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, 2007oro
            
            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
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            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 o                                          No  x




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.


Yes o                                          No  x




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 xNo  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.  x




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  o
            Accelerated
      filer  o
            Non-accelerated filer  o
            Smaller
      reporting company  x







Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o                                          No  x




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, 2007 (the last business day of the registrant’s most
recently completed second quarter) was $3,973,758.





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, 2008Common
      Stock, $.05 par value per share
            
            4,645,680
      sharesConvertible
      Preferred Stock, $.05 par value per share
            
            467,500
      shares









TABLE OF
CONTENTS




PART
      IPageItem
      1.
            Business
            2Item
      1A.
            Risk Factors
            4Item
      1B.
            Unresolved Staff Comments
            7Item
      2.
            Properties
            7Item
      3.
            Legal Proceedings
            7Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            10PART
      IIItem
      5.
            Market for the Registrant’s Common Stock, Convertible
      Preferred Stock andRelated
      Stockholder Matters
            10Item
      6.
            Selected Financial Data
            13Item
      7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            14Item
      7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            20Item
      8.
            Financial Statements and Supplementary
    Data
            21Item
      9.
            Changes In and Disagreements With Accountants on Accounting
      and Financial
      Disclosure
            21Item
      9A.
            Controls and Procedures
            21Item
      9B.
            Other Information
            22PART
      IIIItem
      10.
            Directors, Executive Officers and Corporate
      Governance
            23Item
      11.
            Executive Compensation
            25Item
      12.
            Security Ownership of
      Certain Beneficial Owners and Management
            35Item
      13.
            Certain Relationships and
      Related Transactions, and Director Independence
            37Item
      14.
            Principal Accountant Fees and
      Services
            41PART
      IVItem
      15.
            Exhibits and Financial
      Statements Schedules
            42




Table of Contents




PART
I.




Item 1.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”), American/Universal Supply, Inc. (“American”), 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) and lower portions of New York
State.  We are also the non-exclusive supplier of the Goodman line of
heating and air conditioning equipment in substantially the same trading
area.  We distribute these products through eight locations in New
Jersey, seven locations in New York State, three locations in Massachusetts and
one location in Willow Grove, Pennsylvania.  Of these locations, two
are used for warehousing purposes only.  In addition, we distribute
American Standard heating and air conditioning equipment, as well as other
heating and air conditioning accessories, in Elmsford and Hicksville, New
York.  We utilize 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.




In
September 2006, we began to distribute appliances, such as washers and dryers,
to appliance dealers primarily in New York, New Jersey, and portions of
Connecticut, Delaware and Pennsylvania.




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.




On
December 31, 2007, pursuant to a Plan of Merger dated December 11, 2007, the
Company’s subsidiaries American and RALwere merged.  RAL was the
surviving company in the merger.  This merger has no effect on the
Company’s consolidated financial statements or the daily operations of American
and RAL.




2
 Table of Contents





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 2007,
2006 and 2005, 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 42%, 40% and 42% HVAC equipment; 39%, 39% and 38% parts and
accessories; and 15%, 16% 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.




As of
December 31, 2007, we had 215 non-union full-time employees.  We
believe that our employee relations are satisfactory.




We have
no foreign operations and have only one operating segment.




Distribution, Customers and
Suppliers




We stock
inventory in all of our 21 locations.  We deliver products to
customers with our fleet of 22 leased and 23 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
6,500 customers in 2007.  No customer accounted for more than 2% of
consolidated net sales in 2007.  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 2007,
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.




3
 Table of Contents





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.




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.




Item
1A.Risk
Factors




The
following important factors could adversely impact our business.




Our
business is significantly impacted by changes in general and local economic
conditions.




Our
business is substantially affected by changes in general economic factors
outside of our control, such as:




a.
            employment
      levels and job growth;




b.
            population
      growth;




c.
            housing
      demand or modernization of existing
homes;




d.
            consumer
      confidence (which can be substantially affected by external conditions,
      including international hostilities involving the United States);
      and




e.
            the
      availability of financing for homeowners and
  homebuyers.




