
these lawsuits relating to alleged sales of asbestos products, or products
containing asbestos, by the Universal Predecessor.  Subsequent to
December 31, 2008, 10 plaintiffs have had their actions dismissed, which results
in 27 remaining plaintiffs in these lawsuits. The Company never sold any
asbestos related products.
 
 Of the existing plaintiffs as of
December 31, 2008, 15 filed actions in 2007, 7 filed actions in 2006, 3 filed
actions in 2005, 9 filed actions in 2004, and 3 filed actions in 2003. There are
173 other plaintiffs that have had their actions dismissed and 13 other
plaintiffs that have settled as of December 31, 2008 for a total of $3,358,500.
There has been no judgment against the Universal Predecessor.
 
 Our Universal subsidiary was named by
36 plaintiffs; of these, 11 filed actions in 2007, 6 filed actions in 2006, 11
filed actions in 2005, 5 filed actions in 2001, 1 filed an action in 2000, and 2
filed actions in 1999.  Sixteen plaintiffs naming Universal have had
their actions dismissed and, of the total $3,358,500 of settled actions, 2
plaintiffs naming Universal have settled for $26,500.  No money was
paid by Universal in connection with any settlement.  Following these
dismissed and settled actions there exists 18 plaintiffs that name Universal, as
of December 31, 2008.
 
 As set forth in more detail below, the
Company has been indemnified against asbestos-based claims, and insurance
companies are defending the interests of the Universal Predecessor and the
Company in these cases.
 
 Based on advice of counsel, the Company
believes that none of the litigation that was brought against the Company’s
Universal subsidiary through December 31, 2008 is material, and that the only
material litigation that was brought against the Universal Predecessor through
that date was Rhodes v. A.O. Smith Corporation, filed on April 26, 2004 in the
Superior Court of New Jersey, Law Division, Middlesex County, Docket Number
MID-L-2979-04AS. The Company was advised that the Rhodes case was
settled for $3,250,000 (“Settlement”) under an agreement reached in connection
with a $10,000,000 jury verdict that was rendered on August 5, 2005. The Company
was not a defendant in the Rhodes
case.
  5
 Table of Contents
  The Company believes that Rhodes differed from
the other lawsuits in that plaintiff established that he contracted mesothelioma
as a result of his occupational exposure to asbestos dust and fibers and that a
predecessor of the Company was a major supplier of the asbestos containing
products that allegedly caused his disease.
 
 i.
              Indemnification
 
 John A.
Hildebrandt, Paul Hildebrandt and the Universal Predecessor have jointly and
severally agreed to indemnify our Universal subsidiary from and against any and
all damages, liabilities and claims due to exposure to asbestos at any time
prior to the June 25, 1999 closing of the purchase agreement referred to
earlier.  These agreements are set forth in the purchase agreement.
Paul Hildebrandt, one of the indemnitors, was a Director of the Company from
September 29, 2004 to January 28, 2005.
 
 The
indemnitors may use their own counsel to defend these claims. The indemnitors
are not liable for any settlement effected without their consent. The
indemnitors may settle and pay money claims without the consent of the Company.
There is no indemnification unless claims aggregate $50,000; once this trigger
point is reached, indemnification is required for all claims, including the
first $50,000, but excluding claims of less than $10,000. The indemnification
requirement survives at least until 30 days after the running of any relevant
statutes of limitation.
 
 The
obligation of the indemnitors is joint and several, so that the Company can have
recourse against any one or more of these indemnitors, whether or not any other
indemnitor has previously defaulted on its obligation to us. There are no other
limitations to our rights to indemnification.  The Company cannot be
certain that the indemnitors have the financial wherewithal to meet their
obligations to indemnify the Company.
 
 ii.
              Insurance
 
 The
assets that the Universal Predecessor sold to us included its insurance policies
and other agreements and contracts. The policies provide coverage for liability
accruing during the periods for which premiums were paid.  The
Universal Predecessor was formed in 1940. Copies of policies are available for
each year beginning in 1970 and ending with the closing under the purchase
agreement in 1999. Copies of policies for the period from 1940 to 1969 are not
available.
 
 Insurance
companies acknowledge coverage for potential asbestos claims under certain of
these policies.  Insurance companies under additional policies have
reserved their right to deny coverage but have continued to defend and indemnify
the Universal Predecessor and the Company under the contested
policies.
 
 There are
periods during the years from 1940 to 1999 in which our Universal Predecessor
did not have coverage for potential asbestos claims.  Subject to
litigation, insurance companies may maintain that the existence of these
periods’ results in coverage for only a portion of a particular injury that
varies with the period during which there was asbestos coverage relating to the
injury, and that the balance of any settlement or judgment is to be paid by the
insured.  As of December 31, 2008, no insurance company has claimed
any contribution for a gap in coverage except for a claim for $160 made by one
insurance company to the Universal Predecessor in 1995.  The Universal
Predecessor asserted that it had no obligation to pay this amount and did not
make any payment.
 
 Insurance
companies have, as of December 31, 2008, defended us and the Universal
Predecessor, and have paid all settlement amounts and defense
costs.  Except for $160 referred to above, the insurance companies
have not requested any payments from us or from the Universal
Predecessor.
  6
 Table of Contents
  Our
Universal subsidiary has not engaged in the sale of asbestos products since its
formation in 1997. Its product liability policies for all years since 1998
exclude asbestos claims.
 
 (b)           The RAL Supply Group,
Inc.
 
 The RAL Supply Group, Inc., a wholly
owned subsidiary of the Company, is a New York corporation (“RAL”), formerly
known as RAL Purchasing Corp.  On September 30, 2003, RAL acquired
substantially all of the assets of The RAL Supply Group, Inc., formerly known as
The LAR Acquisition Corp., also a New York corporation, including its name,
pursuant to the terms of a purchase agreement.  The Company filed a
copy of the purchase agreement (“RAL APA”) with the Securities and Exchange
Commission on October 15, 2003 as Exhibit 10(a)(i) on Form
8-K.  Subsequent to the sale, The RAL Supply Group, Inc. (the selling
corporation) changed its name to RSG, Inc. RSG, Inc. is hereinafter referred to
as the “RAL Predecessor.”
 
 The RAL Predecessor acquired certain
assets from Dyson-Kissner-Moran Corporation (“RSG Predecessor”) in 1993, prior
to the RAL Predecessor’s sale of assets to RAL.
 
 Our RAL subsidiary and other companies
have been sued in the Supreme Court of New York (Orange County) by a plaintiff
filing a lawsuit on or about July 30, 2008 alleging injury due to asbestos. As
of December 31, 2008, there existed one plaintiff in a lawsuit relating to
alleged sales of asbestos products, or products containing
asbestos.  The lawsuit alleges injury due to asbestos during the
1970’s, prior to RAL Predecessor’s acquisition of assets from the RSG
Predecessor and RAL’s acquisition of assets from the RAL Predecessor. The
Company never sold any asbestos related products.
 
 The RAL Predecessor agreed in the RAL
APA to indemnify and hold harmless our RAL subsidiary from and against, among
other things, damages that relate to products sold or manufactured or services
performed or other actions taken or omitted by the RAL Predecessor prior to the
closing of the acquisition.  The Company cannot be certain that the
indemnitor has the financial wherewithal to meet its obligations to indemnify
the Company.
 
 (c)           General
 
 Regardless of indemnification and
insurance coverage, we do not in any event consider our Company to be liable for
the asbestos-based lawsuits that name us or for any other claim that arises as a
result of actions or omissions by the Universal Predecessor or RAL Predecessor
companies. We expressly disclaimed the assumption of any liabilities when we
purchased the assets of the Universal Predecessor and RAL Predecessor. It is our
opinion that the existing asbestos litigation will not have a material adverse
effect on the Company.  Nevertheless, we could be materially and
adversely affected if we are held liable for substantial asbestos claims or if
the Company incurs substantial legal or settlement costs. This material and
adverse effect would occur if indemnitors fail to honor their indemnification
agreements and insurance is not available either because policy limits are
exceeded, or because insurance companies successfully deny coverage or claim
limitations on their liabilities by reason of gaps in coverage or
otherwise.
 
 Since we regard as remote the potential
payment of any asbestos-based claim, we have not accrued any balance for any
period relating to asbestos claims, and we have not recorded any amount for
asbestos claims for any period in any of our financial
statements.
  7
 Table of Contents
  (d)           Other
Litigation
 
 The Company is periodically involved in
other litigation in the ordinary course of business.  The Company
vigorously defends all matters in which the Company or its subsidiaries are
named defendants and, for insurable losses, maintains significant levels of
insurance to protect against adverse judgments, claims or
assessments.  Although the adequacy of existing insurance coverage or
the outcome of any legal proceedings cannot be predicted with certainty, the
Company does not believe the ultimate liability associated with any claims or
litigation will have a material impact to its financial condition or results of
operations.
 
 Item4.Submission of Matters to a
Vote of Security Holders
 
 None.
  8
 Table of Contents
  PART
II
 
 Item5.Market for the Registrant’s
Common Stock, Convertible PreferredStock and Related
Stockholder Matters
 
 (a)           Price Range of Common Stock
and Convertible Preferred Stock
 
 From July 11, 2002 through March 30,
2004, the Company’s common stock was traded on the Over the Counter (OTC) – Pink
Sheets market. Commencing March 31, 2004, the Company’s common stock and
convertible preferred stock were traded on the Over the Counter (OTC)-Bulletin
Board market.  The following table sets forth the quarterly high and
low bid prices during 2008 and 2007.  The quotations set forth below
represent inter-dealer quotations, which exclude retail markups, markdowns and
commissions and do not necessarily reflect actual transactions.
  Common Stock
                                                    
                                                    
                                                    Convertible Preferred Stock2008
                                                    
                                                    High
                                                    
                                                    
                                                    Low
                                                    
                                                    
                                                    High
                                                    
                                                    
                                                    LowFirst
      Quarter
                                                    
                                                    $
                                                    1.45
                                                    
                                                    
                                                    $
                                                    0.90
                                                    
                                                    
                                                    $
                                                    1.20
                                                    
                                                    
                                                    
                                                    0.95Second
      Quarter
                                                    
                                                    
                                                    1.45
                                                    
                                                    
                                                    
                                                    0.70
                                                    
                                                    
                                                    
                                                    0.95
                                                    
                                                    
                                                    
                                                    0.65Third
      Quarter
                                                    
                                                    
                                                    1.25
                                                    
                                                    
                                                    
                                                    0.51
                                                    
                                                    
                                                    
                                                    11.00
                                                    
                                                    
                                                    
                                                    0.75Fourth
      Quarter
                                                    
                                                    
                                                    0.73
                                                    
                                                    
                                                    
                                                    0.30
                                                    
                                                    
                                                    
                                                    5.00
                                                    
                                                    
                                                    
                                                    1.50Common Stock
                                                    
                                                    
                                                    Convertible Preferred Stock2007
                                                    
                                                    High
                                                    
                                                    
                                                    Low
                                                    
                                                    
                                                    High
                                                    
                                                    
                                                    LowFirst
      Quarter
                                                    
                                                    $
                                                    1.95
                                                    
                                                    
                                                    $
                                                    1.70
                                                    
                                                    
                                                    $
                                                    1.95
                                                    
                                                    
                                                    $
                                                    1.75Second
      Quarter
                                                    
                                                    
                                                    1.78
                                                    
                                                    
                                                    
                                                    1.50
                                                    
                                                    
                                                    
                                                    1.85
                                                    
                                                    
                                                    
                                                    1.51Third
      Quarter
                                                    
                                                    
                                                    1.68
                                                    
                                                    
                                                    
                                                    1.25
                                                    
                                                    
                                                    
                                                    1.65
                                                    
                                                    
                                                    
                                                    1.35Fourth
      Quarter
                                                    
                                                    
                                                    1.45
                                                    
                                                    
                                                    
                                                    0.95
                                                    
                                                    
                                                    
                                                    1.36
                                                    
                                                    
                                                    
                                                    1.16
 (b)           Approximate number of common
and convertible preferred stockholders:
  Approximate
      Number of Record HoldersTitle of Class
                      
                      (As of March 1, 2009)Common
      stock par value $.05 per share
                      
                      283Convertible
      preferred stock par value $.05 per share
                      
                      769
  (c)           Dividends
 
 The Company does not contemplate common
stock dividend payments in the near future and is restricted from paying any
dividends under its credit facility.
  9
 Table of Contents
  (d)           Securities Authorized for
Issuance Under Equity Compensation Plans
 
 The following table sets forth certain
information regarding the securities authorized for issuance under the 1996
Stock Incentive Plan and the Colonial Commercial Corp. 2006 Stock Plan, as of
December 31, 2008.
  Equity Compensation Plan
      InformationNumber of securities to be issued upon exercise of
      outstanding options, warrants and rights
                                            
                                            
                                            Weighted-average exercise price of outstanding
      options, warrants and rights
                                            
                                            
                                            Number of securities remaining available for
      future issuance under equity compensation plans1996 Stock Incentive Plan:Equity
      compensation plans approved by security holders
                                            
                                            
                                            22,000
                                            
                                            
                                            $
                                            0.25
                                            
                                            
                                            
                                            0Equity
      compensation plans not approved by security holders
                                            
                                            
                                            0
                                            
                                            
                                            $
                                            0.00
                                            
                                            
                                            
                                            0Colonial Commercial Corp. 2006 Stock
      Plan:Equity
      compensation plans approved by security holders
                                            
                                            
                                            75,000
                                            
                                            
                                            $
                                            1.85
                                            
                                            
                                            
                                            925,000Equity
      compensation plans not approved by security holders
                                            
                                            
                                            0
                                            
                                            
                                            $
                                            0.00
                                            
                                            
                                            
                                            0Total
                                            
                                            
                                            97,000
                                            
                                            
                                            $
                                            1.49
                                            
                                            
                                            
                                            925,000
  In June
1996, the Company adopted the 1996 Stock Option Plan (the “1996 Plan”) to grant
options to key employees and other persons who render service (non-employee) to
the Company.  The plan expired on December 31, 2005.
 
 At December 31, 2008, a total of 22,000
options were outstanding under the Company’s 1996 Stock Option Plan, which
expire in June 2009.
 
 On September 29, 2006, the Company
adopted the Colonial Commercial Corp. 2006 Stock Plan, (the “2006
Plan”).  The 2006 Plan enables the Company to grant equity and
equity-linked awards to our Directors, officers, employees and other persons who
provide services to the Company.  The 2006 Plan is intended to allow
us to provide incentives that will (1) strengthen the desire of highly competent
persons to provide services to us and (2) further stimulate their efforts on our
behalf.
 
 On December 6, 2006,  (the
“Grant Date”), the Company granted ten-year options to purchase 25,000 shares of
common stock to three Directors. The option to each Director was immediately
vested for 10,000 shares and will vest for 5,000 additional shares on each of
the first three anniversaries of the Grant Date if the optionee then continues
as a Director.
 
 As of December 31, 2008, 60,000 vested
options and 15,000 unvested options were outstanding under the Company’s 2006
Stock Option Plan.
  10
 Table of Contents
  (e)           Purchases of Equity
Securities
 
 On September 2, 2008, the Company
announced that it was offering to shareholders who owned 99 or fewer shares of
the Company’s convertible preferred stock on August 20, 2008, to purchase those
shares at $1.25 per share. The tender offer was to expire on October 31, 2008;
however, on October 28, 2008 the Company announced that it was extending the
expiration date of the tender offer to December 31, 2008.  The Company
retired the convertible preferred stock purchased through this tender
offer.
 
 Through December 31, 2008, shareholders
tendered 2,186 shares of convertible preferred stock under the tender offer. The
Company accounted for these transactions utilizing the constructive retirement
method.
 
 The table below sets forth purchases of
the Company’s stock for the quarter ended December 31, 2008. There were
approximately 14,000 odd-lot shares eligible for purchase under the tender
offer.
 
 Total Number of Shares (or Units)
      Purchased
                                      
                                      
                                      Average Price Paid per Share (or
      Unit)
                                      
                                      
                                      Total Number of Shares (or Units) Purchased as
      Part of Publicly Announced Plans or Programs
                                      
                                      
                                      Maximum Number (or Approximate Dollar Value) of
      Shares (or Units) that May Yet Be Purchased Under the Plans or
      ProgramsOctober
      1, 2008-October 31, 2008
                                      
                                      
                                      757
                                      
                                      
                                      $
                                      1.25
                                      
                                      
                                      
                                      757
                                      
                                      
                                      
                                      13,243November
      1, 2008-November 30, 2008
                                      
                                      
                                      1,046
                                      
                                      
                                      
                                      1.25
                                      
                                      
                                      
                                      1,046
                                      
                                      
                                      
                                      12,197December
      1, 2008-December 31, 2008
                                      
                                      
                                      383
                                      
                                      
                                      
                                      1.25
                                      
                                      
                                      
                                      383
                                      
                                      
                                      
                                      11,814Total
                                      
                                      
                                      2,186
                                      
                                      
                                      $
                                      1.25
                                      
                                      
                                      
                                      2,186
                                      
                                      
                                      
                                      11,814
 
 Item6.Selected
Financial Data
 
 Not applicable.
 
 Item7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 
 We begin Management’s Discussion and
Analysis of Financial Condition and Results of Operations of Colonial Commercial
Corp. and subsidiaries with a discussion of the “Critical Accounting Policies”
that we believe are important to understanding the assumptions and judgments
incorporated into our reported financial results which we discuss under
“Comparison of Year Ended December 31, 2008 with Year Ended December 31,
2007.”  Within “Comparison of Year Ended December 31, 2008 with Year
Ended December 31, 2007,” the term “same-store locations” is defined as the
portion of the Company’s operations that conducted business throughout each of
the years ended December 31, 2008 and December 31, 2007.  Same-store
locations may include the addition of new products as well as the deletion of
products previously sold at these locations.  We then provide an
analysis of cash flows, and discuss our financial commitments under “Liquidity
and Capital Resources,” followed by “Equity Transactions,” and the “Impact of
Inflation and Seasonality” on the Company.
  11
 Table of Contents
  Forward-Looking
Statements
 
 The following material contains
forward-looking statements relating to such matters as anticipated financial
performance and business prospects. When used in this Report, the words
“anticipates,” “expects,” “believes,” “may,” “intends” and similar expressions
are intended to be among the statements that identify forward-looking
statements.  From time to time, the Company may also publish
forward-looking statements.  The Private Securities Litigation Reform
Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 provide a safe harbor for forward-looking
statements.  Forward-looking statements involve risks and
uncertainties, including, but not limited to, the consummation of certain events
referred to in this report, the availability of financing, technological
changes, competitive factors, maintaining customer and vendor relationships,
inventory obsolescence and availability, and other risks detailed in the
Company’s periodic filings with the Securities and Exchange Commission, which
could cause the Company’s actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company’s
forward-looking statements.
 
 Critical Accounting
Policies
 
 The accounting policies below are
critical to the Company’s business operations and the understanding of results
of operations. The Company’s discussion and analysis of its financial condition
and results of operations are based upon the Company’s consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities as the date of the consolidated financial statements and the
reported amount of revenue and expenses during the reporting period. The Company
bases its estimates on historical experience and on various other factors that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of asset and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
 
 Revenue for the Company primarily
consists of sales of heating, ventilation and air conditioning equipment,
climate control systems and plumbing and electrical fixtures and supplies.
Revenue is recognized when the earnings process is complete, which is generally
upon shipment or delivery of products in accordance with agreed-upon shipping
terms and when title and risk of loss transfers to the customer.  The
Company has no further obligations subsequent to shipment or
delivery.  Customers have the right to return defective products,
which are substantially covered under the manufacturer’s
warranty.  The customer receives a credit from the Company for
defective products returned and the Company receives a corresponding credit
provided by the manufacturer.  The only warranty provided on products
sold is provided by the manufacturer.
 