We
may lose business to competitors and may otherwise be unable to favorably
compete.




See
“Business-Competition” section above. Several of the companies that compete with
the Company have substantially greater financial and other
resources.  No assurance can be given that the Company will continue
to be able to respond effectively to competitive pressures.  Increased
competition by existing and future competitors could result in reductions in
sales, prices, volumes and gross margins that could materially adversely affect
the Company’s business, financial condition and results of
operations.  Furthermore, the Company’s success depends, in part, on
its ability to gain market share from competitors.




4
 Table of Contents





We
are dependent on third party suppliers to deliver equipment parts and
accessories to us for resale to contractors.




We have
no long term contracts with our suppliers. We are at risk that our suppliers may
cease making their products available to us on acceptable terms or at
all.  The loss of one or both of our two major suppliers could have a
material adverse effect on our business.




We
are dependent upon uninterrupted delivery of products.




Our
Company depends upon transportation of products from our suppliers and to our
customers.  Any interruption or cessation of the transportation of
these products by national or regional stoppages, fuel shortages, or other, will
significantly impair the Company’s ability to do business.




Our
business may be negatively impacted by inventory losses or
obsolescence.




Our
businesses depend on providing current products in good condition from our
inventory to the customer.  Although we believe that we carry adequate
insurance to protect ourselves from significant product losses, any uninsured
loss of inventory, damages to inventory, or theft of inventory could have a
significant impact on our profitability.  Alternatively, in the event
that we are unable to sell our inventory in a timely manner, the unsold product
may become obsolete and unsaleable and cause us to incur significant financial
losses.




We
could incur substantial losses in the event there are sudden changes in demand
for our products.




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 any of these
cases, the Company may have understated or overstated the write-down required
for excess and obsolete inventory or otherwise incur additional financial
losses.




Our
business is largely dependent upon seasonal weather variability.




A major
portion of our business is the distribution of heating, ventilating and air
conditioning products.  The sale of these products is heavily
influenced by temperature extremes and any major shift in the variation of the
climate may have a significant adverse impact on our business.




The
Company’s financial leverage may result in a negative impact upon our ability to
do business.




Our
Company is financially leveraged.  Our leverage may place burdens on
our ability to comply with the terms of our indebtedness, may restrict our
ability to pay certain term loans, and further restrict our ability to operate
and fulfill our financial obligations.  The amount of our debt could
have significant consequences.  As an example, it could limit our
ability to obtain future financing for working capital, capital expenditures,
debt service requirements, acquisitions, or other needs.  It requires
us to dedicate a substantial portion of our cash flow from operations to the
payment of our debt and reduces our ability to use cash for other
purposes.  It has a negative impact on our flexibility in planning or
reacting to business changes.  It increases our vulnerability to any
downturn in our business or to a significant rise in interest rates and may
place us at a competitive disadvantage with our competitors who are not in such
a leveraged position.




Our
ability to meet our debt service and other obligations depends upon our future
performance.  Our earnings vary based upon all the conditions
described herein and, hence, our ability to pay our obligations is affected
accordingly.




5
 Table of Contents




We may be
unable to renew our credit line at the expiration of its term or obtain
alternate financing which would have a significant impact on the continuation of
the operation of our business.




Since our
debt accrues interest at a floating rate, extended periods of high interest
rates could affect the viability of our business.




Our
lender may call our loan due which would have a significant impact on our
ability to do business




Our
Company was in violation of our lender’s loan covenants for the third and fourth
quarters of 2007, for which our lender has given us waivers.  Our
lender has imposed a $35,000 fee for the waiver of the fourth quarter of 2007
covenants violation.  If at any time our Company is in violation of
our lender’s loan covenants in the future, the lender may waive this violation,
increase our interest rate by up to 3.0% and impose additional fees upon us for
the violation.  The increase in the interest rate or a significant
financial penalty would have a negative impact on the operation of our
business.  If our lender does not waive this violation and calls our
loan due, it may be difficult to obtain alternate financing which would have a
significant impact on the continuation of the operation of our
business.