 The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The Company establishes and monitors the
allowance for doubtful accounts based on the credit risk of specific customers,
customer concentrations, historical trends and other information. The Company
had accounts receivable of $8,802,631, net of an allowance for doubtful accounts
of $472,526, as of December 31, 2008.  Although the Company believes
its allowance is sufficient, if the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances would be required.
  12
 Table of Contents
  The Company writes down its inventories
for estimated slow moving and obsolete goods in accordance with the lower of
cost or market value, based upon assumptions about future demand and market
conditions. A significant sudden increase in the demand for the Company’s
products could result in a short-term increase in the cost of inventory
purchases, while a significant decrease in demand could result in an increase in
the amount of excess inventory quantities on-hand. Additionally, the Company’s
estimates of future product demand may prove to be inaccurate, in which case the
Company may have understated or overstated the write-down required for excess
and obsolete inventory.
 
 Under Statement of Financial Accounting
Standards No. 142, goodwill is reviewed at least annually for
impairment.  In assessing the recoverability of the Company’s
goodwill, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets and
liabilities of the reporting unit.  As a result of the Company’s
annual impairment test, there was no indication of impairment for goodwill
acquired in prior business combinations.  If the Company’s estimates
or its related assumptions change in the future, the Company may be required to
record impairment charges related to its goodwill.  Goodwill and other
intangible assets amounting to $1,628,133 and $329,485 at December 31, 2008,
respectively, consist of assets arising from acquisitions.
 
 The Company has accounted for, and
currently accounts for, income taxes in accordance with Statement 109
“Accounting for Income Taxes.”  This statement establishes financial
accounting and reporting standards for the effects of income taxes that result
from an enterprise’s activities during the current and preceding
years.  It requires an asset and liability approach for financial
accounting and reporting of income taxes.  The realization of future
tax benefits of deductible temporary differences and operating loss or tax
credit carryforwards will depend on whether the Company will have sufficient
taxable income of an appropriate character within the carryback and carryforward
period permitted by the tax law to allow for utilization of the deductible
amounts and carryforwards. Without sufficient taxable income to offset the
deductible amounts and carryforwards, the related tax benefits will expire
unused. The Company evaluates both positive and negative evidence in making a
determination as to whether it is more likely than not that all or some portion
of the deferred tax asset will not be realized.  As of December 31,
2008, the Company had a deferred tax valuation allowance of approximately
$7,500,000.
 
 Comparison of Year Ended
December 31, 2008 with Year Ended December 31, 2007
 
 Sales increased by 3.9%, or $3,180,649,
to $85,606,514 for the year ended December 31, 2008 from $82,425,865 for the
same period in 2007.  The acquisition of S&A Supply, Inc. on
September 10, 2007 constituted new operations for a portion of the year ended
December 31, 2008.  The new branch opening in the Albany, New York
area on April 10, 2007 constituted new operations for a portion of the year
ended December 31, 2008.  Sales from these new operations were
$8,114,697 for the year ended December 31, 2008, while sales from same-store
locations declined by 6.0%, or $4,934,047, from $82,425,864 to
$77,491,817.  The decrease in sales from same-store locations reflects
the difficult economic environment related to a significant reduction in new
construction and the moderation of residential renovations.
  13
 Table of Contents
  Gross profit increased by 6.0%, or
$1,412,772, to $24,967,664 for the year ended December 31, 2008 from $23,554,892
for the same period in 2007.  Gross profit from new operations was
$2,319,406 for the year, while gross profit from same-store locations declined
by 3.8%, or $906,634, from $23,554,892 to $22,648,258.  The decline in
gross profit from same-store locations was directly caused by lower
sales.  Gross profit expressed as a percentage of sales increased by
0.6% to 29.2% in 2008 compared to 28.6% for the comparable period in
2007.  The increase in gross profit expressed as a percentage of sales
is primarily the result of a change in the sales mix to higher efficiency
heating and air conditioning systems, which are usually sold at higher margins,
partially offset by lower vendor rebates and purchase discounts.  Cost
of sales excludes the distribution costs of incoming freight, purchasing,
receiving, inspection, warehousing and handling costs, as these costs are
included in our selling, general and administrative expenses.  Our
gross margins may not be comparable to those of other entities since some
entities include these distribution costs in the cost of sales.  These
distribution costs were $545,509 and $545,985 for the years ended December 31,
2008 and 2007, respectively.
 
 Operating income decreased by 53.9%, or
$679,135, to $579,816 for the year ended December 31, 2008 from $1,258,951 for
the same period in 2007.  This percentage decrease in operating income
reflects the combined effects of the increase in gross profit of 6.0% offset by
the increase in selling, general and administrative expenses of
9.4%.  Selling, general and administrative expenses from new
operations were $2,618,491 for the year, while selling, general and
administrative expenses from same-store locations decreased by 2.4%, or
$526,584, from $22,295,941 to $21,769,357.
 
 Net interest expense decreased by
23.2%, or $348,573, to $1,153,746 for the year ended December 31, 2008 from
$1,502,319 for the same period in 2007.  The net interest expense
decrease is primarily the result of a reduction in the interest rate of the
Company’s credit facility from an average rate of 7.8% for the year ended
December 31, 2007 to an average rate of 4.8% for the year ended December 31,
2008.
 
 The Company’s income tax expense for
the year ended December 31, 2008 was $715,850 compared to $105,487 for the same
period in 2007.  The Company recorded a net federal tax expense of
$708,500 for the year ended December 31, 2008 based on the Company’s revaluation
of its deferred tax asset.  The decrease in the deferred tax asset was
based on projected taxable income and management’s assessment of future
utilization of net operating loss carryforwards. The Company records state
income tax expense based on year-to-date profit of the Company and its
subsidiaries and records federal alternative minimum tax expense as the Company
utilizes its net operating loss carryforwards to offset any federal taxes
due.  Comparison of the Company’s effective tax rate from period to
period may not be consistent as the Company’s subsidiaries file separate state
tax returns and the Company files a consolidated federal
return.  State taxes vary with the profit of the Company and its
separate subsidiaries, while federal taxes are based upon the consolidation of
the Company and its subsidiaries.
 
 The Company’s net loss increased by
$956,503, to a net loss of $1,008,140 for the year ended December 31, 2008,
compared to a net loss of $51,637 for the same period in 2007.  The
decrease in net income is primarily the result of the effect of losses incurred
from our new operations in the amount of $299,000, plus the Company’s charge to
its deferred tax asset in the amount of $708,500, as described above, offset by
a decrease of $348,573 in interest expense.
  14
 Table of Contents
  Liquidity and Capital
Resources
 
 Credit
Facility
 
 In connection with the acquisition of
S&A Supply, Inc., the Company amended its secured credit facility
(“Agreement”) with Wells Fargo Bank, National Association (“Wells”) to increase
the Company’s facility from $15 million to $25 million and extended the term of
the facility from August 1, 2010 to August 1, 2012.  The $25 million
facility includes a $1 million structural sublimit payable in 24 equal monthly
installments, and up to $500,000 of seasonal
over-advances.  Borrowings under the credit facility are secured by
substantially all the assets of the Company, as defined in the
Agreement.  Availability under the revolving credit line was
$1,470,921 as of December 31, 2008 and is determined by a percentage of
available assets as defined in the Agreement, less reserves.
 
 The initial interest rate on the term
loan is prime minus 0.25%, but the interest rate on up to 75% of the loan’s
outstanding balance can be converted by the Company to 21⁄2% over
LIBOR.  The revolving credit line bears interest at .25% below prime.
Reserves, determined by the bank, reduce the availability of the credit facility
by $164,000.  The balance outstanding under the revolving line of
credit was $13,163,864 as of December 31, 2008.  The interest rate on
the revolving credit facility as of December 31, 2008 was 3.0%.
 
 The
Company believes that the credit facility is sufficient to finance its current
operating needs.  However, the business of the Company would be materially
and adversely affected if the bank demands payment of the loan and the Company
is unable to refinance the loan.  In the event that Mr. Pagano no
longer performs the duties of the President of Universal or the Vice President
of RAL for any reason other than death or disability, the Company will be
considered in default of its credit agreement with Wells Fargo Bank, National
Association unless a waiver is obtained.  The facility contains
covenants that are determined annually and relate to the Company’s monthly and
quarterly net income, quarterly cash flows, quarterly tangible net worth, and
annual capital expenditures.  The facility also restricts the payment
of dividends, subordinated debt and purchase of securities.  The
continuation of the credit facility is conditioned upon the Company and Wells
reaching agreement on the covenants.  While the Company and Wells have
reached mutually agreeable covenants for 2009, there is no assurance that they
will be able to do so in the future.  As of December 31, 2008, the
Company was in compliance with all of its financial loan covenants.
 
 As of December 31, 2008, the Company
had $417,387 in cash compared with $622,723 at December 31, 2007.
 
 Net cash provided by operating
activities was $5,418,161 for the year ended December 31, 2008.  The net
cash provided by operating activities for the 2008 period is primarily a result
of non-cash charges of $2,200,661 and changes in operating assets and
liabilities of $4,225,640 offset by net loss of $1,008,140.  The decrease
in accounts payable of $755,246 was primarily due to decreased inventory levels
in the amount of $3,576,067.
 
 Cash flows used in investing activities
were $520,031 during the year ended December 31, 2008, entirely due to purchases
of equipment.
 
 Cash flows used in financing activities
of $5,103,466 consisted of $4,863,191 in net repayments under the credit
facility-revolving credit, $59,087 received from the issuance of notes payable,
$296,630 for repayments of notes payable and $2,733 for the repurchase of
preferred stock.
  15
 Table of Contents
  Equity
Transactions
 
 During the year ended December 31,
2008, 17,423 shares of redeemable preferred stock were converted into 17,423
shares of common stock.  As of December 31, 2008, the number of
convertible preferred shares outstanding was 447,891.
 
 On September 2, 2008, the Company
announced that it was offering to shareholders who owned 99 or fewer shares of
the Company’s convertible preferred stock on August 20, 2008, to purchase those
shares at $1.25 per share. The tender offer was to expire on October 31, 2008;
however, on October 28, 2008 the Company announced that it was extending the
expiration date of the tender offer to December 31, 2008.  The Company
retired the convertible preferred stock purchased through this tender offer.
There were approximately 14,000 odd-lot shares eligible for purchase under the
tender offer.
 
 Through December 31, 2008, shareholders
tendered 2,186 shares of convertible preferred stock under the tender offer. The
Company accounted for these transactions utilizing the constructive retirement
method.
 
 Impact of Inflation,
Deflation and Seasonality
 
 To date, the effect of inflation or
deflation has had a minor impact on the Company’s operations causing limited
price increases in certain product lines. The Company’s business is affected by
significant outdoor temperature swings.  Demand related to the
residential central air conditioning replacement market is highest in the second
and third quarters with demand for heating equipment usually highest in the
fourth quarter.
 
 Item7A.Quantitative and Qualitative
Disclosures About Market Risk
 
 Not
applicable.
 
 Item8.Financial Statements and
Supplementary Data
 
 The consolidated financial statements
of the Company, together with the Report of Independent Registered Public
Accounting Firm thereon of Eisner LLP, appear herein. See Index to Consolidated
Financial Statements, appearing on page F-1.
 
 Item9.Changes In and Disagreements
With Accountants on Accounting and Financial Disclosure
 
 None.
 
 Item9A.Controls and Procedures
 
 Evaluation of Disclosure
Controls and Procedures
 
 Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15
under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.  In addition, the design of
disclosure controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their costs.
  16
 Table of Contents
  Based on management’s evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2008, our disclosure controls and procedures are designed at a
reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
 
 Management’s Report on
Internal Control Over Financial Reporting
 
 A company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.  Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
 
 Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as defined in Exchange Act Rule 13a-15(f).  Management conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.  Based on
this evaluation, management concluded that our internal control over financial
reporting was effective as of December 31, 2008. Management reviewed the
results of their assessment with our Audit Committee.
 
 This Annual Report on Form 10-K does
not include an attestation report of the Company's independent registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this Annual Report on Form 10-K.
 
 Changes in Internal Control
Over Financial Reporting
 
 We regularly review our system of
internal control over financial reporting and make changes to our processes and
systems to improve controls and increase efficiency, while ensuring that we
maintain an effective internal control environment.  Changes may include
such activities as implementing new, more efficient systems, consolidating
activities, and migrating processes.
 
 There were no changes in our internal
control over financial reporting that occurred during the period covered by this
Annual Report on Form 10-K that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 Item9B.  Other Information
 
 None.
  17
 Table of Contents
  PART
III
 
 Item10.Directors, Executive
Officers and Corporate Governance
 
 The names, ages and positions of the
Registrant’s Directors and executive officers are listed below, along with a
brief account of their business experience during the last five
years.  Officers are appointed annually by the Board of Directors at
its first meeting following the Annual Meeting of Stockholders and from time to
time at the pleasure of the Board.  There are no family relationships
among these Directors and officers, except for Melissa Goldman-Williams, who is
the daughter of Michael Goldman, nor any arrangements or understandings between
any Directors or officers and any other person pursuant to which any of such
officers were selected as executive officers.
 
 Name
                                        
                                        Age
                                        
                                        Position with the
CompanyDirectors and Executive
      Officers:Dr.
      E. Bruce Fredrikson
                                        
                                        71
                                        
                                        Director,
      Chairman of Audit CommitteeMelissa
      Goldman-Williams
                                        
                                        41
                                        
                                        DirectorMichael
      Goldman
                                        
                                        70
                                        
                                        Director,
      Chairman of the BoardStuart
      H. Lubow
                                        
                                        51
                                        
                                        Director,
      Chairman of Nominating CommitteeRonald
      H. Miller
                                        
                                        65
                                        
                                        DirectorWilliam
      Pagano
                                        
                                        69
                                        
                                        Director
      and Chief Executive Officer of the Company and President of
      UniversalWilliam
      Salek
                                        
                                        47
                                        
                                        Chief
      Financial Officer and Secretary of the Company and Vice President of
      Universal
 
 Dr. E. Bruce
Fredrikson
 
 Dr. E. Bruce Fredrikson has been a
Director of the Company since January 28, 2005. Dr. Fredrikson is currently an
independent consultant in corporate finance and governance.  He is
Professor of Finance, Emeritus, at Syracuse University’s Martin J. Whitman
School of Management where he taught from 1966 until his retirement in May 2003.
He is a director of Consumer Portfolio Services, Inc., a consumer finance
company, and is non-executive Chairman of the Board of Track Data Corporation, a
financial services company.  He is Chairman of the Audit Committee of
both of these companies.  Dr. Fredrikson holds an A.B. in economics
from Princeton University and a M.B.A. in accounting and a Ph.D. in finance from
Columbia University.
 
 Melissa
Goldman-Williams
 
 Melissa Goldman-Williams has been a
Director of the Company since October 22, 2004.    Mrs.
Goldman-Williams presently serves as the Chief Operating Officer of Westeye
East, an appliance distributor.  Previously, Mrs. Goldman-Williams was
the Chief Operating Officer and a member of the Board of Directors of Goldman
Associates of New York, Inc., now an investment company located in Florida,
until its acquisition by Westeye East on January 1, 2007.  Mrs.
Goldman-Williams holds a B.A. from Lehigh University and a Masters Degree in
Environmental Management from Duke University.
 
 Michael
Goldman
 
 Michael Goldman has been a Director of
the Company since September 29, 2004 and was appointed Chairman of the Board on
April 17, 2006.  Since 1987 Mr. Goldman was the Chief Executive
Officer and Chairman of the Board of Directors of Goldman Associates of New
York, Inc., an appliance distributor for the Northeast, until January
1, 2007.  The assets of this company were acquired by Westeye East, on
January 1, 2007 and it is now an investment company located in
Florida.  Mr. Goldman continues to serve as the Chief Executive
Officer and Chairman of the Board of Directors of Goldman Associates of New
York, Inc.  Mr. Goldman is a Certified Public Accountant and holds a
B.S. in Accounting from Brooklyn College and an M.B.A. in Management from
Syracuse University.
  18
 Table of Contents
  Stuart H.
Lubow
 
 Stuart H. Lubow became a Director of
the Company on May 11, 2006.  Mr. Lubow is a founder, Chairman,
President and Chief Executive Officer of Community National Bank.  Mr.
Lubow was founder, President and Chief Executive Officer of Community State Bank
from 1997 to 2003 and was the Executive Vice President and Chief Operating
Officer of Garden State Bank until 1996.  Mr. Lubow has been a banking
executive for over 25 years.  He is a past Chairman of the Community
Bankers Association of New Jersey, as well as the former Chairman of the Teaneck
Development Corporation.  Mr. Lubow holds a B.A. in Accounting from
Moravian College and has served as an instructor at the New York University
School of Continuing Education.
 
 Ronald H.
Miller
 
 Ronald H. Miller has been a Director of
the Company since 1983.  Mr. Miller holds a B.S. in Education from
Ohio State University and a J.D. from Ohio State University.  Mr.
Miller was engaged in the practice of law since 1969 until his retirement in
2007.  Mr. Miller is an acting Judge of Auglaize County Municipal
Court in the State of Ohio.
 
 William
Pagano
 
 William Pagano has been the President
of Universal since November 1998, and was appointed as a Director of the Company
in February 2002, as President of the Company on October 27, 2005, and as Chief
Executive Officer of the Company on April 17, 2006. Prior to November 1998, Mr.
Pagano was engaged in the practice of law.  Mr. Pagano holds a B.S. in
Industrial Management, and an M.B.A., both from Fairleigh Dickinson
University.  Mr. Pagano also holds a J.D. from Seton Hall
University.
 
 William
Salek
 
 William Salek has been the Vice
President of Universal since June 1999 and was appointed as the Chief Financial
Officer of the Company in October 2004 and Secretary of the Company in February
2005.  Mr. Salek has been employed by Universal since
1983.  Mr. Salek holds a B.S. in Accounting from Clarion
University.  Mr. Salek is a director of Educational Partnership for
Instructing Children, Inc., a non-profit learning institute.
 
 Compliance with Section
16(a) of the Exchange Act
 
 The Company believes that during the
period from January 1, 2008 through December 31, 2008, all executive officers,
Directors and greater than 10% beneficial owners, complied with Section 16(a)
filing requirements.
  19
 Table of Contents
  Code of
Ethics
 
 The Company has adopted a Code of
Ethics that applies to all employees, including all employees of  the
Company’s subsidiaries, as well as each member of the Company’s Board of
Directors.
 
 Audit
Committee
 
 The Company has a separately designated
standing audit committee established in accordance with Section 3(a)(58)(A) of
the Exchange Act.  Serving on the Committee are Dr. E. Bruce
Fredrikson and Ronald H. Miller.  The Board of Directors had
determined that it has two audit committee financial experts serving on the
Audit Committee, Dr. Fredrikson and Ronald H. Miller.  Both Dr.
Fredrikson and Mr. Miller are independent Directors as defined in the NASDAQ
Stock Marketplace Rule 4200.
 
 Item11.Executive
Compensation
 
 Summary Compensation
Table
 
 The
following table sets forth information about compensation paid or accrued by the
Company during the fiscal years ended December 31, 2008 and 2007 to William
Pagano and William Salek, the only named executive officers of the Company whose
compensation exceeded $100,000.
 