Our
Company’s business is dependent upon the creditworthiness of our contractor
customers.




Our
Company would be significantly negatively impacted in the event our contractor
customers are unable to pay their obligations to us.  This may occur
if the economy or housing market slows, unemployment rises, interest rates
increase dramatically, a natural disaster occurs within our region, or an act of
terror substantially stops our economy from operating for a significant period
of time.  If these contractors are unable to pay their accounts with
us, the result would be that we would be unable to pay our lending institutions
and vendors, substantially impacting our ability to operate.




We
could incur substantial losses for asbestos-based claims.




See Item
3, Legal Proceedings for a potential material and adverse effect to us if we are
held liable for substantial asbestos claims against a predecessor of one of our
subsidiaries, indemnitors fail to honor their indemnification agreements and
insurance policies are held not to cover these liabilities.




Our
ability to operate our Company effectively could be impaired if we fail to
attract and retain key personnel.




Although
William Pagano, a Director and Chief Executive Officer, has entered into an
employment agreement with us that expires in 2010, our ability to operate our
businesses and implement our strategies will depend upon our ability to attract
and retain other qualified personnel.




Our
ability to operate our business effectively could be impaired if we are unable
to extend the leases for our locations.




We lease
20 locations with approximately 420,000 square feet for showrooms, counter sales
and warehousing.  We own no real estate.  Our leases expire
at various times between May 31, 2009 and April 30, 2018.  Our
business will be negatively impacted if we are unable to extend our existing
leases at reasonable rates and we are unable to lease alternative space on
acceptable terms.




6
 Table of Contents





Our
Company’s election of Board of Directors and corporate actions requiring
shareholder approval could be controlled by a group of existing
shareholders.




As of
December 31, 2007, Michael Goldman, our Chairman, William Pagano, our Chief
Executive Officer and a Director, and Rita Folger, a more than 5% shareholder,
had beneficial ownership of approximately 55% of the Company’s common stock and
0% of the Company’s convertible preferred stock.  If voted as a group,
Messrs. Goldman and Pagano and Mrs. Folger would have the power to elect all six
members of the Board of Directors and control all corporate actions requiring
shareholder approval.




Item 1B.
Unresolved Staff Comments




None.




Item 2.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, Hicksville, Middletown, Fishkill, New Windsor, Peekskill,
Poughkeepsie, Suffern, and Half Moon, New York; and Great Barrington and
Pittsfield, Massachusetts.  Additionally, the Company maintains two
separate warehouse locations in Cedar Knolls, New Jersey and New Hampton, New
York.  These locations consist of approximately 420,000 square feet
under leases expiring between 2009 and 2018 with current aggregate annual rents
of approximately $3,110,097.




In
addition, the Company has a month-to-month lease for a portion of the New
Windsor, New York location, consisting of 11,000 square feet, for $2,500 per
month, a month-to-month lease for a location in Willow Grove, Pennsylvania,
consisting of 2,500 square feet, for $2,204 per month, and a month-to-month
lease for a location in North Adams, Massachusetts, consisting of 6,000 square
feet, for $1,425 per month.




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, 2007, we leased all our
facilities.




Item 3.Legal
Proceedings




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 “Predecessor.”  The majority
shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
Hildebrandt.




7
 Table of Contents




The
Company understands that 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. Currently, there exist 86 plaintiffs
in these lawsuits relating to alleged sales of asbestos products, or products
containing asbestos, by the Predecessor. The Company never sold any asbestos
related products.




Of the
existing plaintiffs as of December 31, 2007, 15 filed actions in 2007, 7 filed
actions in 2006, 14 filed actions in 2005, 33 filed actions in 2004, 15 filed
actions in 2003, and 2 filed actions in 2002. There are 126 other plaintiffs
that have had their actions dismissed and 12 other plaintiffs that have settled
as of December 31, 2007 for a total of $3,357,500. There has been no judgment
against the Predecessor.  Subsequent to December 31, 2007, one of the
existing cases was dismissed by summary judgment.