 Non-Equity
                                                        
                                                        
                                                        AllIncentive
      Plan
                                                        
                                                        
                                                        OtherName and Principal Position
                                                        
                                                        Year
                                                        
                                                        Salary
                                                        
                                                        
                                                        Compensation
                                                        
                                                        
                                                        Compensation
                                                        
                                                        
                                                        TotalWilliam
      Pagano—Director and Chief
                                                        
                                                        2008
                                                        
                                                        $
                                                        200,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        $
                                                        200,000Executive
      Officer of the Company and,
                                                        
                                                        2007
                                                        
                                                        $
                                                        200,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        $
                                                        200,000President
      of Universal*William
      Salek—Chief Financial Officer
                                                        
                                                        2008
                                                        
                                                        $
                                                        130,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        $
                                                        130,000and
      Secretary of the Company and Vice
                                                        
                                                        2007
                                                        
                                                        $
                                                        120,000
                                                        
                                                        
                                                        $
                                                        14,235
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        $
                                                        134,235President
      and Secretary of Universal
 
 *Mr. Pagano deferred his salary from
November 23, 2008 through December 31, 2008. Mr. Pagano will receive his
deferred salary in the amount of $21,538 on or about March 31, 2009. On March 4,
2009, Mr. Pagano waived his right to receive incentive compensation for 2008. On
March 3, 2008, Mr. Pagano waived his right to receive incentive compensation for
2007.
 
 During the fiscal years ended 2008 and
2007, no stock awards, option awards, bonuses or nonqualified deferred
compensation earnings were earned by the named executive officers.
 
 Narrative Disclosure to
Summary Compensation Table
 
 Mr. Pagano is the Chief Executive
Officer of the Company. Mr. Salek is the Chief Financial Officer and Secretary
of the Company.
  20
 Table of Contents
  William
Pagano
 
 Universal
Supply Group, Inc., (“Universal”), a wholly owned subsidiary of the Company, and
Mr. Pagano entered into an employment agreement dated as of June 25, 1999, as
amended, (“Employment Agreement”), and expiring on December 31, 2010, pursuant
to which the Company employed Mr. Pagano as President of
Universal.  The Employment Agreement provides for (i) a salary of
$200,000 per year, reduced by any amounts payable to Mr. Pagano for loss of
earnings or the like under any insurance plan or policy, the premiums for which
are paid for in their entirety by the Company; (ii) fringe benefits commensurate
with Mr. Pagano’s position as President, in such group life, health, accident,
disability or hospitalization insurance plans, subject to underwriting
requirements as Universal, or its parent, may make available to its other
executive employees and (iii) additional incentive compensation based on a
percentage of earnings, as defined below, of the subsidiaries, limited to two
times his base compensation. Mr. Pagano is subject to the confidentiality and
non-compete provisions set forth in the Employment Agreement.
 
 For the calendar years 2008 through
2010, Mr. Pagano will receive, as incentive compensation, a percentage of the
Incentive Compensation Base.  Incentive Compensation Base shall mean
the Universal’s net earnings (as determined by the Company, Universal’s parent)
which are included in the Company’s consolidated audited financial statements,
plus the amount of any deductions from net earnings which are made in such
statements for (i) interest paid or accrued in connection with the acquisition
of the Universal, (ii) Federal income taxes, (iii) parent company management
fees or allocation of overhead from the parent company either paid or accrued
and (iv) incentive compensation under this Agreement.  Earnings of
businesses acquired by Universal shall be included in determining incentive
compensation base.  Incentive compensation will be paid within 30 days
following receipt by Universal of the Independent Accountant’s report for the
year involved and said report shall be binding and conclusive on the calculation
of net earnings and incentive compensation.  Incentive compensation
for any year beginning in 2005 shall in no event exceed two times Mr. Pagano’s
base compensation for such year.
  Portion
      of Incentive
                  
                  Additional
      CompensationCompensation Base
                  
                  PercentagesUp
      to
                  
                  $    250,000
                  
                  8%$    251,000
                  to
                  $    500,000
                  
                  9%$    501,000
                  to
                  $    750,000
                  
                  10%$    751,000
                  to
                  $
      1,000,000
                  
                  11%$
      1,001,000
                  
                  And
      over
                  
                  12%
  21
 Table of Contents
  For the fiscal years ending December
31, 2008 and 2007 the incentive compensation base was $517,100 and $1,473,150,
respectively, and the incentive compensation was computed as
follows:
 
 2008Incentive
                                                                                                                  
                                                                                                                  AdditionalCompensation
                                                                                                                  
                                                                                                                  Compensation
                                                                                                                  
                                                                                                                  IncentiveBase
                                                                                                                  
                                                                                                                  Percentages
                                                                                                                  
                                                                                                                  Compensation$    250,000
                                                                                                                  
                                                                                                                  at 8%
                                                                                                                  
                                                                                                                  $   20,000$    250,000
                                                                                                                  
                                                                                                                  at 9%
                                                                                                                  
                                                                                                                  $   22,500$      17,100
                                                                                                                  
                                                                                                                  at 10%
                                                                                                                  
                                                                                                                  $     1,710$               0
                                                                                                                  
                                                                                                                  at 11%
                                                                                                                  
                                                                                                                  $            0$               0
                                                                                                                  
                                                                                                                  at 12%
                                                                                                                  
                                                                                                                  $            0$    517,100
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  $   44,2102007Incentive
                                                                                                                  
                                                                                                                  AdditionalCompensation
                                                                                                                  
                                                                                                                  Compensation
                                                                                                                  
                                                                                                                  IncentiveBase
                                                                                                                  
                                                                                                                  Percentages
                                                                                                                  
                                                                                                                  Compensation$    250,000
                                                                                                                  
                                                                                                                  at
      8%
                                                                                                                  
                                                                                                                  $   20,000$    250,000
                                                                                                                  
                                                                                                                  at
      9%
                                                                                                                  
                                                                                                                  $   22,500$    250,000
                                                                                                                  
                                                                                                                  at
      10%
                                                                                                                  
                                                                                                                  $   25,000$    250,000
                                                                                                                  
                                                                                                                  at
      11%
                                                                                                                  
                                                                                                                  $   27,500$    473,150
                                                                                                                  
                                                                                                                  at
      12%
                                                                                                                  
                                                                                                                  $   56,778$ 1,473,150
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  $ 151,778
 
 Total incentive compensation for the
fiscal years ended December 31, 2008 and 2007 was $44,210 and $151,778,
respectively.  On March 4, 2009, Mr. Pagano waived his right to
receive incentive compensation for 2008.  On March 3, 2008, Mr. Pagano
waived his right to receive incentive compensation for 2007.
 
 In the event that Mr. Pagano no longer
performs the duties of the President of Universal or the Vice President of RAL
for any reason other than death or disability, the Company will be considered in
default of its credit agreement with Wells Fargo Bank, National Association
unless a waiver is obtained.
 
 William
Salek
 
 Mr. Salek’s employment agreement
expired on December 31, 2007. Mr. Salek is currently employed by the Company on
an at-will basis at an annual compensation rate of $130,000. Mr. Salek did not
receive an incentive award for the fiscal year ending December 31,
2008.
 
 Outstanding Equity Awards at
Fiscal Year End
 
 There were no equity awards outstanding
for the named executive officers as of December 31, 2008.
  22
 Table of Contents
  Potential Payments Upon
Termination or Change In Control
 
 No named executive officer is entitled
to any payments upon the termination or retirement of such named executive
officer or upon a change of control of the Company..
 
 Director’s
Compensation
 
 The following table sets forth
compensation to members of the Board of Directors, other than those employed by
the Company, during the fiscal year ended December 31, 2008.
 
 Name
                                    
                                    Fees
      Earned or Paid in
Cash
                                    
                                    
                                    Option Awards*
                                    
                                    
                                    All
      Other Compensation
                                    
                                    
                                    TotalDr.
      E. Bruce Fredrikson
                                    
                                    $
                                    22,000
                                    
                                    
                                    $
                                    8,902
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    30,902Melissa
      Goldman-Williams
                                    
                                    $
                                    12,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    12,000Michael
      Goldman
                                    
                                    $
                                    12,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    13,221
                                    
                                    
                                    $
                                    25,221Stuart
      H. Lubow
                                    
                                    $
                                    12,000
                                    
                                    
                                    $
                                    8,902
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    20,902Ronald
      H. Miller
                                    
                                    $
                                    12,000
                                    
                                    
                                    $
                                    8,902
                                    
                                    
                                    
                                    -
                                    
                                    
                                    $
                                    20,902
 
 *The dollar amount of stock option
awards are recognized for financial statement reporting purposes with respect to
the year ended December 31, 2008, in accordance with FAS 123R.
 
 Members of the Board of Directors,
other than those employed by the Company, received a fee of $12,000 annually
consisting of an annual retainer of $8,000 and a fee of $1,000 for each meeting
of the Board, limited to $4,000 per annum payable in advance in four equally
quarterly installments.
 
 Dr. E. Bruce Fredrikson’s annual
retainer fee for serving as a Director and Chairman of the Audit Committee is
$18,000.  The fee is payable in $4,500 installments in advance of each
quarter.
 
 Members of the Board of Directors
receive no fees if they are employed by the Company.
 
 For the calendar year 2008, the Company
paid the premiums for Michael Goldman's COBRA health insurance.  In
January 2008, the Company paid $13,221 for this premium for
2008.
 
 On December 6, 2006, the Company
granted ten-year options to purchase 25,000 shares of common stock at an
exercise price of $1.85 per share to each of the following Directors: Dr. E.
Bruce Fredrikson, Stuart H. Lubow and Ronald H. Miller. The option to each
Director was immediately vested for 10,000 shares and will vest for 5,000
additional shares on each of the first three anniversaries of the Grant Date if
the optionee then continues as a Director. The options were granted in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended.
  23
 Table of Contents
  Item12.Security Ownership of
Certain Beneficial Owners and Management
 
 The
following table sets forth, as of March 1, 2009, information with respect to
beneficial ownership by named executive officers and Directors of the Company,
holders of over 5% of a class of stock and of named executive officers and
Directors of the Company as a group.
 
 Common Stock
                                  
                                  
                                  Preferred StockAmount
      and
                                  
                                  
                                  
                                  
                                  
                                  Amount
      andNature
      of
                                  
                                  
                                  Percent
                                  
                                  
                                  Nature
      ofBeneficial
                                  
                                  
                                  of
                                  
                                  
                                  Beneficial
                                  
                                  
                                  Percent
      ofName of Beneficial Owner
                                  
                                  Ownership*
                                  
                                  
                                  Class
                                  
                                  
                                  Ownership*
                                  
                                  
                                  ClassOfficers and Directors:Dr.
      E. Bruce Fredrikson
                                  
                                  
                                  30,600
                                  (1)
                                  
                                  
                                  **
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  **Melissa
      Goldman-Williams
                                  
                                  
                                  5,400
                                  
                                  
                                  
                                  **
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  **Michael
      Goldman
                                  
                                  
                                  1,317,329
                                  (2)
                                  
                                  
                                  29.68
                                  %
                                  
                                  
                                  91,065
                                  
                                  
                                  
                                  20.33
                                  %Stuart
      H. Lubow
                                  
                                  
                                  20,000
                                  (3)
                                  
                                  
                                  **
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  **Ronald
      H. Miller
                                  
                                  
                                  21,054
                                  (4)
                                  
                                  
                                  **
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  **William
      Pagano
                                  
                                  
                                  768,971
                                  (5)
                                  
                                  
                                  16.40
                                  %
                                  
                                  
                                  0
                                  
                                  
                                  
                                  **William
      Salek
                                  
                                  
                                  53,333
                                  (6)
                                  
                                  
                                  1.14
                                  %
                                  
                                  
                                  0
                                  
                                  
                                  
                                  **All Officers and Directors as a
      Group:
                                  
                                  
                                  2,216,687
                                  ***
                                  
                                  
                                  47.61
                                  %
                                  
                                  
                                  91,065
                                  
                                  
                                  
                                  20.33
                                  %Holders of over 5% of a class of stock who are not
      Officers or Directors:Rita
      C. Folger
                                  
                                  
                                  578,719
                                  (7)
                                  
                                  
                                  12.34
                                  %
                                  
                                  
                                  0
                                  
                                  
                                  
                                  **Goldman Associates of New York,
      Inc.
                                  
                                  
                                  979,255
                                  (8)
                                  
                                  
                                  21.04
                                  %
                                  
                                  
                                  0
                                  
                                  
                                  
                                  **
 
 The beneficial owners listed above have
all given a business address of 275 Wagaraw Road, Hawthorne, New Jersey
07506.
 
 *For the purposes of this table,
“Beneficial Ownership” is defined as set forth in rule 13d-3 under the
Securities Exchange Act of 1934, as amended.  Except as set forth in
the following notes, each person listed in the table has sole voting and sole
investment power with respect to the shares of Common Stock listed in the
table.
 
 **Represents beneficial ownership of
less than one percent of the Company’s outstanding securities.
  24
 Table of Contents
  ***Assumes the conversion by Mr.
Goldman of his 91,065 shares of Convertible Preferred Stock into 91,065 shares
of Common Stock.
 
 (1)  Dr.
E. Bruce Fredrikson’s beneficial ownership consists of 10,600 shares of Common
Stock and 20,000 shares of Common Stock issuable upon exercise of his
options.
 
 (2)  Michael
Goldman is the Chief Executive Officer and Chairman of the Board of Goldman
Associates of New York, Inc. (“Goldman Associates”). Goldman Associates is the
owner of 979,255 shares of Common Stock (“Goldman Shares”). Mr. Goldman is the
owner of 247,009 shares of Common Stock, 91,065 shares of Common Stock issuable
at any time upon conversion of 91,065 shares of Convertible Preferred Stock, and
the beneficial owner of the Goldman Shares.  Mr. Goldman’s Common
Stock ownership in the table above reflects the aggregate amount of his
beneficially owned shares consisting of: (i) 247,009 shares of Common Stock,
(ii) 91,065 shares of Common Stock issuable at any time upon conversion of
91,065 shares of Convertible Preferred Stock, and (iii) the Goldman Shares. Mr.
Goldman’s beneficial ownership excludes 20,000 shares of Common Stock owned by
his wife, of which Goldman Associates and Michael Goldman disclaim beneficial
ownership.  Mr. Goldman’s wife disclaims beneficial ownership of Mr.
Goldman’s shares.
 
 (3)  Stuart
H. Lubow’s beneficial ownership consists of 20,000 shares of Common Stock
issuable upon exercise of his options.
 
 (4)  Ronald
H. Miller’s beneficial ownership consists of 1,054 shares of Common Stock and
20,000 shares of Common Stock issuable upon exercise of his
options.
 
 (5)  William
Pagano’s beneficial ownership consists of 735,638 shares of Common Stock and
33,333 shares of Common Stock issuable at any time upon conversion of a $100,000
Convertible Note at a conversion price of $3 per share.
 
 (6)  William
Salek’s beneficial ownership consists of 45,000 shares of Common Stock and 8,333
shares of Common Stock issuable upon conversion of a $25,000 Convertible Note at
a conversion price of $3 per share.
 
 (7)  Rita
C. Folger’s beneficial ownership consists of 545,386 shares of Common Stock and
33,333 shares of Common Stock issuable upon conversion of a $100,000 Convertible
Note at a conversion price of $3 per share. Mrs. Folger is the wife of Oscar
Folger and the mother of Jeffrey Folger.  Oscar and Jeffrey Folger
were each an employee of the Company as Vice President-Chief Legal Counsel and
Assistant Vice President-Legal, respectively, until March 31,
2007.  As of April 1, 2007, Oscar and Jeffrey Folger ceased to act as
employees of the Company, but their law firm Folger & Folger remains as
counsel to the Company.  Mr. Folger’s beneficial ownership consists of
5,000 shares of Common Stock issuable at any time upon exercise of his
options.  Mr. Folger disclaims beneficial ownership of his wife’s
shares, and Mrs. Folger disclaims beneficial ownership of her husband’s
shares.
 
 (8)  The
beneficial ownership of Goldman Associates of New York, Inc. consists of 979,255
shares of Common Stock.  See Footnote 2, above, for information
relating to beneficial ownership of these securities held by Michael
Goldman.
  25
 Table of Contents
  Item13.Certain Relationships and
Related Transactions, and Director
Independence
 
 Certain Relationships and
Related Transactions
 
 (a)
              A
      subsidiary of the Company leases a warehouse and store in Wharton, New
      Jersey comprising of 27,000 square feet from a company owned by Mr. Paul
      Hildebrandt under a lease that expires in June 2010.  The
      Company paid Mr. Hildebrandt’s company $241,095 and $234,866 as rent
      during the years ended December 31, 2008 and 2007,
      respectively.
 
 The
Company owes Mr. Hildebrandt $55,000 pursuant to two notes: (a) a subordinated
note in the amount of $150,000, paid $30,000 annually commencing December 31,
2004, of which the final $30,000 payment that was due December 31, 2008 was
deferred until on orabout March 31,
2009, and (b) a
$25,000 convertible note due June 1, 2009.  William Salek, the
Company’s Chief Financial Officer, is the son-in-law of Mr.
Hildebrandt.  Mr. Hildebrandt served as a Director of the Company from
July 2004 to January 2005.
 
 (b)
              Pursuant
      to a secured note dated July 29, 2004, as amended by Amendment 1 dated
      March 27, 2008 and further amended by Amendment 2 dated February 12, 2009,
      the Company owes Goldman Associates of New York, Inc. (“Goldman
      Associates”), the principal amount of $750,000 collateralized by the
      assets of the Company. The secured note is subordinate to the borrowings
      under the credit facility, bears interest at the prime rate plus 2% and is
      due on January 1, 2010.
 
 Michael
Goldman is the Chief Executive Officer and Chairman of the Board of Goldman
Associates and is Chairman of the Board of the Company.
 
 In
January 2008, the Company paid $13,221 in premiums for Michael Goldman’s
COBRA health insurance for the calendar year 2008.
 
 (c)
              Oscar
      and Jeffrey Folger were each an employee of the Company as Vice
      President-Chief Legal Counsel and Assistant Vice President-Legal,
      respectively, until March 31, 2007.  As of April 1, 2007, Oscar
      and Jeffrey Folger ceased to act as employees of the Company, but their
      law firm Folger & Folger remains as counsel to the
      Company.  Rita Folger, a more than 5% shareholder of the
      Company, is the wife of Oscar Folger and the mother of Jeffrey
      Folger.  Professional fees paid to Folger & Folger for the
      years ended 2008 and 2007 were $60,087 and $115,412,
      respectively.
 
 No money
was paid to either Oscar or Jeffrey Folger as part time employees of the Company
for the year ended December 31, 2008 and $3,000 was paid to each of Oscar and
Jeffrey Folger as part time employees of the Company for the year ended December
31, 2007.
 
 (d)
                Pioneer
      Realty Holdings, LLC, a New York limited liability company (“Pioneer”), is
      the owner of the premises located at 836 Route 9, Fishkill, New York,
      formerly known as 2213 Route 9, Fishkill, New York that is leased to a
      subsidiary of the Company under a lease that expires on March 31, 2017,
      subject to two five-year renewal
options.
 
 William
Pagano, Chief Executive Officer and Director of the Company, has a 55% interest
in Pioneer and each of Mrs. Folger and Jeffrey Folger has an 8% interest in
Pioneer Realty Partners I, LLC, which has a 40% interest in
Pioneer.  The Company paid Pioneer Realty Holdings, LLC $250,146 and
$176,556 in rent during the years ended December 31, 2008 and 2007,
respectively.
  26
 Table of Contents
  (e)
                Mr.
      Pagano and Mrs. Folger are each holders of convertible unsecured notes in
      the amount of $100,000, issued pursuant to the terms of a private
      placement made on July 29, 2004, as amended by Amendment 1 dated March 27,
      2008 and further amended by Amendment 2 dated February 12, 2009. The
      convertible unsecured notes bear interest at the prime rate plus 2% and
      are due on January 1, 2010.
 
 Mr. Salek
and the wife of Michael Goldman are holders of convertible unsecured notes in
the amounts of $25,000 and $12,500, respectively, issued pursuant to the terms
of a private placement made on July 29, 2004. The convertible unsecured notes
bear interest at 11% and are due on June 1, 2009.
 
 Interest
expense on the notes held by Mr. Pagano and Mrs. Folger amounted to $11,000 for
each of the years ended December 31, 2008 and 2007, paid to each Mr. Pagano and
Mrs. Folger.
 
 Interest
expense on the note held by Mr. Salek amounted to $4,583 and $5,500 for the
years ended December 31, 2008 and 2007, respectively.
 
 Interest
expense on the note held by the wife of Michael Goldman amounted to $2,292 and
$2,750 for the years ended December 31, 2008 and 2007,
respectively.
 
 The positions with the Company and the
relevant stock ownerships of the persons and entities referenced in this Item
are set forth in Items 10 and 12.
 
 Director
Independence
 
 The Board of Directors is comprised of
six members, of which three are classified as “independent” as defined in the
NASDAQ Stock Marketplace Rule 4200.  The three independent Directors
are Dr. E. Bruce Fredrikson, Stuart H. Lubow and Ronald H. Miller.
 
 Item14.Principal
Accountant Fees and Services
 
 Audit
Fees
 
 Audit fees for 2008 and 2007 were
$235,000 and $233,100, respectively.  All services provided by
independent accountants were approved by the audit committee.  Audit
Fees consist of fees billed for professional services rendered for the audit of
the Company’s annual statements, for review of interim consolidated financial
statements included in quarterly reports and services that were normally
provided by Eisner LLP in connection with statutory and regulatory filings or
engagements.
 
 Audit Related
Fees
 
 The Company did not incur audit related
fees from Eisner LLP in 2008 or 2007.  Audit-Related Fees consist of
fees billed for assurance and related services that are reasonably related to
the performance of the audit or review of the Company’s consolidated financial
statements and are not reported under “Audit Fees.”
 
 Tax Fees
 
 The Company did not incur tax fees from
Eisner LLP in 2008 or 2007.  Tax Fees consist of fees billed for
professional services rendered for tax compliance.  These services
include assistance regarding federal, state and local tax
compliance.
 
 All Other
Fees
 
 All other fees for professional
services rendered to the Company by Eisner LLP during the fiscal years 2008 and
2007 were $0 and $37,000, respectively.
  27
 Table of Contents
  The Audit Committee meets with the
independent auditor prior to the audit and discusses the planning and staffing
of the audit, approves in advance the engagement of the independent auditor for
all audit services and non-audit services and approves the fees and other terms
of any such engagement, and obtains periodically from the independent auditor a
communication of the matters required to be discussed by Statements of Auditing
Standards No. 61 and SEC Rule 10(a).  The Audit Committee also meets
with the auditors prior to the filing of Forms 10-K and 10-Q to discuss the
results of their audit and reviews. In addition, the Company obtains a letter
describing all relationships between the auditor and the Company and discusses
with the auditor any disclosed relationships or services that may impact auditor
objectivity and independence.
  28
 Table of Contents
  PART
IV
 
 Item15.Exhibits and Financial
Statement Schedules
 
 (a)
              Exhibits
      and Financial Statements
 
 (1)
              Financial
      Statements.  See Item 8., Financial Statements
      and Supplementary Data
 
 (2)
              Financial
      Statement Schedules.  See F-1 through F-30,
    attached
 
 (3)
              Exhibits
 
 INDEX TO
EXHIBITS
 
 Exhibit
                              
                              Exhibit Name
                              
                              FiledHerewith
                              
                              Form
                              
                              Date
      FiledWith SEC
                              
                              Incorporated
      By ReferenceFrom
    Exhibit3.01
                              
                              Restated
      Certificate of Incorporation of Registrant dated January 6,
      1983
                              
                              
                              
                              10-K
                              
                              03-30-06
                              
                              3.01(a)
                              
                              Certificate
      of Amendment of the Certificate of Incorporation dated October 31,
      1986
                              
                              
                              
                              10-K
                              
                              03-30-06
                              
                              3.01(a)(b)
                              
                              Certificate
      of Amendment of the Certificate of Incorporation dated June 24,
      1988
                              
                              
                              
                              10-K
                              
                              03-30-06
                              
                              3.01(b)(c)
                              
                              Certificate
      of Amendment of the Certificate of Incorporation dated January 13,
      1998
                              
                              
                              
                              10-K
                              
                              03-30-06
                              
                              3.01(c)(d)
                              
                              Certificate
      of Amendment of the Certificate of Incorporation dated January 13,
      1998
                              
                              
                              
                              10-K
                              
                              03-30-06
                              
                              3.01(d)(e)
                              
                              Certificate
      of Amendment of the Certificate of Incorporation dated September 29,
      2006
                              
                              
                              
                              10-Q
                              
                              11-13-06
                              
                              3.013.02
                              
                              By-Laws
      of Registrant
                              
                              
                              
                              10-K
                              
                              03-30-06
                              
                              3.02(a)
                              
                              Amended
      and Restated By-Laws of Registrant, ratified and adopted June 13,
      2006
                              
                              
                              
                              8-K
                              
                              06-19-06
                              
                              3.014.01
                              
                              Specimen
      of Common Stock Certificate
                              
                              
                              
                              10-K
                              
                              03-30-06
                              
                              4.014.02
                              
                              Specimen
      of Convertible Preferred Stock Certificate
                              
                              
                              
                              10-K
                              
                              03-30-06
                              
                              4.0210.01
                              
                              Employment
      Agreement dated as of January 1, 1998 between Registrant and Bernard
      Korn
                              
                              
                              
                              10-KSB
                              
                              03-31-98
                              
                              10(a)(a)
                              
                              Amendment
      Number 1 dated April 1, 1999 to Employment Agreement dated as of January
      1, 1998 between Registrant and Bernard Korn
                              
                              
                              
                              10-K
                              
                              04-11-01
                              
                              10(a)(i)(b)
                              
                              Amendment
      Number 2 dated April 1, 2000 to Employment Agreement dated as of January
      1, 1998 between Registrant and Bernard Korn
                              
                              
                              
                              10-K
                              
                              04-11-01
                              
                              10(a)(ii)(c)
                              
                              Amendment
      Number 3 dated October 29, 2002 to Employment Agreement dated as of
      January 1, 1998 between Registrant and Bernard Korn
                              
                              
                              
                              10-K
                              
                              11-18-03
                              
                              10(a)(iii)(d)
                              
                              Amendment
      Number 4 dated October 29, 2002 to Employment Agreement dated as of
      January 1, 1998 between Registrant and Bernard Korn
                              
                              
                              
                              10-K
                              
                              11-18-03
                              
                              10(a)(iv)
  29
 Table of Contents
 
 (e)
                        
                        Amendment
      Number 5 dated May 17, 2004 to Employment Agreement dated as of January 1,
      1998 between Registrant and Bernard Korn
                        
                        
                        
                        10-K
                        
                        03-30-06
                        
                        10.01(e)(f)
                        
                        Employment
      Agreement dated April 17, 2006 between Registrant and Bernard
      Korn
                        
                        
                        
                        8-K
                        
                        04-21-06
                        
                        10.0110.02
                        
                        Employment
      Agreement dated as of June 25, 1999 between Universal Supply Group, Inc.
      and William Pagano
                        
                        
                        
                        8-K
                        
                        07-09-99
                        
                        10(a)(iii)(a)
                        
                        Amendment
      Number 1 dated October 29, 2002 to Employment Agreement dated as of June
      25, 1999 between Universal Supply Group, Inc. and William
      Pagano
                        
                        
                        
                        8-K
                        
                        11-02-05
                        
                        10.02(b)
                        
                        Amendment
      Number 2 dated as of June 15, 2005 to Employment Agreement dated as of
      June 25, 1999 between Universal Supply Group, Inc. and William
      Pagano
                        
                        
                        
                        8-K
                        
                        06-20-05
                        
                        99.1(c)
                        
                        Amendment
      Number 3 dated as of March 12, 2007 to Employment Agreement dated as of
      June 25, 1999 between Universal Supply Group, Inc. and William
      Pagano
                        
                        
                        
                        8-K
                        
                        03-12-07
                        
                        10.0410.03
                        
                        Employment
      Agreement dated June 25, 1999 between Universal Supply Group, Inc. and
      William Salek
                        
                        
                        
                        10-K
                        
                        03-30-06
                        
                        10.03(a)
                        
                        Amended
      and Restated Employment Agreement dated as of January 20, 2005 to
      Employment Agreement dated as of June 25, 1999 between Universal Supply
      Group, Inc. and William Salek
                        
                        
                        
                        8-K
                        
                        01-20-05
                        
                        10.0110.04
                        
                        1996
      Stock Option Plan
                        
                        
                        
                        S-8
                        
                        10-02-97
                        
                        28B10.05
                        
                        2006
      Stock Plan
                        
                        
                        
                        10-Q
                        
                        11-13-06
                        
                        10.01(a)
                        
                        Form
      of stock option grant letter
                        
                        
                        
                        8-K
                        
                        12-06-06
                        
                        10.0110.06
                        
                        Purchase
      Agreement dated March 25, 1999 for business and assets subject to certain
      liabilities of Universal Supply Group, Inc.
                        
                        
                        
                        10-KSB
                        
                        03-30-99
                        
                        10(g)(a)
                        
                        Amendment
      Number 1 dated June 25, 1999 to Purchase Agreement dated March 25,
      1999
                        
                        
                        
                        8-K
                        
                        07-09-99
                        
                        10(a)(ii)(b)
                        
                        Loan
      and Security Agreement dated June 24, 1999 between LaSalle Bank National
      Association and Universal Supply Group, Inc.
                        
                        
                        
                        8-K
                        
                        07-09-99
                        
                        10(a)(iv)(c)
                        
                        Demand
      Note dated June 24, 1999 between LaSalle Bank National Association and
      Colonial Commercial Sub Corp.
                        
                        
                        
                        8-K
                        
                        07-09-99
                        
                        10(a)(v)(d)
                        
                        Guaranty
      of All Liabilities and Security Agreement of Colonial Commercial Sub Corp.
      by Colonial Commercial Corp. to LaSalle Bank National Association dated
      June 24, 1999
                        
                        
                        
                        8-K
                        
                        07-09-99
                        
                        10(a)(vi)(e)
                        
                        Waiver
      and Tenth Amendment dated November 21, 2002 to the Loan and Security
      Agreement dated June 24, 1999 between LaSalle Bank National Association
      and Universal Supply Group, Inc.
                        
                        
                        
                        10-K
                        
                        11-18-03
                        
                        10(e)(vi)
  30
 Table of Contents
 
 (f)
                  
                  Securities
      Pledge Agreement dated November 21, 2002 made by the Registrant in favor
      of LaSalle Bank National Association, re: Universal Supply Group,
      Inc.
                  
                  
                  
                  10-K
                  
                  11-18-03
                  
                  (10)(e)(vii)10.07
                  
                  Certain
      documents related to refinance with Wells Fargo Business Credit, Inc. of
      asset based loan and term loan dated July 28, 2004, previously with
      LaSalle Bank National Association:(a)
                  
                  Credit
      Security Agreement dated July 28, 2004 between American/Universal Supply,
      Inc., The RAL Supply Group, Inc. and Universal Supply Group, Inc. to Wells
      Fargo Business Credit, Inc.
                  
                  
                  
                  10-Q
                  
                  08-16-04
                  
                  10.1(b)
                  
                  First
      Amendment to the Credit Security Agreement dated May 11,
    2006
                  
                  
                  
                  8-K
                  
                  06-27-06
                  
                  10.02(c)
                  
                  Second
      Amendment to the Credit Security Agreement dated September 10,
      2007
                  
                  
                  
                  8-K
                  
                  09-14-07
                  
                  10.0810.08
                  
                  Certain
      documents related to Well-Bilt Steel Products, Inc.:(a)
                  
                  Reaffirmation
      Agreement, General Release Consent and Acknowledgement of Commercial
      Reasonableness of Private Sale dated February 1, 2001between Atlantic
      Hardware & Supply Corporation, Universal Supply Group, Inc., Colonial
      Commercial Corp., and the Secured Lender
                  
                  
                  
                  8-K
                  
                  02-16-01
                  
                  10(a)(i)(b)
                  
                  Reaffirmation
      Agreement, General Release Consent and Acknowledgement of Commercial
      Reasonableness of Private Sale dated February 1, 2001between Well-Bilt
      Steel Products, Inc. and the Secured Lender
                  
                  
                  
                  8-K
                  
                  02-16-01
                  
                  10(a)(ii)(c)
                  
                  Foreclosure
      Agreement dated February 1, 2001 between Independent Steel Products, LLC,
      the Secured Lender, Atlantic Hardware & Supply Corporation, Universal
      Supply group, Inc. and Well-Bilt Steel Products, Inc.
                  
                  
                  
                  8-K
                  
                  02-16-01
                  
                  10(a)(iii)(d)
                  
                  Bill
      of Sale and Assignment dated February 1, 2001 made by the Secured Lender
      in favor of Independent Steel Products, LLC
                  
                  
                  
                  8-K
                  
                  02-16-01
                  
                  10(a)(iv)10.09
                  
                  Inventory
      Control Agreement re: Universal Supply Group, Inc. taking in inventory on
      a consignment basis dated August 9, 2001 between Douglas-Guardian Services
      Corporation, Universal Supply Group, Inc. and GMC Sales
    corp.
                  
                  
                  
                  10-K
                  
                  11-18-03
                  
                  10(g)10.10
                  
                  Agreement
      of Purchase of Sale of Assets dated July 1, 2002 between Goldman
      Associates of New York, Inc. and Universal Supply Group,
    Inc.
                  
                  
                  
                  10-K
                  
                  11-18-03
                  
                  10(h)
  31
 Table of Contents
 
 10.11
                  
                  Private
      Placement Purchase Agreement dated June 30, 2003 by and among Colonial
      Commercial Corp. and the persons who are counterparts to the Agreement as
      “Investors”
                  
                  
                  
                  10-K
                  
                  03-30-06
                  
                  10.1010.12
                  
                  Private
      Placement Purchase Agreement dated February 12, 2004 by and among Colonial
      Commercial Corp. and the persons who are counterparts to the Agreement as
      “Investors”
                  
                  
                  
                  10-K
                  
                  03-30-06
                  
                  10.1110.13
                  
                  Private
      Placement Purchase Agreement dated July 29, 2004 by and among Colonial
      Commercial Corp, and the persons who are counterparts to the Agreement as
      “Investors” including:(a)
                  
                  Private
      Placement Purchase Agreement
                  
                  
                  
                  10-Q
                  
                  08-16-04
                  
                  4.1(b)
                  
                  Convertible
      Note Payable
                  
                  
                  
                  10-Q
                  
                  08-16-04
                  
                  4.2(c)
                  
                  Amendment
      No. 1 dated March 27, 2008 to the Convertible Note Payable dated as of
      July 29, 2004 by and among Colonial Commercial Corp. and Rita
      Folger
                  
                  
                  
                  10-K
                  
                  03-31-08
                  
                  10.13(c)(d)
                  
                  Amendment
      No. 1 dated March 27, 2008 to the Convertible Note Payable dated as of
      July 29, 2004 by and among Colonial Commercial Corp. and William
      Pagano
                  
                  
                  
                  10-K
                  
                  03-31-08
                  
                  10.13(d)(e)
                  
                  Amendment
      No. 2 dated February 12, 2009 to the Convertible Note Payable dated as of
      July 29, 2004 by and between Colonial Commercial Corp. and Rita
      Folger
                  
                  
                  
                  8-K
                  
                  02-13-09
                  
                  10.06(f)
                  
                  Amendment
      No. 2 dated February 12, 2009 to the Convertible Note Payable dated as of
      July 29, 2004 by and between Colonial Commercial Corp. and William
      Pagano
                  
                  
                  
                  8-K
                  
                  02-13-09
                  
                  10.0910.14
                  
                  Private
      Placement Purchase Agreement dated July 29, 2004 by and among Michael
      Goldman and Goldman Associates of New York, Inc.
including:
                  
                  
                  
                  10-Q
                  
                  08-16-04
                  
                  4.3(a)
                  
                  Private
      Placement Agreement
                  
                  
                  
                  10-Q
                  
                  08-16-04
                  
                  4.4(b)
                  
                  Secured
      Note
                  
                  
                  
                  10-Q
                  
                  08-16-04
                  
                  4.5(c)
                  
                  Warrant
                  
                  
                  
                  10-Q
                  
                  08-16-04
                  
                  4.6(d)
                  
                  Amendment
      No. 1 dated March 27, 2008 to the Secured Note Payable dated as of July
      29, 2004 by and among Colonial Commercial Corp. and Goldman Associates of
      New York, Inc.
                  
                  
                  
                  10-K
                  
                  03-31-08
                  
                  10.14(d)(e)
                  
                  Amendment
      No. 2 dated February 12, 2009 to the Secured Note Payable dated as of July
      29, 2004 by and between Colonial Commercial Corp. and Goldman Associates
      of New York, Inc.
                  
                  
                  
                  8-K
                  
                  02-13-09
                  
                  10.0310.15
                  
                  Asset
      Purchase Agreement dated September 5, 2003 for the purchase of certain
      assets, subject to certain liabilities of The RAL Supply Group, Inc., by
      RAL Purchasing Corp., a wholly-owned subsidiary of Colonial Commercial
      Corp.
                  
                  
                  
                  8-K
                  
                  10-15-03
                  
                  10(a)(i)
  32
 Table of Contents
 
 10.16
                  
                  RAL
      Closing Statement dated September 30, 2003
                  
                  
                  
                  8-K
                  
                  10-15-03
                  
                  10(a)(ii)10.17
                  
                  Asset
      Purchase Agreement dated September 10, 2007 for the purchase of certain
      assets, subject to certain liabilities of S&A Supply, Inc. by S&A
      Purchasing Corp., a wholly-owned subsidiary of Colonial Commercial
      Corp.
                  
                  
                  
                  8-K
                  
                  09-14-07
                  
                  10.01(a)
                  
                  Form
      of Amendment Number 1 dated March 26, 2008 to Asset Purchase Agreement
      dated September 10, 2007 for the purchase of certain assets, subject to
      certain liabilities of S&A Supply, Inc. by S&A Purchasing Corp., a
      wholly-owned subsidiary of Colonial Commercial Corp.
                  
                  
                  
                  10-K
                  
                  03-31-08
                  
                  10.17(a)10.18
                  
                  Lease
      Agreement by and between Zanzi Realty, Inc. and The RAL Supply Group,
      Inc., dated September 1, 1998
                  
                  
                  
                  8-K
                  
                  11-02-05
                  
                  10.04(a)
                  
                  First
      Modification of Lease Agreement dated September 30, 2003 to Lease
      Agreement by and between Zanzi Realty, Inc. and The RAL Supply Group,
      Inc., dated September 1, 1998
                  
                  
                  
                  8-K
                  
                  11-02-05
                  
                  10.05(b)
                  
                  Second
      Modification of Lease Agreement dated April 12, 2005 to Lease Agreement by
      and between Zanzi Realty, Inc. and The RAL Supply Group, Inc., dated
      September 1, 1998
                  
                  
                  
                  8-K
                  
                  11-02-05
                  
                  10.06(c)
                  
                  Third
      Modification of Lease Agreement dated February 21, 2007 to Lease Agreement
      by and between Zanzi Realty, Inc. and The RAL Supply Group, Inc., dated
      September 1, 1998
                  
                  
                  
                  8-K
                  
                  02-23-07
                  
                  10.04(d)
                  
                  Option
      Agreement by and between Pioneer Realty Holdings, LLC and Colonial
      Commercial Corp., dated as of February 21, 2007.
                  