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.  Six
plaintiffs naming Universal have had their actions dismissed and, of the total
$3,357,500 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
currently exist 28 plaintiffs that name Universal.




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 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, 2007 is
material, and that the only material litigation that was brought against
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.




On April
29, 2005, prior to the Rhodes case trial, the Predecessor filed a third party
complaint against Sid Harvey Industries (“Third Party Complaint”) in an action
demanding contributor payment in connection with the Settlement. Sid Harvey
Industries moved successfully for summary judgment.  The Predecessor
filed an appeal as to the dismissal of Predecessor’s Third Party
Complaint.  In a decision dated December 29, 2006, the Superior Court
of New Jersey, Appellate Division, reversed the dismissal of Predecessor’s Third
Party Complaint and remanded the matter for further proceedings as to
Predecessor’s claim for contribution.




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.




Indemnification




John A.
Hildebrandt, Paul Hildebrandt and the 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.




8
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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.




Insurance




The
assets that the 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 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 Predecessor and the Company under the contested policies.




There are
periods during the years from 1940 to 1999 in which our 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, 2007, 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 Predecessor in 1995.  The Predecessor
asserted that it had no obligation to pay this amount and did not make any
payment.




Insurance
companies have, as of December 31, 2007, defended us and the 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 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.




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 Predecessor
companies. We expressly disclaimed the assumption of any liabilities when we
purchased the assets of the 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 claim limitations on their liabilities by
reason of gaps in coverage or otherwise.




9
 Table of Contents





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.




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.




Item
4.Submission of Matters to a
Vote of Security Holders




None.




PART
II




Item 5.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 2007 and 2006.  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 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




Common Stock
            
            
            Convertible Preferred Stock2006
            
            High
            
            
            Low
            
            
            High
            
            
            LowFirst
      Quarter
            
            $
            2.38
            
            
            $
            1.95
            
            
            $
            2.40
            
            
            $
            1.79Second
      Quarter
            
            
            3.00
            
            
            
            2.10
            
            
            
            2.85
            
            
            
            2.10Third
      Quarter
            
            
            2.50
            
            
            
            1.85
            
            
            
            2.30
            
            
            
            2.00Fourth
      Quarter
            
            
            2.35
            
            
            
            1.70
            
            
            
            2.40
            
            
            
            1.80





10
 Table of Contents





(b)  Approximate number of common
and convertible preferred stockholders:




Approximate
      Number of Record HoldersTitle
      of Class
            
            (As
      of March 1, 2008)Common
      stock par value $.05 per share
            
            290Convertible
      preferred stock par value $.05 per share
            
            838




(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.




(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, 2007.




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, 2007, a total of 22,000 options were outstanding under the
Company’s 1996 Stock Option Plan, which expire in June 2009.




11
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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”), 100,000 options, having an expiration date
in 2016, were granted under the Company’s 2006 Plan, of which 40,000 options
vested and became exercisable immediately and 20,000 options vest and become
exercisable on each of the first three anniversaries of the Grant
Date.  On January 22, 2007, Phillip Siegel resigned as a Director 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.  Mr.
Siegel did not exercise his 10,000 vested options and said options were
forfeited.  As of December 31, 2007, 75,000 options were outstanding
under the Company’s 2006 Stock Option Plan.




(e)  Purchases of Equity
Securities




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 for an aggregate purchase price of $9,832 and
approximately $240,168 remains available for repurchase under the
program.  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, 2007.





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, 2007-October 31, 2007
            
            
            0
            
            
            $
            0
            
            
            
            0
            
            
            $
            250,000November
      1, 2007-November 30, 2007
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            250,000December
      1, 2007-December 31, 2007
            
            
            8,150
            
            
            
            1.21
            
            
            
            8,150
            
            
            
            240,168Total
            
            
            8,150
            
            
            $
            1.21
            
            
            
            8,150
            
            
            $
            240,168




12
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Item
6.Selected FinancialData




Years
      Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Sales
            
            $
            82,425,865
            
            
            $
            71,494,652
            
            
            $
            66,690,945
            
            
            $
            61,454,128
            
            
            $
            44,671,136Operating
      income
            
            
            1,258,951
            
            
            
            2,017,082
            
            
            
            2,347,645
            
            
            
            1,580,076
            
            
            
            1,167,591Net
      (loss) income
            
            $
            (51,637
            )
            
            $
            815,772
            
            
            $
            2,062,852
            
            
            $
            1,523,420
            
            
            $
            1,191,257Income
      per common  share:Basic:Net
      (loss) income per common share
            
            $
            (0.01
            )
            
            $
            0.18
            
            
            $
            0.48
            
            
            $
            0.45
            
            
            $
            0.60Diluted:Net (loss) income per common share
            
            $
            (0.01
            )
            
            $
            0.16
            
            
            $
            0.40
            
            
            $
            0.34
            
            
            $
            0.34







December
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Total
      assets
            
            $
            36,107,221
            
            
            $
            28,517,944
            
            
            $
            27,217,854
            
            
            $
            24,248,516
            
            
            $
            20,489,981Current
      liabilitiesBorrowings under credit facility
            
            
            18,027,055
            
            
            
            13,615,696
            
            
            
            11,745,985
            
            
            
            12,325,209
            
            
            
            12,232,030
            (1)Other
            
            
            10,044,287
            
            
            
            6,832,504
            
            
            
            8,216,989
            
            
            
            6,617,377
            
            
            
            7,089,276
            (2)Long-term
      liabilities, less current obligations
            
            
            1,267,314
            
            
            
            1,317,394
            
            
            
            1,400,834
            
            
            
            1,398,774
            
            
            
            326,700




(1)
              The
      amounts shown in the table as “Borrowings under Credit Facility,” as of
      December 31, 2003, include $2,500,000 which Colonial Commercial Corp. and
      Universal agreed to pay to their lending bank in consideration of the bank
      releasing Colonial Commercial Corp. and Universal from their guarantees to
      the bank of an additional $3,300,695 of Atlantic Hardware & Supply
      Corporation’s (“Atlantic”) line of credit.  Atlantic is an
      inactive wholly owned subsidiary of the Company with no
      assets.
 (2)
                Amount
      includes $219,007 of contingent liabilities of Atlantic.  This
      liability was settled in June 2004.


13
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Item 7.Management’s Discussion and
Analysis of Financial Condition and Results of
Operations




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 provides 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.




14
 Table of Contents





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 $11,364,038
and an allowance for doubtful accounts of $478,857 as of December 31,
2007.  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.




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.  Upon adoption and again
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 $366,376 at December 31, 2007, 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, 2007, the Company had a deferred tax
valuation allowance of approximately $6,800,000.




Comparison of Year Ended
December 31, 2007 with Year Ended December 31, 2006




Sales
increased by 15.3%, or $10,931,213, to $82,425,865 for the year ended December
31, 2007 from $71,494,652 for the same period in 2006.  The inclusion
of sales from our acquisition of S&A Supply, Inc., which occurred on
September 10, 2007, accounted for $4,640,000 of this increase.  The
remainder of the increase is related to the opening of our branch in the Albany,
New York area in April 2007, the inclusion of sales of appliances for the full
year of 2007 as opposed to the last four months of 2006, and increased sales of
air conditioning products in our existing New York locations due to increased
market penetration related to improving sales focus and service levels to our
customers.




15
 Table of Contents





Gross
profit increased by 9.9%, or $2,117,686, to $23,554,892 for the year ended
December 31, 2007 from $21,437,206 for the same period in 2006.  Gross
profit expressed as a percentage of sales decreased by 1.4% to 28.6% in 2007
compared to 30.0% for the comparable period in 2006.  The lower gross
profit expressed as a percentage of sales was caused by increased sales of lower
margin air conditioning equipment and appliances, as well as a reflection of the
more competitive market place.  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 $545,985 and $431,780 for the years ended December 31, 2007 and 2006,
respectively.