                  
                  
                  8-K
                  
                  02-23-07
                  
                  10.0510.19
                  
                  Offer
      to Purchase Odd Lot Shares and Letter of Transmittal dated August 16,
      2005
                  
                  
                  
                  8-K
                  
                  08-18-05
                  
                  10.0111.01
                  
                  Statement
      re computation of per share earnings (loss)—Not filed since computations
      are readily apparent from the Consolidated Financial
      Statements14.01
                  
                  Code
      of Ethics
                  
                  
                  
                  10-K
                  
                  04-15-05
                  
                  1421.01
                  
                  Subsidiaries
      of Registrant
                  
                  Yes23.01
                  
                  Consent
      of Registered Independent Public Accounting Firm
                  
                  Yes31.01
                  
                  Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
                  
                  Yes
  33
 Table of Contents
 
 31.02
                  
                  Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
                  
                  Yes32.01
                  
                  Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
                  
                  Yes32.02
                  
                  Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002
                  
                  Yes99.01
                  
                  Affidavit
      dated January 28, 2002 in support of Atlantic Hardware & Supply
      Corporation’s Petition for Relief under Chapter 11 of the U.S. Bankruptcy
      Code
                  
                  
                  
                  10-K
                  
                  11-18-03
                  
                  99.199.02
                  
                  Dismissal
      of Atlantic Hardware & Supply Corporation’s Petition for Relief by the
      U.S. Bankruptcy Court for the Eastern District of New York dated May 18,
      2005
                  
                  
                  
                  10-K
                  
                  03-30-06
                  
                  99.02
  34
 Table of Contents
  COLONIAL COMMERCIAL CORP.
AND SUBSIDIARIES
 
 Index to
Consolidated Financial Statements
  CONTENTSPageReport
      of Independent Registered Public Accounting Firm
                                            F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                                            F-3Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
                                            F-4Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2008
      and 2007
                                            F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
                                            F-6Notes
      to the Consolidated Financial Statements
                                            F-7Schedule
      II – Valuation and Qualifying Accounts
                                            F-30All
      other schedules are omitted because they are not required or the
      information required is given in the consolidated financial statements or
      notes
thereto.
  F-1
 Table of Contents
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Stockholders
 Colonial
Commercial Corp.
 
 We have
audited the accompanying consolidated balance sheets of Colonial Commercial
Corp. and subsidiaries (the "Company") as of December 31, 2008 and 2007 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years then ended.  Our audit also included the
financial statement schedule – Valuation and Qualifying Accounts – listed in the
index at Item 15. These financial statements and schedule are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company's internal control over financial
reporting.  Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Colonial Commercial
Corp. and subsidiaries as of December 31, 2008 and 2007, and the consolidated
results of their operations and their consolidated cash flows for each of the
years then ended in conformity with accounting principles generally accepted in
the United States of America.  Also in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
 
 
 /s/
Eisner LLP
 
 New York,
New York
 March 26,
2009
  F-2
 Table of Contents
 
 PART I. FINANCIAL
      INFORMATIONItem
      1.  Financial StatementsCOLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
      Balance SheetsDecember
      31,
                                  
                                  
                                  December
      31,2008
                                  
                                  
                                  2007AssetsCurrent
      assets:Cash
                                  
                                  $
                                  417,387
                                  
                                  
                                  $
                                  622,723Accounts
      receivable, net of allowance for doubtful accounts of $472,526 in 2008 and
      $478,857 in 2007
                                  
                                  
                                  8,802,631
                                  
                                  
                                  
                                  11,364,038Inventory
                                  
                                  
                                  13,706,594
                                  
                                  
                                  
                                  17,282,661Prepaid
      expenses and other current assets
                                  
                                  
                                  1,090,634
                                  
                                  
                                  
                                  1,107,623Deferred
      tax asset - current portion
                                  
                                  
                                  170,000
                                  
                                  
                                  
                                  532,500Total
      current assets
                                  
                                  
                                  24,187,246
                                  
                                  
                                  
                                  30,909,545Property
      and equipment
                                  
                                  
                                  1,684,932
                                  
                                  
                                  
                                  1,799,689Goodwill
                                  
                                  
                                  1,628,133
                                  
                                  
                                  
                                  1,628,133Other
      intangibles
                                  
                                  
                                  329,485
                                  
                                  
                                  
                                  366,376Other
      assets - noncurrent
                                  
                                  
                                  159,801
                                  
                                  
                                  
                                  227,478Deferred
      tax asset - noncurrent
                                  
                                  
                                  830,000
                                  
                                  
                                  
                                  1,176,000$
                                  28,819,597
                                  
                                  
                                  $
                                  36,107,221Liabilities
      and Stockholders' EquityCurrent
      liabilities:Trade
      payables
                                  
                                  $
                                  7,019,742
                                  
                                  
                                  $
                                  7,774,988Accrued
      liabilities
                                  
                                  
                                  1,467,244
                                  
                                  
                                  
                                  1,970,396Income
      taxes payable
                                  
                                  
                                  558
                                  
                                  
                                  
                                  2,576Borrowings
      under credit facility - revolving credit
                                  
                                  
                                  13,163,864
                                  
                                  
                                  
                                  18,027,055Convertible
      notes payable, includes related party notes of $62,500 in each 2008 and
      2007
                                  
                                  
                                  137,500
                                  
                                  
                                  
                                  137,500Notes
      payable - current portion; includes related party notes of $30,000 in each
      2008 and 2007
                                  
                                  
                                  171,044
                                  
                                  
                                  
                                  158,827Total
      current liabilities
                                  
                                  
                                  21,959,952
                                  
                                  
                                  
                                  28,071,342Convertible
      notes payable, includes related party notes of $200,000 and $262,500 in
      2008 and 2007, respectively
                                  
                                  
                                  200,000
                                  
                                  
                                  
                                  337,500Notes
      payable, excluding current portion; includes related party notes of
      $750,000 in each 2008 and 2007
                                  
                                  
                                  875,246
                                  
                                  
                                  
                                  929,814Total
      liabilities
                                  
                                  
                                  23,035,198
                                  
                                  
                                  
                                  29,338,656Commitments
      and contingenciesStockholders'
      equity:Redeemable
      convertible preferred stock, $.05 par value, 2,500,000 shares authorized,
      447,891and 467,500 shares issued and outstanding in 2008 and 2007,
      respectively, liquidation preference of $2,239,455 and $2,337,500 in 2008
      and 2007, respectively
                                  
                                  
                                  22,395
                                  
                                  
                                  
                                  23,375Common
      stock, $.05 par value, 20,000,000 shares authorized, 4,654,953 and
      4,637,530 shares issued and outstanding in 2008 and 2007,
      respectively
                                  
                                  
                                  232,747
                                  
                                  
                                  
                                  231,876Additional
      paid-in capital
                                  
                                  
                                  10,797,534
                                  
                                  
                                  
                                  10,773,451Accumulated
      deficit
                                  
                                  
                                  (5,268,277
                                  )
                                  
                                  
                                  (4,260,137
                                  )Total
      stockholders' equity
                                  
                                  
                                  5,784,399
                                  
                                  
                                  
                                  6,768,565$
                                  28,819,597
                                  
                                  
                                  $
                                  36,107,221The
      accompanying notes are an integral part of these consolidated financial
      statements.
  F-3
 Table of Contents
 
 COLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
      Statements of OperationsFor
      the Year Ended December 31,2008
                    
                    
                    2007Sales
                    
                    $
                    85,606,514
                    
                    
                    $
                    82,425,865Cost
      of sales
                    
                    
                    60,638,850
                    
                    
                    
                    58,870,973Gross
      profit
                    
                    
                    24,967,664
                    
                    
                    
                    23,554,892Selling,
      general and administrative expenses, net
                    
                    
                    24,387,848
                    
                    
                    
                    22,295,941Operating
      income
                    
                    
                    579,816
                    
                    
                    
                    1,258,951Other
      income
                    
                    
                    281,640
                    
                    
                    
                    297,218Interest
      expense, net; includes related party interest of $72,955 in 2008 and
      $101,770 in 2007
                    
                    
                    (1,153,746
                    )
                    
                    
                    (1,502,319
                    )(Loss)
      income from operations before income tax
                    
                    
                    (292,290
                    )
                    
                    
                    53,850Income
      tax expense
                    
                    
                    715,850
                    
                    
                    
                    105,487Net
      loss
                    
                    $
                    (1,008,140
                    )
                    
                    $
                    (51,637
                    )Loss per
      common share:Basic
      and diluted
                    
                    $
                    (0.22
                    )
                    
                    $
                    (0.01
                    )Weighted
      average shares outstanding:Basic
      and diluted
                    
                    
                    4,649,478
                    
                    
                    
                    4,645,186The
      accompanying notes are an integral part of these consolidated financial
      statements.
  F-4
 Table of Contents
  COLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
      Statements of Stockholders' EquityNumber of sharesRedeemable Convertible Preferred
      Stock
                                        
                                        
                                        Common Stock
                                        
                                        
                                        Redeemable Convertible Preferred
      Stock
                                        
                                        
                                        Common Stock
                                        
                                        
                                        Additional Paid-In
                                          Capital
                                        
                                        
                                        Accumulated Deficit
                                        
                                        
                                        Total Stockholders' EquityBalance at December 31, 2006
                                        
                                        
                                        467,500
                                        
                                        
                                        
                                        4,593,680
                                        
                                        
                                        $
                                        23,375
                                        
                                        
                                        $
                                        229,684
                                        
                                        
                                        $
                                        10,707,791
                                        
                                        
                                        $
                                        (4,208,500
                                        )
                                        
                                        $
                                        6,752,350Net
      Loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (51,637
                                        )
                                        
                                        
                                        (51,637
                                        )Options
      exercised
                                        
                                        
                                        
                                        
                                        
                                        
                                        52,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        2,600
                                        
                                        
                                        
                                        10,400
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        13,000Stock-based
      compensation
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        30,364
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        30,364Repurchase
      of Common Stock
                                        
                                        
                                        
                                        
                                        
                                        
                                        (8,150
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (408
                                        )
                                        
                                        
                                        (9,424
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (9,832
                                        )Tax
      effect of options exercised
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        34,320
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        34,320Balance at December 31, 2007
                                        
                                        
                                        467,500
                                        
                                        
                                        
                                        4,637,530
                                        
                                        
                                        
                                        23,375
                                        
                                        
                                        
                                        231,876
                                        
                                        
                                        
                                        10,773,451
                                        
                                        
                                        
                                        (4,260,137
                                        )
                                        
                                        
                                        6,768,565Net
      Loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (1,008,140
                                        )
                                        
                                        
                                        (1,008,140
                                        )Conversion
      of shares of preferred stock to common stock
                                        
                                        
                                        (17,423
                                        )
                                        
                                        
                                        17,423
                                        
                                        
                                        
                                        (871
                                        )
                                        
                                        
                                        871
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        -Repurchase
      of preferred shares
                                        
                                        
                                        (2,186
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (109
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (2,623
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (2,732
                                        )Stock-based
      compensation
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        26,706
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        26,706Balance at December 31, 2008
                                        
                                        
                                        447,891
                                        
                                        
                                        
                                        4,654,953
                                        
                                        
                                        $
                                        22,395
                                        
                                        
                                        $
                                        232,747
                                        
                                        
                                        $
                                        10,797,534
                                        
                                        
                                        $
                                        (5,268,277
                                        )
                                        
                                        $
                                        5,784,399The
      accompanying notes are an integral part of these consolidated financial
      statements.
 F-5
 Table of Contents
  COLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
      Statements of Cash FlowsFor
      The Year Ended2008
                        
                        
                        2007Cash
      flows from operating activities:Net
      loss
                        
                        $
                        (1,008,140
                        )
                        
                        $
                        (51,637
                        )Adjustments
      to reconcile net (loss) to net cash provided by operating
      activities:Deferred
      tax
                        
                        
                        708,500
                        
                        
                        
                        -Stock-based
      compensation
                        
                        
                        26,706
                        
                        
                        
                        30,364Provision
      for doubtful accounts
                        
                        
                        736,084
                        
                        
                        
                        652,468Depreciation
                        
                        
                        634,788
                        
                        
                        
                        554,076Amortization
      of intangibles
                        
                        
                        36,891
                        
                        
                        
                        11,954Accretion
      of debt discount
                        
                        
                        57,692
                        
                        
                        
                        39,183Tax
      effect of options exercised
                        
                        
                        
                        
                        
                        
                        34,320Changes
      in operating assets and liabilitiesAccounts
      receivable
                        
                        
                        1,825,323
                        
                        
                        
                        (1,426,013
                        )Inventory
                        
                        
                        3,576,067
                        
                        
                        
                        (821,110
                        )Prepaid
      expenses and other current assets
                        
                        
                        16,989
                        
                        
                        
                        (34,833
                        )Other
      assets - noncurrent
                        
                        
                        67,677
                        
                        
                        
                        (25,301
                        )Trade
      payables
                        
                        
                        (755,246
                        )
                        
                        
                        2,108,151Accrued
      liabilities
                        
                        
                        (503,152
                        )
                        
                        
                        (23,663
                        )Income
      taxes payable
                        
                        
                        (2,018
                        )
                        
                        
                        946Net
      cash provided by operating activities
                        
                        
                        5,418,161
                        
                        
                        
                        1,048,905Cash
      flows from investing activities:Acquisition
      of S&A Supply Inc.
                        
                        
                        
                        
                        
                        
                        (4,703,375
                        )Additions
      to property and equipment
                        
                        
                        (520,031
                        )
                        
                        
                        (451,095
                        )Net
      cash used in investing activities
                        
                        
                        (520,031
                        )
                        
                        
                        (5,154,470
                        )Cash
      flows from financing activities:Issuance
      of common stock and exercise of stock options
                        
                        
                        -
                        
                        
                        
                        13,000Repurchase
      of preferred stock
                        
                        
                        (2,732
                        )
                        
                        
                        -Repurchase
      of common stock
                        
                        
                        
                        
                        
                        
                        (9,832
                        )Repayments
      of notes payable: includes related party repayments of $92,500 and $30,000
      in 2008 and 2007, respectively
                        
                        
                        (296,630
                        )
                        
                        
                        (215,242
                        )Proceeds
      from notes payable
                        
                        
                        59,087
                        
                        
                        
                        46,752(Repayments)
      borrowings under credit facility - revolving credit, net
                        
                        
                        (4,863,191
                        )
                        
                        
                        4,411,359Net
      cash (used in) provided by financing activities
                        
                        
                        (5,103,466
                        )
                        
                        
                        4,246,037(Decrease)
      increase in cash
                        
                        
                        (205,336
                        )
                        
                        
                        140,472Cash
      - beginning of period
                        
                        
                        622,723
                        
                        
                        
                        482,251Cash
      - end of period
                        
                        $
                        417,387
                        
                        
                        $
                        622,723The
      accompanying notes are an integral part of these consolidated financial
      statements.
  F-6
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
 
 1.
Summary of Significant
Accounting Policies and Practices
 
 (a) Description of
Business
 
 Colonial Commercial Corp. (“Colonial”),
through its operating subsidiaries, Universal Supply Group, Inc. (“Universal”),
The RAL Supply Group, Inc. (“RAL”), and S&A Supply, Inc. (“S&A”)
(together, the “Company”), is a distributor of heating, ventilation and air
conditioning (HVAC), climate control products, plumbing and electrical fixtures
and supplies and appliances to building contractors and other users, which the
Company considers its only operating segment.  The Company’s products
are marketed primarily to HVAC, plumbing and electrical contractors, who, in
turn, sell such products to residential and commercial/industrial
customers.  The Company’s customers are located in the United States,
primarily New Jersey, New York, Massachusetts and portions of eastern
Pennsylvania, Connecticut and Vermont.  The Company has no long term
agreement with any customer.  The Company deals with its customers on
a purchase order by purchase order basis.  The Company has no material
long term agreements with any supplier.  The Company enters into
agreements with vendors which involve volume rebates, pricing and advertising,
all within the standard practices of the industry.  Additionally,
certain supplier agreements limit the sale of competitive products in designated
markets that the Company serves.  All purchases are made with domestic
vendors, some of which, however, may manufacture products in foreign
locations.
 
 (b) Principles of
Consolidation
 
 The consolidated financial statements
include the accounts of Colonial and its wholly-owned
subsidiaries.  All significant intercompany balances and transactions
have been eliminated in consolidation.
 
 (c)  Revenue
Recognition
 
 Revenue is recognized when the earnings
process is complete, which is generally upon shipment or delivery of products,
and the price is determined and collectability is reasonably assured, in
accordance with agreed-upon shipping terms and when title and risk of loss
transfers to the customer.  The Company has no further obligations
subsequent to shipment or delivery.  Customers have the right to
return defective products, which are substantially covered under the
manufacturer’s warranty.  The customer receives a credit from the
Company for defective products returned and the Company receives a corresponding
credit provided by the manufacturer.  The only warranty provided on
products sold is the one provided by the manufacturer.
 
 (d) Cash
Equivalents
 
 The Company considers all highly liquid
investment instruments with an original maturity of three months or less to be
cash equivalents.  There were no cash equivalents at December 31, 2008
and 2007.
  F-7
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 (e) Accounts Receivable
 
 Accounts receivable consist of trade
receivables recorded at original invoice amount, less an estimated allowance for
uncollectible accounts. Trade credit is generally extended on a short-term
basis; thus trade receivables generally do not bear interest. However, a service
charge may be applied to receivables that are past due. These charges, when
collected,are included as other income.  Trade receivables are
periodically evaluated for collectibility based on past credit history with
customers and their current financial condition. Changes in the estimated
collectibility of trade receivables are recorded in the results of operations
for the period in which the estimate is revised. Trade receivables that are
deemed uncollectible are offset against the allowance for uncollectible
accounts. The Company generally does not require collateral for trade
receivables.
 
 (f) Inventory
 
 Inventory is stated at the lower of
cost or market and consists solely of finished goods.  Cost is
determined using the first-in, first-out method.
 
 Distribution costs of incoming
freight, purchasing, receiving, inspection, warehousing and handling costs are
included in selling, general and administrative expenses.  Such costs
were $545,509 and $545,985 for the years ended December 31, 2008 and 2007,
respectively.
 
 The Company’s reserve for slow-moving
and obsolete inventory at December 31, 2008 amounted to $403,000, a decrease of
$29,000 during the year ended December 31, 2008.
 
 (g) Vendor
Rebates
 
 The Company has arrangements with
several vendors that provide rebates to be payable to the Company when the
Company achieves any of a number of measures, generally related to the volume
level of purchases.  The Company accounts for such rebates as a
reduction of inventory until the sale of the product.  Rebates under
arrangements with vendors that require a specified cumulative level of purchases
are recognized by the Company based on progress toward achieving such levels,
provided the rebates are probable and estimable.
 
 (h) Property and
Equipment
 
 Property and equipment are stated at
cost.  Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets as follows:
 
 Computer
      hardware and software
                          
                          3-5
      yearsFurniture
      and fixtures
                          
                          5
      yearsAutomobiles
                          
                          3-5
      yearsShowroom
      fixtures and displays
                          
                          3
      years
 
 Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful life of the
asset.
  F-8
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 (i) Goodwill and Other
Intangible Assets
 
 Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," requires that
goodwill be tested for impairment at least annually to determine if the carrying
value of the recorded goodwill is impaired.  Goodwill is recorded when
the purchase price paid for an acquisition exceeds the estimated fair value of
the net identified tangible and intangible assets acquired.  The
impairment review process compares the fair value of the reporting unit in which
goodwill resides to its carrying value.  If the fair value of the
reporting unit is less that its carrying value, an impairment loss is recorded
to the extent that the implied fair value of goodwill, as defined under SFAS No.
142, within the reporting unit is less than its carrying
value.  Intangible assets determined to have finite lives are
amortized over their remaining useful lives.  The Company has
determined Universal, RAL and S&A are reporting units.
 
 (j) Stock
Options
 
 The Company recognizes equity based
compensation expense in accordance with SFAS No. 123(R), “Share-Based Payment”,
which established standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires an entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the award.
 
 (k)  Net Loss Per Common
Share
 
 Basic income per share excludes any
dilution.  It is based upon the weighted average number of common
shares outstanding during the period.  Dilutive earnings per share
reflect the potential dilution that would occur if securities or other contracts
to issue common stock were exercised or converted into common
stock.
 
 (l)  Income
Taxes
 
 Income taxes are accounted for under
the asset and liability method.  Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax credit
carryforwards.  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 deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
 
 The Company records a valuation
allowance against any portion of the deferred income tax asset when it believes,
based on the weight of available evidence, it is more likely than not that some
portion of the deferred tax asset will not be realized.
 
 In June 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation FASB No. 109 (“FIN 48”), which prescribes
accounting for and disclosure of uncertainty in tax positions.  This
interpretation defines the criteria that must be met for the benefits of a tax
position to be recognized in the financial statements and the measurement of tax
benefits recognized.
  F-9
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 The Company adopted the provisions of
FIN 48 on January 1, 2007.  Under FIN 48, tax positions must meet
a “more-likely-than-not” recognition threshold at the effective date to be
recognized upon the adoption of FIN 48 and in subsequent periods.  The
adoption of FIN 48 had no impact on the Company’s consolidated financial
position and did not result in unrecognized tax benefits being
recorded.  Accordingly, no corresponding interest and penalties have
been accrued.  When an accrual for interest and penalties is required,
interest and penalties will be recognized in tax expense.  The Company
files income tax returns in the U.S. federal jurisdiction and various states.
There are currently no federal or state income tax examinations underway for
these jurisdictions.  The Company is no longer subject to U.S. federal
income tax examinations by the Internal Revenue Service and state and local tax
authorities for tax years before 2003.  The Company does, however,
have prior year net operating losses dating back to 2000, which remain open for
examination.
 
 (m) Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of
 
 Long-lived assets, such as intangible
assets, furniture, equipment and leasehold improvements, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through estimated undiscounted
future cash flows from the use of these assets.  When any such
impairment exists, the related assets will be written down to fair
value.
 
 (n) Use of
Estimates
 
 The preparation of the financial
statements in accordance with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.  Significant estimates include valuation reserves for accounts
receivable, inventory, income taxes, valuation of goodwill and the impairment of
long lived assets.  Actual results could differ from those
estimates.
 
 (o)  Recent Issued Accounting
Pronouncements
 
 In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements,
(“SFAS 157”).  This Standard defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements.  SFAS 157, as
originally issued, was effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years.  However, on February 12, 2008, the FASB issued Staff Position
No. SFAS 157-2 which deferred the effective date of SFAS 157 for one year, as it
relates to nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed in financial statements at fair value on a
recurring basis (at least annually). The provisions of SFAS 157 as they relate
to financial assets and liabilities were effective for us beginning January 1,
2008. The adoption of SFAS 157 on January 1, 2008 did not have a material impact
on the Company’s financial position, results of operations or cash
flows. The Company is currently evaluating the potential impact of SFAS 157
on its nonfinancial assets and liabilities on our consolidated financial
statements.
  F-10
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 In February 2007, the FASB issued
Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities, (“FASB 159”).  This standard
permits an entity to choose to measure many financial instruments and certain
other items at fair value.  The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
with having to apply complex accounting provisions.  SFAS 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007.  The adoption of SFAS 159 on January 1, 2008 did
not have a material impact on the Company’s financial position.
 
 In December 2007, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 110, Use of a Simplified Method in
Developing Expected Term of Share Options (“SAB 110”).  SAB 110
expresses the current view of the staff that it will accept a company’s election
to use the simplified method discussed in Staff Accounting Bulletin 107, Share Based Payment, (“SAB
107”), for estimating the expected term of “plain vanilla” share options
regardless of whether the company has sufficient information to make more
refined estimates.  SAB 110 became effective for the Company on
January 1, 2008.  The adoption of SAB 110 on January 1, 2008 did not
have a material impact on the Company’s financial position.
 
 In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, (“FASB
141R”).  This standard requires that entities recognize the assets
acquired, liabilities assumed, contractual contingencies and contingent
consideration measured at their fair value at the acquisition date for any
business combination consummated after the effective date.  It further
requires that acquisition-related costs are to be recognized separately from the
acquisition and expensed as incurred.  FASB 141R is effective for
fiscal years beginning after December 15, 2008.  FASB 141R will be
applied prospectively for acquisitions beginning in 2009 and
thereafter.
 
 In December 2007, the FASB issued SFAS
No. 160, Noncontrolling
Interests in Consolidated Financial Statements–an amendment of ARB No.
51.  SFAS No. 160 requires that the ownership interests in subsidiaries
held by parties other than the parent be clearly identified, labeled, and
presented in the consolidated statement of financial position within equity, in
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest on the face of the consolidated statement of income, and
that entities provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners.  SFAS No. 160 is effective for fiscal years,
beginning on or after December 15, 2008 and cannot be applied earlier.  The
adoption of SFAS No. 160 is not expected to have a material impact on the
Company’s financial position.
 
 In April 2008, the FASB issued Staff
Position No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142,Goodwill and
Other Intangible Assets(“SFAS 142”). The intent of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141(R) and other applicable accounting literature.
FSP FAS 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of FSP FAS 142-3 is not expected to have a material impact on
the Company’s financial position.
  F-11
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 In May 2008, the FASB issued SFAS
No. 162, The Hierarchy of
Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162
identifies the sources of accounting principles and provides entities with a
framework for selecting the principles used in preparation of financial
statements that are presented in conformity with GAAP. The current GAAP
hierarchy has been criticized because it is directed to the auditor rather than
the entity, it is complex, and it ranks FASB Statements of Financial Accounting
Concepts, which are subject to the same level of due process as FASB Statements
of Financial Accounting Standards, below industry practices that are widely
recognized as generally accepted but that are not subject to due process. The
Board believes the GAAP hierarchy should be directed to entities because it is
the entity (not its auditors) that is responsible for selecting accounting
principles for financial statements that are presented in conformity with GAAP.
The adoption of SFAS 162 is not expected to have a material impact on the
Company’s financial position.
 
 2.
Business
Acquisitions
 
 S&A
Acquisition
 
 On September 10, 2007, the Company,
through a wholly owned subsidiary, purchased from S&A Supply, Inc., a
Massachusetts corporation, (“S&A Supply”) and affiliates of S&A Supply,
all of their tangible and intangible assets, including accounts receivable,
inventory, fixed assets, but excluding certain accounts receivable and other
specifically excluded assets, and assumed certain liabilities, including trade
accounts payable and motor vehicle loans.  S&A Supply is a
distributor of heating, electrical, and plumbing supplies in the western
Massachusetts area.
 
 This acquisition is being operated as a
wholly owned subsidiary of the Company and under the name of S&A Supply,
Inc.  The acquisition expands our geographic trading area and adds
electrical equipment and supplies to our product offerings.
 
 In connection with the acquisition, the
Company entered into three 5-year lease agreements for two locations in Great
Barrington, Massachusetts and one location in Pittsfield, Massachusetts for
aggregate annual rentals of $180,000, plus real estate taxes and
maintenance.  The Company also assumed a month-to-month tenancy with a
non-related party for a location in North Adams, Massachusetts. On April 4,
2008, the Company closed its North Adams, Massachusetts location of
S&A.
 
 The Company also entered into
employment agreements with Brian Mead and Adam Mead, minority shareholders of
S&A Supply and its affiliates, and a consulting agreement with Nancy Mead,
the majority shareholder of S&A Supply and its affiliates for an annual
aggregate commitment of approximately $170,000 for salary, automotive expenses
and other benefits, plus additional incentives if certain levels of
profitability are achieved.  Said agreements expire on December 31,
2010.
 
 The acquisition was accounted for using
the purchase method of accounting and was financed out of the Company’s credit
facility.  The Company’s financials statements for the year ended
December 31, 2007 include the activity of S&A Supply from September 10, 2007
through December 31, 2007.  The purchase price is equal to the book
value of the assets on the date of acquisition, plus $315,000, less the book
value of the assumed liabilities on the date of acquisition.
 
 Based on a third party valuation, the
purchase price, including acquisition costs, resulted in the recognition of
$373,000 of other intangible assets. The weighted average amortization period at
the date of acquisition was approximately twelve years.
  F-12
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 The fair values of the assets acquired
and liabilities assumed for the acquisition are as follows:
 
 Inventory
                                                        
                                                        $
                                                        3,610,000Accounts
      receivable
                                                        
                                                        
                                                        1,520,000Other
      current assets
                                                        
                                                        
                                                        36,000Property
      and equipment, net
                                                        
                                                        
                                                        390,000Customer
      List
                                                        
                                                        
                                                        290,000Trade
      Name
                                                        
                                                        
                                                        73,000Covenant
      not to compete
                                                        
                                                        
                                                        10,000Total
      tangible and intangible assets acquired
                                                        
                                                        
                                                        5,929,000Less
      liabilities assumed:Current
      liabilities
                                                        
                                                        
                                                        1,100,000Long-term
      liabilities
                                                        
                                                        
                                                        125,000Total
      liabilities
                                                        
                                                        
                                                        1,225,000Net
      Assets Acquired
                                                        
                                                        $
                                                        4,704,000
 
 Presented below are the unaudited pro
forma financial results prepared under the assumption that the S&A Supply
acquisition had been completed at the beginning of the period
presented:
  Pro Forma Condensed Consolidated Operating
      Data(Unaudited)For the Year EndedDecember
      31,2007Net
      Sales
                                                    
                                                    $
                                                    91,753,435Operating
      income
                                                    
                                                    
                                                    970,451Net
      loss
                                                    
                                                    $
                                                    (559,972
                                                    )Loss
      per common share:Basic
      and diluted:
                                                    
                                                    $
                                                    (0.12
                                                    )
  F-13
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 3.
Property and
Equipment
 
 Property and equipment consists of the
following at December 31:
 
 2008
                      
                      
                      2007Computer
      hardware and software
                      
                      $
                      1,315,149
                      
                      
                      $
                      1,259,181Furniture
      and fixtures
                      
                      
                      184,026
                      
                      
                      
                      177,077Leasehold
      improvements
                      
                      
                      1,595,212
                      
                      
                      
                      1,552,898Showroom
      fixtures and displays
                      
                      
                      362,720
                      
                      
                      
                      29,958Automobiles
                      
                      
                      967,373
                      
                      
                      
                      950,8144,424,480
                      
                      
                      
                      3,969,928Less
      accumulated depreciation and amortization
                      
                      
                      (2,739,548
                      )
                      
                      
                      (2,170,239
                      )$
                      1,684,932
                      
                      
                      $
                      1,799,689
 
 Depreciation expense amounted to
$634,788 and $554,076 for the years ended December 31, 2008 and 2007,
respectively.
 
 4.
Other Intangible
Assets
 
 The Company has certain identifiable
intangible assets that are subject to amortization.  Intangible assets
are included in “Other intangibles” in the consolidated balance sheets. The
components of intangible assets are as follows:
 
 December 31, 2008
                                                          
                                                          
                                                          December 31, 2007EstimatedGross
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          Net
                                                          
                                                          
                                                          Gross
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          Net
                                                          
                                                          
                                                          UsefulCarrying
                                                          
                                                          
                                                          Accumulated
                                                          
                                                          
                                                          Carrying
                                                          
                                                          
                                                          Carrying
                                                          
                                                          
                                                          Accumulated
                                                          
                                                          
                                                          Carrying
                                                          
                                                          
                                                          LifeAmount
                                                          
                                                          
                                                          Amortization
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          Amortization
                                                          
                                                          
                                                          Amount
                                                          
                                                          
                                                          (Years)Covenants
      Not to Compete
                                                          
                                                          $
                                                          251,667
                                                          
                                                          
                                                          $
                                                          (245,833
                                                          )
                                                          
                                                          $
                                                          5,834
                                                          
                                                          
                                                          $
                                                          251,667
                                                          
                                                          
                                                          $
                                                          (241,000
                                                          )
                                                          
                                                          $
                                                          10,667
                                                          
                                                          
                                                          
                                                          3-5Customer
      List
                                                          
                                                          $
                                                          291,864
                                                          
                                                          
                                                          $
                                                          (36,608
                                                          )
                                                          
                                                          $
                                                          255,256
                                                          
                                                          
                                                          $
                                                          291,864
                                                          
                                                          
                                                          $
                                                          (8,209
                                                          )
                                                          
                                                          $
                                                          283,655
                                                          
                                                          
                                                          
                                                          10Trade
      Name
                                                          
                                                          $
                                                          72,966
                                                          
                                                          
                                                          $
                                                          (4,571
                                                          )
                                                          
                                                          $
                                                          68,395
                                                          
                                                          
                                                          $
                                                          72,966
                                                          
                                                          
                                                          $
                                                          (912
                                                          )
                                                          
                                                          $
                                                          72,054
                                                          
                                                          
                                                          
                                                          20Total
                                                          
                                                          $
                                                          616,497
                                                          
                                                          
                                                          $
                                                          (287,012
                                                          )
                                                          
                                                          $
                                                          329,485
                                                          
                                                          
                                                          $
                                                          616,497
                                                          
                                                          
                                                          $
                                                          (250,121
                                                          )
                                                          
                                                          $
                                                          366,376
 
 Amortization expense amounted to
$36,891 and $11,954 for the years ended December 31, 2008 and 2007,
respectively.
 
 Estimated Amortization
Expense:
 
 For
      the Years Ended December 31,2009
                      
                      $
                      36,3372010
                      
                      
                      35,5042011
                      
                      
                      33,0042012
                      
                      
                      33,0042013
                      
                      
                      33,004Thereafter
                      
                      
                      158,632$
                      329,485
  F-14
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 5.
Financing
Arrangements
 
 In connection with the acquisition of
S&A Supply, Inc., the Company amended its secured credit facility
(“Agreement”) with Wells Fargo Bank, National Association (“Wells”) to increase
the Company’s facility from $15 million to $25 million and extended the term of
the facility from August 1, 2010 to August 1, 2012.  The $25 million
facility includes a $1 million structural sublimit, as defined in the Agreement,
payable in 24 equal monthly installments, and up to $500,000 of seasonal
over-advances.  Borrowings under the credit facility are secured by
substantially all the assets of the Company, as defined in the
Agreement.  Availability under the revolving credit line was
$1,470,921 as of December 31, 2008 and is determined by a percentage of
available assets as defined in the Agreement, less reserves.
 
 The initial interest rate on the term
loan is prime minus 0.25%, but the interest rate on up to 75% of the loan’s
outstanding balance can be converted by the Company to 21⁄2% over
LIBOR.  The revolving credit line bears interest at .25% below
prime.  Reserves, determined by the bank, reduce the availability of
the credit facility by $164,000.  The balance outstanding under the
revolving line of credit was $13,163,864 as of December 31, 2008.  The
interest rate on the revolving credit facility as of December 31, 2008 was
3.0%.
 
 The
Company believes that the credit facility is sufficient to finance its current
operating needs.  However, the business of the Company would be materially
and adversely affected if the bank demands payment of the loan and the Company
is unable to refinance the loan.  In the event that Mr. Pagano no
longer performs the duties of the President of Universal or the Vice President
of RAL for any reason other than death or disability, the Company will be
considered in default of its credit agreement with Wells Fargo Bank, National
Association unless a waiver is obtained.  The facility contains
covenants that are determined annually and relate to the Company’s monthly and
quarterly net income, quarterly cash flows, quarterly tangible net worth, and
annual capital expenditures.  The facility also restricts the payment
of dividends, subordinated debt and purchase of securities.  The
continuation of the credit facility is conditioned upon the Company and Wells
reaching agreement on the covenants.  While the Company and Wells have
reached mutually agreeable covenants in the past, there is no assurance that
they will be able to do so in the future.  As of December 31, 2008,
the Company was in compliance with all of its financial loan
covenants.
  F-15
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 6.
Notes
Payable
 
 Notes
payable consist of the following at December 31:
 
 2008
                                        
                                        
                                        2007Various
      term notes payable: (collateralized by the book value of equipment, the
      purchase of which such notes financed) with aggregate monthly principal
      and interest installments of $9,254 and $13,043 for 2008 and 2007,
      respectively, bearing interest between 0% to 6.9%
                                        
                                        $
                                        236,290
                                        
                                        
                                        $
                                        336,333Subordinated
      term note payable: $30,000 annual principal payment, interest at 9%
      payable monthly. The note was due on December 31, 2008 and deferred to on
      or about March 31, 2009.*
                                        
                                        
                                        30,000
                                        
                                        
                                        
                                        30,000Subordinated
      term note payable to an investment company: $30,000 annual principal
      payments, interest at 9% payable monthly. The note was due on December 31,
      2008 and deferred to on or about March 31, 2009.
                                        
                                        
                                        30,000
                                        
                                        
                                        
                                        30,000Term
      notes payable to private investors: subordinated unsecured convertible
      notes payable, bearing interest at 11% per annum, interest payable
      quarterly, with 50% of the principal payable on June 1, 2008 and the
      balance on June 1, 2009.  The notes are convertible into 45,833
      shares in 2008 and 91,666 shares in 2007 of common stock at $3.00 per
      share during the term of the notes.**
                                        
                                        
                                        137,500
                                        
                                        
                                        
                                        275,000Term
      notes payable to private investors: subordinated unsecured convertible
      notes payable, bearing interest at 11% per annum, interest payable
      quarterly, with the principal payable on January 1, 2010.  The
      notes are convertible into 66,667 shares of common stock at $3.00 per
      share during the term of the notes.***
                                        
                                        
                                        200,000
                                        
                                        
                                        
                                        200,000Term
      note of $750,000 payable to a corporation: subordinated secured note
      payable, bearing interest at the prime rate and payable quarterly,
      principal payable on January 1, 2010 and warrants to purchase 150,000
      shares of common stock at $3.00 per share that expired December 31, 2008.
      The warrant was initially recorded at a fair value of $187,500 and
      recorded as a discount from the face value of the note and an increase to
      additional paid in capital. The discount is being accreted over the term
      of the note as additional interest expense. The Company recorded $57,692
      and $39,183 in interest expense during 2008 and 2007, respectively,
      related to the warrant.****
                                        
                                        
                                        750,000
                                        
                                        
                                        
                                        692,3081,383,790
                                        
                                        
                                        
                                        1,563,641Less
      current installments
                                        
                                        
                                        (308,544
                                        )
                                        
                                        
                                        (296,327
                                        )$
                                        1,075,246
                                        
                                        
                                        $
                                        1,267,314
 
 *The term
note payable bearing interest at 9% is to Paul Hildebrandt, who is a related
party.
 