Operating
income decreased by 37.6%, or $758,131, to $1,258,951 for the year ended
December 31, 2007 from $2,017,082 for the same period in 2006.  This
percentage decrease in operating income reflects the effect of the difference
between the increase in gross profit of 9.9% compared to the increase in
selling, general and administrative expenses of 14.8%.  The increase
in selling, general and administrative expenses was $2,875,817 to $22,295,941
for the year ended December 31, 2007 from $19,420,124 for the same period in
2006.  This was caused by an increase in expenses for accounting and
professional fees related to the implementation of controls and procedures
required under the Sarbanes Oxley Act of 2002 and additional required filings
with the Securities and Exchange Commission in the amount of $239,000, an
increase in bad debt expense related to the declining economic conditions within
the construction industry in the amount of $486,000 and a non-cash expense
related to the death benefit due to the estate of the Company’s founder in
December 2007 in the amount of $45,000.  Additionally we incurred
approximately $1,955,000 in added expenses related to the operation of our new
Albany, New York location in April 2007, our appliance division’s expenses being
recorded for the full year of 2007 rather than four months in 2006 and the added
selling, general and administrative for the operation of S&A Supply, Inc.
which commenced on September 10, 2007.




Other
income increased by 7.0%, or $19,352, to $297,218 for the year ended December
31, 2007 from $277,866 for the same period in 2006.  This increase is
primarily the result of an increase in service charges collected from customers’
past due invoices in the year ended December 31, 2007.  Interest
expense, net increased by 10.9%, or $147,534, to $1,502,319 for the year ended
December 31, 2007 from $1,354,785 for the same period in 2006.  The
interest expense increase is the result of increasing interest rates and
increased borrowings under the credit line to support the acquisition of S&A
Supply, Inc., the operation of our new location in Albany, New York, and, in
general, higher inventory levels and accounts receivable related to increased
sales.  The revolving credit line bears interest at .25% below the
prime rate and the prime rate was 7.25% at December 31, 2007 compared to 8.25%
at December 31, 2006.  As a result, pre tax income decreased by 94.3%,
or $886,313, to $53,850 for the year ended December 31, 2007 from $940,163 for
the same period in 2006.




The
Company’s income tax expense for the year ended December 31, 2007 was $105,487
compared to $124,391 for the same period in 2006.  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.




16
 Table of Contents





The
Company’s net income decreased by 106.3%, or $867,409, to a net loss of $51,637
for the year ended December 31, 2007, compared to net income of $815,772 for the
same period in 2006.  This decrease in net income was caused by the
decrease in pre-tax income of $886,313, as stated above.




Comparison of Year Ended
December 31, 2006 with Year Ended December 31, 2005




Sales
increased by 7.2%, or $4,803,707, to $71,494,652 for the year ended December 31,
2006 from $66,690,945 for the same period in 2005.  The increase in
sales is primarily a result of increased market penetration at two of the
Company’s subsidiaries, an increase in general industry pricing, and increased
sales of additional hydronic heating product lines.  The increases in
these areas were offset by weaknesses in sales of heating equipment, parts and
accessories related to an unusually warm November and December, as well as
weaknesses in sales of commercial control systems.




Gross
profit increased by 6.5%, or $1,306,809, to $21,437,206 for the year ended
December 31, 2006 from $20,130,397 for the same period in 2005.  Gross
profit expressed as a percentage of sales decreased by 0.2% to 30.0% in 2006
compared to 30.2% for the comparable period in 2005.  The lower gross
profit expressed as a percentage of sales was caused by a decrease in sales of
parts for heating systems due to a warmer November and December.  The
sale of parts usually commands higher margins than equipment
sales.  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 $431,780 and $421,248 for the
years ended December 31, 2006 and 2005, respectively.