 **Included
in the above term note payable bearing interest at 11%, are three notes
considered to be related party transactions; $25,000 in 2008 and $50,000 in 2007
term note payable to William Salek, Chief Financial Officer and Secretary of the
Company, $12,500 in 2008 and $25,000 in 2007 term note payable to the wife of
Michael Goldman and $25,000 in 2008 and $50,000 in 2007 term note payable to
Paul Hildebrandt.
  F-16
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 ***Included
in the above term note payable bearing interest at 11%, are two notes considered
to be related party transactions; $100,000 term note payable to William Pagano,
President of Universal and Director of the Company, and $100,000 term note
payable to Rita Folger, beneficial owner of greater than 5% of the Company. On
February 12, 2009, the Company amended the Convertible Notes dated as of July
29, 2004, as amended by Amendment 1 dated March 27, 2008, payable to each Rita
Folger and William Pagano (“Amended Convertible Notes”).  The Amended
Convertible Notes provide for (i) the first maturity date and the final maturity
date of each note to be extended to January 1, 2010 so that the entire principal
amount of each note is due and payable on January 1, 2010, and (ii) a decrease
in the interest rate from and after January 1, 2009 to the prime rate in effect
from time to time plus 2%.
 
 ****The
term note payable bearing interest at prime rate is to Goldman Associates of New
York, Inc., (“Goldman Associates”), in which Michael Goldman is Chief Executive
Officer and Chairman of the Board, is also considered a related party. Goldman
Associates’ standstill agreement pursuant to the Private Placement Agreement
expired on May 31, 2008.  Pursuant to the Private Placement Agreement,
Goldman Associates agreed that it and its affiliates will not until May 31, 2008
without the prior written consent of the Board of Directors of the Company (i)
acquire, agree to acquire or make any proposal to acquire any voting securities
or assets of the Company or any of its affiliates, (ii) propose to enter into
any merger, consolidation, recapitalization, business combination, or other
similar transaction involving the Company or any of its affiliates, (iii) make,
or in any way participate in any “solicitation” of “proxies” (as such terms are
used in the proxy rules of the Securities and Exchange Commission) to vote or
seek to advise or influence any person with respect to the voting of any voting
securities of the Company or any of its affiliates or (iv) form, join or in any
way participate in a “group” as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, in connection with any of the foregoing or (v)
advise, assist or encourage any other persons in connection with the
foregoing.  On February 12, 2009, the Company amended the Secured Note
dated July 29, 2004, as amended by Amendment 1 dated March 27, 2008 (“Amended
Secured Note”).  The Amended Secured Note provides for (i) the
maturity date of the note to be extended from January 1, 2009 to January 1,
2010, and (ii) an increase in the interest rate from and after January 1, 2009
to the prime rate in effect from time to time plus 2%.
 
 Maturities
of notes payable are as follows:
 
 2009
                      
                      $
                      308,5442010
                      
                      
                      1,024,9062011
                      
                      
                      27,9272012
                      
                      
                      18,7142013
                      
                      
                      3,699$
                      1,383,790
 
 7.
Capital
Stock
 
 Each share of the Company’s convertible
preferred stock is convertible into one share of the Company’s common
stock.  Convertible preferred stockholders will be entitled to a
dividend, based upon a formula, when and if any dividends are declared on the
Company’s common stock.  The convertible preferred stock is
redeemable, at the option of the Company, at $7.50 per share.  The
shares contain a liquidation preference provision entitling the holder to
receive payments equaling $5.00 per share.
  F-17
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 The voting rights of the common
stockholders and preferred stockholders are based upon the number of shares of
convertible preferred stock outstanding.  The Company's Restated
Certificate of Incorporation provides that the Board of Directors is to consist
of one class of Directors if there are less than 600,000 shares Convertible
Preferred Stock outstanding.  As of December 31, 2008, the number of
preferred shares outstanding was 447,891; accordingly, the Board of Directors to
be elected at the 2009 annual shareholders’ meeting will consist of one class of
Directors elected by the holders of common stock and convertible preferred stock
voting together as one class on a share for share basis.
 
 At December 31, 2008, there were
642,391 shares of common stock reserved for conversion of preferred stock and
for the exercise of vested stock options and convertible notes.
 
 Messrs. Goldman, Korn, Pagano, Rozzi,
and Mrs. Folger each signed a stock purchase and sale standstill agreement in
which they agreed until May 31, 2008 not to purchase any stock without written
consent from the Company and they will not sell any stock to anyone when such a
sale would create a new 5% shareholder unless such person first enters into a
similar standstill agreement.  On November 2, 2007, the Company
terminated said Standstill Agreements dated June 21, 2004 between the Company
and Messrs. Goldman, Korn, Pagano, Rozzi, and Mrs. Folger.
 
 8.Equity
Transactions
 
 During the year ended December 31,
2008, no shares were issued pursuant to the exercise of stock
options.
 
 During the year ended December 31,
2007, the Company issued 52,000 shares of common stock pursuant to the exercise
of stock options.  On January 2, 2007, Bernard Korn obtained 52,000
shares of common stock by exercising 52,000 outstanding stock
options.  Mr. Korn was Chairman and Chief Executive Officer of the
Company until his resignation on April 17, 2006 and served as a non-executive
employee of the Company until his death on December 12, 2007.
 
 During the year ended December 31,
2008, 17,423 shares of redeemable preferred stock were converted into 17,423
shares of common stock. During the year ended December 31, 2007, no shares of
redeemable preferred stock were converted into common stock. As of December 31,
2008 and 2007, the number of convertible preferred shares outstanding was
447,891 and 467,500, respectively.
 
 On September 2, 2008, the Company
announced that it was offering to shareholders who owned 99 or fewer shares of
the Company’s convertible preferred stock on August 20, 2008, to purchase those
shares at $1.25 per share. The tender offer was to expire on October 31, 2008;
however, on October 28, 2008 the Company announced that it was extending the
expiration date of the tender offer to December 31, 2008.  The Company
retired the convertible preferred stock purchased through this tender offer.
There were approximately 14,000 odd-lot shares eligible for purchase under the
tender offer.
 
 Through December 31, 2008, shareholders
tendered 2,186 shares of convertible preferred stock under the tender offer. The
Company accounted for these transactions utilizing the constructive retirement
method.
  F-18
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 On November 21, 2007, the Board of
Directors authorized the Company to repurchase up to $250,000 of its common
and/or preferred stock in open market or privately negotiated
purchases.  There is no expiration date associated with this
program.  As of December 31, 2007, the Company purchased 8,150 shares
of common stock on the open market for an aggregate purchase price of $9,832 and
$240,168 remains available for repurchase under the program.  The
Company accounted for these transactions utilizing the constructive retirement
method. The Company did not purchase any shares during the year ended December
31, 2008 under the program.
 
 9.
Stock Option
Plans
 
 In June
1996, the Company adopted the 1996 Stock Option Plan (the “1996 Plan”) and the
ability to grant options under this plan expired on December 31,
2005.  At December 31, 2008, a total of 22,000 options were
outstanding under the 1996 Plan, which expire in June 2009.
 
 On September 29, 2006, the Company
adopted the Colonial Commercial Corp. 2006 Stock Plan, (the “2006
Plan”).  The 2006 Plan enables the Company to grant equity and
equity-linked awards to our Directors, officers, employees and other persons who
provide services to the Company.  The 2006 Plan is intended to allow
us to provide incentives that will (1) strengthen the desire of highly competent
persons to provide services to us and (2) further stimulate their efforts on our
behalf.
 
 The
following is a summary of certain provisions of the 2006 Plan.
 
 Shares Available. The
maximum number of shares of common stock that may be delivered under the 2006
Plan is 1,000,000, subject to adjustment for certain specified changes to the
Company's capital structure.  As of December 31, 2008, 925,000 options
were available to be issued.
 
 Eligibility. All
directors, officers and other employees and other persons who provide services
to the Company are eligible to participate in the 2006 Plan.
 
 Administration. The
administrator of the 2006 Plan will be the board or any other committee which
the board designates to serve as the administrator of the 2006
Plan.
 
 Types of Awards. The
types of awards that may be made under the 2006 Plan are stock options, stock
appreciation rights, restricted stock awards, and stock units. The board or the
committee that administers the 2006 Plan will fix the terms of each award,
including, to the extent relevant, the following: (1) exercise price for
options, base price for stock appreciation rights, and purchase price, if any,
for restricted stock awards, (2) vesting requirements and other conditions to
exercise, (3) term and termination, (4) effect, if any, of a change of control
and (5) method of exercise and of any required payment by the
recipient.
 
 Term of Plan. No
award may be granted under the 2006 Plan after the close of business on the day
immediately preceding the tenth anniversary of the adoption of the 2006 Plan.
However, all awards made prior to such time will remain in effect in accordance
with their terms.
 
 On December 6, 2006, 100,000 10-year
options were granted to independent directors at the closing market price of
that day, or $1.85, 40,000 options vested immediately and 20,000 options vest
and become exercisable on each of the first three anniversaries of the grant
date.  If an independent director resigns, their unvested options are
immediately forfeited and they have 60 days to exercise their vested
options.
  F-19
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 On January 22, 2007, a Director
resigned and his 15,000 options that would have vested on each of the first
three anniversaries of the Grant Date were forfeited and he had sixty days from
the date of his resignation to exercise his 10,000 vested
options.  The Director did not exercise his 10,000 vested options and
said options were forfeited.
 
 No options were granted during the
years ended December 31, 2008 and 2007.
 
 The Company uses the Black-Scholes
valuation method to estimate the fair value of stock options at the grant
date.  The Black-Scholes valuation model uses the option exercise
price and the number of options expected to be exercised as well as assumptions
related to the expected price volatility of the Company’s stock, the rate of
return on risk-free investments, the period during which the options will be
outstanding, and the expected dividend yield for the Company’s stock to estimate
the fair value of the stock option on the grant date.  The fair value
of the stock options, which are subject to grading vesting, is expensed on a
straight-line basis over the vesting life of the stock options.
 
 Changes in options outstanding are as
follows:
 
 Shares Subject to Option
                                                  
                                                  
                                                  Weighted Average Exercise
    Price
                                                  
                                                  
                                                  Aggregate Intrinsic ValueBalance
      at December 31, 2006
                                                  
                                                  
                                                  174,000
                                                  
                                                  
                                                  $
                                                  1.17Options
      Exercised
                                                  
                                                  
                                                  (52,000
                                                  )
                                                  
                                                  
                                                  0.25Options
      Forfeited
                                                  
                                                  
                                                  (25,000
                                                  )
                                                  
                                                  
                                                  1.85Balance
      at December 31, 2007
                                                  
                                                  
                                                  97,000
                                                  
                                                  
                                                  $
                                                  1.49Balance
      at December 31, 2008
                                                  
                                                  
                                                  97,000
                                                  
                                                  
                                                  $
                                                  1.49
                                                  
                                                  
                                                  $
                                                  27,500Options
      vested and expected to vest at December 31, 2008
                                                  
                                                  
                                                  97,000
                                                  
                                                  
                                                  $
                                                  1.49
                                                  
                                                  
                                                  $
                                                  27,500Exercisable
      at December 31, 2008
                                                  
                                                  
                                                  82,000
                                                  
                                                  
                                                  $
                                                  1.42
                                                  
                                                  
                                                  $
                                                  6,160
 
 In 2007,
the Company incurred $30,364 in stock-based compensation expense and as of
December 31, 2007 had unrecognized compensation of $49,754. In 2008, the Company
incurred $26,706 in stock-based compensation expense and as of December 31, 2008
had unrecognized compensation of $23,048.
 
 On January 22, 2007, a Director
resigned and his 10,000 shares of Common Stock issuable upon exercise of his
options expired sixty days after his resignation.  In addition, his
15,000 options that vest over three years were forfeited on his date of
resignation.  On January 2, 2007 an employee exercised 52,000
options.
  F-20
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 The following table summarizes
information about stock options at December 31, 2008:
 
 Options Outstanding and
      ExercisableWeighted
      AverageRange
      of
                        
                        
                        
                        
                        Remaining
                        
                        
                        Weighted
      AverageExercise Prices
                        
                        Shares
                        
                        
                        Contractual Life
                        
                        
                        Exercise Price$   .25
                        
                        
                        22,000
                        
                        
                        
                        0.47
                        
                        
                        $
                        .25$
      1.85
                        
                        
                        60,000
                        
                        
                        
                        7.94
                        
                        
                        $
                        1.85Options Outstanding and
      Non-exercisable$1.85
                        
                        
                        15,000
                        
                        
                        
                        7.94
                        
                        
                        $
                        1.85
 
 The Company expects all 15,000
outstanding and unvested options to vest.
 
 10.
Net Loss Per Common
Share
 
 Employee stock options totaling 97,000
for the year ended December 31, 2008 were not included in the net loss per share
calculation because their effect would have been
anti-dilutive.  Convertible preferred stock, convertible into 447,891
and 467,500 shares of common stock for the years ended December 31, 2008 and
2007 was not included in the net loss per share because its effect would have
been anti-dilutive.  Convertible notes, in the principal amount of
$337,500 and $475,000, convertible into 112,500 and 158,333 shares of common
stock, respectively, were not included in the net loss per share calculation for
the years ended December 31, 2008 and 2007, respectively, because their effect
would have been anti-dilutive.
 
 11.
Income
Taxes
 
 The provision for income taxes consists
of the following:
 
 2008
                    
                    
                    2007State
                    
                    
                    
                    
                    
                    
                    
                    
                    StateAnd
                    
                    
                    
                    
                    
                    
                    
                    
                    AndFederal
                    
                    
                    Local
                    
                    
                    Total
                    
                    
                    Federal
                    
                    
                    Local
                    
                    
                    TotalCurrent
                    
                    $
                    -
                    
                    
                    $
                    7,350
                    
                    
                    $
                    7,350
                    
                    
                    $
                    22,751
                    
                    
                    $
                    82,736
                    
                    
                    $
                    105,487Deferred
                    
                    
                    708,500
                    
                    
                    
                    -
                    
                    
                    
                    708,500
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      tax (benefit) expense
                    
                    $
                    708,500
                    
                    
                    $
                    7,350
                    
                    
                    $
                    715,850
                    
                    
                    $
                    22,751
                    
                    
                    $
                    82,736
                    
                    
                    $
                    105,487
 
 The components of deferred income tax
benefit are as follows:
 
 2008
                  
                  
                  2007Deferred
      tax expense (benefit), exclusive of the effects of the other components
      listed below
                  
                  $
                  0
                  
                  
                  $
                  0Increase
      in beginning-of-the-year balance of the valuation allowance for deferred
      tax assets
                  
                  
                  708,500
                  
                  
                  
                  0Generation
      of continuing operations net operating loss carryforward
                  
                  
                  0
                  
                  
                  
                  0$
                  708,500
                  
                  
                  $
                  0
  F-21
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 A reconciliation of the provision for
income taxes computed at the Federal statutory rate to the reported provision
for income taxes follows:
 
 2008
                        
                        
                        2007Tax
      provision at Federal statutory rate
                        
                        
                        34.00
                        %
                        
                        
                        34.00
                        %Alternative
      minimum tax
                        
                        
                        0.00
                        %
                        
                        
                        42.25
                        %State
      income taxes, net of federal benefit
                        
                        
                        (22.26
                        )%
                        
                        
                        100.09
                        %Change
      in valuation allowance for deferred tax assets
                        
                        
                        (253.42
                        )%
                        
                        
                        (10.06
                        )%Permanent
      differences
                        
                        
                        (5.71
                        )%
                        
                        
                        26.12
                        %Other
                        
                        
                        2.48
                        %
                        
                        
                        3.49
                        %Total
                        
                        
                        (244.91
                        )%
                        
                        
                        195.89
                        %
 
 The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and liabilities at December 31, 2008 and 2007 are presented below.
 
 2008
                    
                    
                    2007Current
      Deferred Tax Assets:Federal
      net operating loss carryforwards
                    
                    $
                    170,000
                    
                    
                    $
                    532,500Current
      Deferred Tax Assets
                    
                    $
                    170,000
                    
                    
                    $
                    532,500Non-current
      Deferred Tax Assets:Federal
      net operating loss carryforwards
                    
                    $
                    8,071,335
                    
                    
                    $
                    7,481,331State
      net operating loss carryforwards
                    
                    
                    196,678
                    
                    
                    
                    136,501Allowance
      for doubtful accounts
                    
                    
                    228,482
                    
                    
                    
                    253,514Additional
      costs inventoried for tax purposes
                    
                    
                    545,345
                    
                    
                    
                    702,761Alternative
      Minimum Tax Credit Carryforward
                    
                    
                    49,436
                    
                    
                    
                    49,436Compensation
                    
                    
                    52,933
                    
                    
                    
                    125,625Rent
                    
                    
                    79,981
                    
                    
                    
                    67,484Non-current
      Deferred Tax Assets
                    
                    
                    9,224,190
                    
                    
                    
                    8,816,652Non-current
      Deferred Tax Liabilities:Goodwill
                    
                    
                    (979,494
                    )
                    
                    
                    (874,415
                    )Depreciation
                    
                    
                    78,148
                    
                    
                    
                    (13,251
                    )Non-current
      Deferred Tax Liabilities
                    
                    
                    (901,346
                    )
                    
                    
                    (887,666
                    )Non-current
      Deferred Tax Assets
                    
                    
                    8,322,844
                    
                    
                    
                    7,928,986Less
      Valuation Allowance
                    
                    
                    (7,492,844
                    )
                    
                    
                    (6,752,986
                    )Net
      Non-Current Deferred Tax Assets
                    
                    $
                    830,000
                    
                    
                    $
                    1,176,000
 
 As of December 31, 2007, net gross
deferred tax asset, before valuation allowance, of $8,461,486 was reduced by a
valuation allowance in the amount of $6,752,986, which reflected management’s
likelihood of utilizing the net operating losses in the future based upon
projected taxable income.
 
 As of December 31, 2008, net deferred
tax asset, before valuation allowance, of $8,492,844 was reduced by a valuation
allowance in the amount of $7,492,844. Such valuation allowance included the
above reduction to the net deferred tax asset of $708,500. Management based this
decision on future projected taxable income and management’s assessment of
future utilization of net operating loss carryforwards.
  F-22
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 As of December 31, 2008, the Company’s
net operating loss carryforwards for federal income tax purposes were
approximately $24,239,000.  Various amounts of net operating loss
carryforwards will expire from 2020 through 2028.  Approximately
$415,000 net operating loss expired during the fiscal year ended
2008.
 
 Expiration Year
                        
                        Net Operating Losses2020
                        
                        
                        5,960,0002021
                        
                        
                        2,737,0002022
                        
                        
                        14,532,0002028
                        
                        
                        1,010,000$
                        24,239,000
 
 The utilization of the net operating
loss carryforwards is subject to certain annual limitations. If certain
substantial changes in ownership occur, there would be a further annual
limitation on the amount of tax carryforwards that can be utilized in the
future.
 
 One of
the Company’s subsidiaries is under examination for sales tax in New York
State.  At this time, the Company has concluded that there will be an
immaterial assessment and has not provided for an adjustment to
income.
 
 12.
Fair Value of
Financial Instruments
 
 Statement of Financial Accounting
Standards No.107, “Disclosures about Fair Value of Financial Instruments,”
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.  The carrying value of all financial instruments classified
as current assets or liabilities is deemed to approximate fair value because of
the short term nature of these instruments.
 
 The Company has determined that it is
not practical to assess the fair value of its fixed rate notes payable without
incurring excessive costs considering the materiality of the instruments to the
Company.
 
 13.
Supplemental Cash Flow
Information
 
 The following is supplemental
information relating to the consolidated statements of cash flows:
 
 Cash
      paid during the years for:
                      
                      2008
                      
                      
                      2007Interest
                      
                      $
                      1,135,526
                      
                      
                      $
                      1,443,514Income
      taxes
                      
                      $
                      18,248
                      
                      
                      $
                      87,773
 
 Non-cash
transactions:
 
 During 2008 and 2007, there were 17,423
and 0 shares, respectively, of convertible preferred stock that were converted
to a similar number of common shares.
 
 14.
Employee Benefit
Plans
 
 401(k)
Plan
 
 The Company has a 401(k) plan, which
covers substantially all employees. Participants in the plan may contribute a
percentage of compensation, but not in excess of the maximum allowed under the
Internal Revenue Code. The plan provided for matching contributions up to a
maximum of 3% of employees’ qualified wages until December 21, 2008, when the
401K employee matching program was discontinued.  In 2008 and 2007,
$204,550 and $185,186, respectively, of matching contributions were made to the
plan.
  F-23
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 15.
Business and Credit
Concentrations
 
 The Company purchases products from a
large number of suppliers.  The same two suppliers accounted for 32%
and 30% of the Company’s purchases for the years 2008 and 2007,
respectively.  As of December 31, 2008, the Company’s outstanding
balance payable to these two suppliers was $1,254,723.  The loss of
one or both of these suppliers could have a material adverse effect upon its
business for a short-term period.
 
 16.
Commitments and
Contingencies
 
 (a)  Compensation
 
 The Company has employment agreements
with the Chief Executive Officer and various employees.  The remaining
terms of the employment agreements as of December 31, 2008 range from one to two
years, and amounts due under these contracts are $499,400 and $350,000 in the
years ended December 31, 2009 and 2010, respectively.  These
commitments do not include amounts that may be earned as an annual incentive
compensation award.
 
 (b)  Leases
 
 The Company recorded lease payments via
the straight line method and, for leases with step rent provisions whereby the
rental payments increase over the life of the lease, the Company recognizes the
total minimum lease payments on a straight-line basis over the lease
term.  The Company is obligated under operating leases for warehouse,
office facilities and certain office equipment which amounted to $3,671,287 and
$3,277,520 for the years ended December 31, 2008 and 2007,
respectively.  At December 31, 2008, future minimum lease payments in
the aggregate and for each of the five succeeding years are as
follows:
 
 2009
                    
                    $
                    3,757,6122010
                    
                    
                    3,286,8522011
                    
                    
                    2,959,1412012
                    
                    
                    2,264,0592013
                    
                    
                    1,630,298Thereafter
                    
                    
                    2,926,797Total
                    
                    $
                    16,824,759
 (c) Litigation
 
 (i)           
Universal Supply
Group, Inc.
 
 Universal Supply Group, Inc., a wholly
owned subsidiary of the Company, is a New York corporation
(“Universal”).  On June 25, 1999, Universal acquired substantially all
of the assets of Universal Supply Group, Inc., a New Jersey corporation,
including its name, pursuant to the terms of a purchase
agreement.  The Company filed a copy of the purchase agreement with
the Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g) on
Form 10KSB, and the Company filed a copy of an amendment to the purchase
agreement on July 9, 1999 as Exhibit 10(a)(ii) on Form
8-K.  Subsequent to the sale, Universal Supply Group, Inc. (the
selling corporation) formerly known as Universal Engineering Co., Inc., changed
its name to Hilco, Inc.  Hilco, Inc. acquired the assets of Amber
Supply Co., Inc., formerly known as Amber Oil Burner Supply Co., Inc., in 1998,
prior to Hilco’s sale of assets to Universal.  Hilco, Inc. is
hereinafter referred to as the “Universal Predecessor.”  The majority
shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
Hildebrandt.
  F-24
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 The Company understands that the
Universal Predecessor and many other companies have been sued in the Superior
Court of New Jersey (Middlesex County) by plaintiffs filing lawsuits alleging
injury due to asbestos. As of December 31, 2008, there exist 37 plaintiffs in
these lawsuits relating to alleged sales of asbestos products, or products
containing asbestos, by the Universal Predecessor.  Subsequent to
December 31, 2008, 10 plaintiffs have had their actions dismissed, which results
in 27 remaining plaintiffs in these lawsuits. The Company never sold any
asbestos related products.
 
 Of the existing plaintiffs as of
December 31, 2008, 15 filed actions in 2007, 7 filed actions in 2006, 3 filed
actions in 2005, 9 filed actions in 2004, and 3 filed actions in 2003. There are
173 other plaintiffs that have had their actions dismissed and 13 other
plaintiffs that have settled as of December 31, 2008 for a total of $3,358,500.
There has been no judgment against the Universal Predecessor.
 
 Our Universal subsidiary was named by
36 plaintiffs; of these, 11 filed actions in 2007, 6 filed actions in 2006, 11
filed actions in 2005, 5 filed actions in 2001, 1 filed an action in 2000, and 2
filed actions in 1999.  Sixteen plaintiffs naming Universal have had
their actions dismissed and, of the total $3,358,500 of settled actions, 2
plaintiffs naming Universal have settled for $26,500.  No money was
paid by Universal in connection with any settlement.  Following these
dismissed and settled actions there exists 18 plaintiffs that name Universal, as
of December 31, 2008.
 
 As set forth in more detail below, the
Company has been indemnified against asbestos-based claims, and insurance
companies are defending the interests of the Universal Predecessor and the
Company in these cases.
 
 Based on advice of counsel, the Company
believes that none of the litigation that was brought against the Company’s
Universal subsidiary through December 31, 2008 is material, and that the only
material litigation that was brought against the Universal Predecessor through
that date was Rhodes v. A.O. Smith Corporation, filed on April 26, 2004 in the
Superior Court of New Jersey, Law Division, Middlesex County, Docket Number
MID-L-2979-04AS. The Company was advised that the Rhodes case was
settled for $3,250,000 (“Settlement”) under an agreement reached in connection
with a $10,000,000 jury verdict that was rendered on August 5, 2005. The Company
was not a defendant in the Rhodes
case.
 
 The Company believes that Rhodes differed from
the other lawsuits in that plaintiff established that he contracted mesothelioma
as a result of his occupational exposure to asbestos dust and fibers and that a
predecessor of the Company was a major supplier of the asbestos containing
products that allegedly caused his disease.
 
 A.
              Indemnification
 
 John A.
Hildebrandt, Paul Hildebrandt and the Universal Predecessor have jointly and
severally agreed to indemnify our Universal subsidiary from and against any and
all damages, liabilities and claims due to exposure to asbestos at any time
prior to the June 25, 1999 closing of the purchase agreement referred to
earlier.  These agreements are set forth in the purchase agreement.
Paul Hildebrandt, one of the indemnitors, was a Director of the Company from
September 29, 2004 to January 28, 2005.
  F-25
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 The
indemnitors may use their own counsel to defend these claims. The indemnitors
are not liable for any settlement effected without their consent. The
indemnitors may settle and pay money claims without the consent of the Company.
There is no indemnification unless claims aggregate $50,000; once this trigger
point is reached, indemnification is required for all claims, including the
first $50,000, but excluding claims of less than $10,000. The indemnification
requirement survives at least until 30 days after the running of any relevant
statutes of limitation.
 
 The
obligation of the indemnitors is joint and several, so that the Company can have
recourse against any one or more of these indemnitors, whether or not any other
indemnitor has previously defaulted on its obligation to us. There are no other
limitations to our rights to indemnification.  The Company cannot be
certain that the indemnitors have the financial wherewithal to meet their
obligations to indemnify the Company.
 
 B.
              Insurance
 
 The
assets that the Universal Predecessor sold to us included its insurance policies
and other agreements and contracts. The policies provide coverage for liability
accruing during the periods for which premiums were paid.  The
Universal Predecessor was formed in 1940. Copies of policies are available for
each year beginning in 1970 and ending with the closing under the purchase
agreement in 1999. Copies of policies for the period from 1940 to 1969 are not
available.
 
 Insurance
companies acknowledge coverage for potential asbestos claims under certain of
these policies.  Insurance companies under additional policies have
reserved their right to deny coverage but have continued to defend and indemnify
the Universal Predecessor and the Company under the contested
policies.
 
 There are
periods during the years from 1940 to 1999 in which our Universal Predecessor
did not have coverage for potential asbestos claims.  Subject to
litigation, insurance companies may maintain that the existence of these
periods’ results in coverage for only a portion of a particular injury that
varies with the period during which there was asbestos coverage relating to the
injury, and that the balance of any settlement or judgment is to be paid by the
insured.  As of December 31, 2008, no insurance company has claimed
any contribution for a gap in coverage except for a claim for $160 made by one
insurance company to the Universal Predecessor in 1995.  The Universal
Predecessor asserted that it had no obligation to pay this amount and did not
make any payment.
 
 Insurance
companies have, as of December 31, 2008, defended us and the Universal
Predecessor, and have paid all settlement amounts and defense
costs.  Except for $160 referred to above, the insurance companies
have not requested any payments from us or from the Universal
Predecessor.
 
 Our
Universal subsidiary has not engaged in the sale of asbestos products since its
formation in 1997. Its product liability policies for all years since 1998
exclude asbestos claims.
  F-26
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 (ii)           The RAL Supply Group,
Inc.
 
 The RAL Supply Group, Inc., a wholly
owned subsidiary of the Company, is a New York corporation (“RAL”), formerly
known as RAL Purchasing Corp.  On September 30, 2003, RAL acquired
substantially all of the assets of The RAL Supply Group, Inc., formerly known as
The LAR Acquisition Corp., also a New York corporation, including its name,
pursuant to the terms of a purchase agreement.  The Company filed a
copy of the purchase agreement (“RAL APA”) with the Securities and Exchange
Commission on October 15, 2003 as Exhibit 10(a)(i) on Form
8-K.  Subsequent to the sale, The RAL Supply Group, Inc. (the selling
corporation) changed its name to RSG, Inc. RSG, Inc. is hereinafter referred to
as the “RAL Predecessor.”
 
 The RAL Predecessor acquired certain
assets from Dyson-Kissner-Moran Corporation (“RSG Predecessor”) in 1993, prior
to the RAL Predecessor’s sale of assets to RAL.
 
 Our RAL subsidiary and other companies
have been sued in the Supreme Court of New York (Orange County) by a plaintiff
filing a lawsuit on or about July 30, 2008 alleging injury due to asbestos. As
of December 31, 2008, there existed one plaintiff in a lawsuit relating to
alleged sales of asbestos products, or products containing
asbestos.  The lawsuit alleges injury due to asbestos during the
1970’s, prior to RAL Predecessor’s acquisition of assets from the RSG
Predecessor and RAL’s acquisition of assets from the RAL Predecessor. The
Company never sold any asbestos related products.
 
 The RAL Predecessor agreed in the RAL
APA to indemnify and hold harmless our RAL subsidiary from and against, among
other things, damages that relate to products sold or manufactured or services
performed or other actions taken or omitted by the RAL Predecessor prior to the
closing of the acquisition.  The Company cannot be certain that the
indemnitor has the financial wherewithal to meet its obligations to indemnify
the Company.
 
 (iii)           General
 
 Regardless of indemnification and
insurance coverage, we do not in any event consider our Company to be liable for
the asbestos-based lawsuits that name us or for any other claim that arises as a
result of actions or omissions by the Universal Predecessor or RAL Predecessor
companies. We expressly disclaimed the assumption of any liabilities when we
purchased the assets of the Universal Predecessor and RAL Predecessor. It is our
opinion that the existing asbestos litigation will not have a material adverse
effect on the Company.  Nevertheless, we could be materially and
adversely affected if we are held liable for substantial asbestos claims or if
the Company incurs substantial legal or settlement costs. This material and
adverse effect would occur if indemnitors fail to honor their indemnification
agreements and insurance is not available either because policy limits are
exceeded, or because insurance companies successfully deny coverage or claim
limitations on their liabilities by reason of gaps in coverage or
otherwise.
 
 Since we regard as remote the potential
payment of any asbestos-based claim, we have not accrued any balance for any
period relating to asbestos claims, and we have not recorded any amount for
asbestos claims for any period in any of our financial statements.
 
 (iv)           Other
Litigation
 
 The Company is periodically involved in
other litigation in the ordinary course of business.  The Company
vigorously defends all matters in which the Company or its subsidiaries are
named defendants and, for insurable losses, maintains significant levels of
insurance to protect against adverse judgments, claims or
assessments.  Although the adequacy of existing insurance coverage or
the outcome of any legal proceedings cannot be predicted with certainty, the
Company does not believe the ultimate liability associated with any claims or
litigation will have a material impact to its financial condition or results of
operations.
  F-27
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 17.
Related Party
Transactions
 
 (a)
              A
      subsidiary of the Company leases a warehouse and store in Wharton, New
      Jersey comprising of 27,000 square feet from a company owned by Mr. Paul
      Hildebrandt under a lease that expires in June 2010.  The
      Company paid Mr. Hildebrandt’s company $241,095 and $234,866 as rent
      during the years ended December 31, 2008 and 2007,
      respectively.
 
 The
Company owes Mr. Hildebrandt $55,000 pursuant to two notes: (a) a subordinated
note in the amount of $150,000, paid $30,000 annually commencing December 31,
2004, of which the final $30,000 payment that was due December 31, 2008 was
deferred until on or about March 31, 2009, and (b) a $25,000 convertible note
due June 1, 2009.  William Salek, the Company’s Chief Financial
Officer, is the son-in-law of Mr. Hildebrandt.  Mr. Hildebrandt served
as a Director of the Company from July 2004 to January 2005.
 
 (b)
              Pursuant
      to a secured note dated July 29, 2004, as amended by Amendment 1 dated
      March 27, 2008 and further amended by Amendment 2 dated February 12, 2009,
      the Company owes Goldman Associates of New York, Inc. (“Goldman
      Associates”), the principal amount of $750,000 collateralized by the
      assets of the Company. The secured note is subordinate to the borrowings
      under the credit facility, bears interest at the prime rate plus 2% and is
      due on January 1, 2010.
 
 Michael
Goldman is the Chief Executive Officer and Chairman of the Board of Goldman
Associates and is Chairman of the Board of the Company.
 
 In
January 2008, the Company paid $13,221 in premiums for Michael Goldman’s
COBRA health insurance for the calendar year 2008.
 
 (c)
              Oscar
      and Jeffrey Folger were each an employee of the Company as Vice
      President-Chief Legal Counsel and Assistant Vice President-Legal,
      respectively, until March 31, 2007.  As of April 1, 2007, Oscar
      and Jeffrey Folger ceased to act as employees of the Company, but their
      law firm Folger & Folger remains as counsel to the
      Company.  Rita Folger, a more than 5% shareholder of the
      Company, is the wife of Oscar Folger and the mother of Jeffrey
      Folger.  Professional fees paid to Folger & Folger for the
      years ended 2008 and 2007 were $60,087 and $115,412,
      respectively.
 
 No money
was paid to either Oscar or Jeffrey Folger as part time employees of the Company
for the year ended December 31, 2008 and $3,000 was paid to each of Oscar and
Jeffrey Folger as part time employees of the Company for the year ended December
31, 2007.
 
 (d)
              Pioneer
      Realty Holdings, LLC, a New York limited liability company (“Pioneer”), is
      the owner of the premises located at 836 Route 9, Fishkill, New York,
      formerly known as 2213 Route 9, Fishkill, New York that is leased to a
      subsidiary of the Company under a lease that expires on March 31, 2017,
      subject to two five-year renewal
options.
 
 William
Pagano, Chief Executive Officer and Director of the Company, has a 55% interest
in Pioneer and each of Mrs. Folger and Jeffrey Folger has an 8% interest in
Pioneer Realty Partners I, LLC, which has a 40% interest in
Pioneer.  The Company paid Pioneer Realty Holdings, LLC $250,146 and
$176,556 in rent during the years ended December 31, 2008 and 2007,
respectively.
  F-28
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 (e)
              Mr.
      Pagano and Mrs. Folger are each holders of convertible unsecured notes in
      the amount of $100,000, issued pursuant to the terms of a private
      placement made on July 29, 2004, as amended by Amendment 1 dated March 27,
      2008 and further amended by Amendment 2 dated February 12, 2009. The
      convertible unsecured notes bear interest at the prime rate plus 2% and
      are due on January 1, 2010.
 
 Mr. Salek
and the wife of Michael Goldman are holders of convertible unsecured notes in
the amounts of $25,000 and $12,500, respectively, issued pursuant to the terms
of a private placement made on July 29, 2004. The convertible unsecured notes
bear interest at 11% and are due on June 1, 2009.
 
 Interest
expense on the notes held by Mr. Pagano and Mrs. Folger amounted to $11,000 for
each of the years ended December 31, 2008 and 2007, paid to each Mr. Pagano and
Mrs. Folger.
 
 Interest
expense on the note held by Mr. Salek amounted to $4,583 and $5,500 for the
years ended December 31, 2008 and 2007, respectively.
 
 Interest
expense on the note held by the wife of Michael Goldman amounted to $2,292 and
$2,750 for the years ended December 31, 2008 and 2007,
respectively.
  F-29
 Table of Contents
  COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements, Continued
 
 Schedule
II
 
 
 Colonial
Commercial Corp. and Subsidiaries
 
 Schedule
of Valuation and Qualifying Accounts
 
 AdditionsBalance
      at
                    
                    
                    Charged
      to
                    
                    
                    Charged
      toBeginning
                    
                    
                    Costs
      and
                    
                    
                    Other
                    
                    
                    
                    
                    
                    Balance
      atDescription
                    
                    of Year
                    
                    
                    Expenses
                    
                    
                    Accounts
                    
                    
                    Deductions
                    
                    
                    End of YearFor
      the year ended December 31, 2008Allowance
      for doubtful accounts
                    
                    $
                    478,857
                    
                    
                    $
                    736,084
                    
                    
                    $
                    79,558
                    (a)
                    
                    $
                    (821,973
                    )
      (b)
                    
                    $
                    472,526For
      the year ended December 31, 2007Allowance
      for doubtful accounts
                    
                    $
                    212,043
                    
                    
                    $
                    652,468
                    
                    
                    $
                    65,937
                    (a)
                    
                    $
                    (451,591
                    )
      (b)
                    
                    $
                    478,857
 
 a.
              Comprised
      primarily of accounts that were previously charged against the allowance,
      and have since been collected.
 
 b.
              Comprised
      primarily of uncollected accounts charged against the
      allowance.
  F-30
 Table of Contents
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of
1934, Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
 COLONIAL
COMMERCIAL CORP.
 
 (Registrant)
 
 By:
                        /s/ William PaganoWilliam
      Pagano,Chief
      Executive Officer and DirectorBy:
                        /s/ William SalekWilliam
      SalekChief
      Financial Officer & Principal Accounting Officer
 
 Dated:
March 27, 2009
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
duly signed below on March 27, 2009 by the following persons on behalf of the
Registrant and in the capacities indicated:
 
 By:
                              /s/ E. Bruce FredriksonE.
      Bruce Fredrikson, DirectorBy:
                              /s/ Melissa
Goldman-WilliamsMelissa
      Goldman-Williams, DirectorBy:
                              /s/ Michael GoldmanMichael
      Goldman, Chairman of the BoardBy:
                              /s/ Stuart H. LubowStuart
      H. Lubow, DirectorBy:
                              /s/ Ronald H. MillerRonald
      H. Miller, DirectorBy:
                              /s/ William PaganoWilliam
      Pagano,Chief
      Executive Officer and Director