Operating
income decreased by 14.1%, or $330,563, to $2,017,082 for the year ended
December 31, 2006 from $2,347,645 for the same period in 2005.  This
percentage decrease in operating income reflects the effect of the difference
between the increase in gross profit of 6.5% compared to the increase in
selling, general and administrative expenses of 9.2%.  The increase in
selling, general and administrative expenses was $1,637,372 to $19,420,124 for
the year ended December 31, 2006 from $17,782,752 for the same period in
2005.  This was caused by increased expenses for additional personnel
to improve customer service, and added cost for increased health insurance,
gasoline, utility expenses and decreasing sales in our heating replacement parts
and commercial control systems business.  Staffing costs increased by
$802,077, while costs for trucking, fuel, and facilities increased by
$197,670.




Other
income increased by 1.9%, or $5,269, to $277,866 for the year ended December 31,
2006 from $272,597 for the same period in 2005.  This increase is
primarily the result of an increase in service charges collected from customers’
past due invoices in the year ended December 31, 2006.  Interest
expense, net increased by 29.7%, or $310,331, to $1,354,785 for the year ended
December 31, 2006 from $1,044,454 for the same period in 2005.  The
interest expense increase is the result of increasing interest rates and
increased borrowings under the credit line to support higher inventory levels
and accounts receivable related to increased sales and higher inventory
levels.  The revolving credit line bears interest at .25% below prime
rate, which was 8.0% at December 31, 2006 compared to 7.25% at December 31,
2005.  As a result, pre tax income decreased by 40.3%, or $635,625, to
$940,163 for the year ended December 31, 2006 from $1,575,788 for the same
period in 2005.




17
 Table of Contents





The
Company’s net income decreased by 60.5%, or $1,247,080, to $815,772 for the year
ended December 31, 2006, compared to net income of $2,062,852 for the same
period in 2005.  This decrease in net income was caused by the
decrease in pre-tax income of $635,625, as stated above, in addition to the
effect of the inclusion of a deferred tax benefit in the year ended December 31,
2005 in the amount of $641,500 with no benefit recognized in the year ended
December 31, 2006.  In 2005, the tax benefit resulted from extending
the tax benefit calculation from a two year earnings projection to a three year
earnings projection, due to improved earnings predictability.




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 maturity 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.  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.  At December
31, 2007, the Company had a standby letter of credit, which expires on July 31,
2008.  The standby letter of credit reduces the availability of the
credit facility by $300,000 and additional reserves determined by the bank
further reduce the availability of the credit facility by
$100,000.  Borrowings under the credit facility are secured by the
available assets of the Company, as defined in the
Agreement.  Availability under the revolving credit line was $718,583
as of December 31, 2007 and is determined by a percentage of available assets as
defined in the Agreement, less letters of credit and reserves.  The
balance outstanding under the revolving line of credit was $18,027,055 as of
December 31, 2007.  The interest rate on the revolving credit facility
as of December 31, 2007 was 7.0%.




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 2008, there is no assurance that they
will be able to do so in the future.  As of December 31, 2007, the
Company was in default of its monthly and quarterly net income and quarterly
cash flow covenants; however, Wells has waived this event of default and reset
the financial covenants for 2008 for a fee of $35,000.  This waiver
applies to the quarter ended December 31, 2007 and does not extend beyond this
period.




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In
addition to this fee, Wells stated that they may require the Company to delay
the repayment of a $750,000 note to Goldman Associates of New York, Inc.
(“Goldman Associates”) which was due on June 30, 2008.  Goldman
Associates has extended the term of payment of this note to January 1,
2009.  Michael Goldman, Chairman of the Board of the Company, is the
beneficial owner of Goldman Associates.  For additional information
regarding Mr. Goldman and Goldman Associates, see Part III, Item 13., Certain Relationships and
Related Transactions, and Director Independence, below.




As of
December 31, 2007, the Company had $622,723 in cash compared with $482,251 at
December 31, 2006.




Net cash
provided by operating activities was $1,048,905 for the year ended December 31,
2007.  The net cash provided by operating activities for the 2007 period is
primarily a result of non-cash charges of $1,322,365 offset by a net loss
of $51,637 and changes in operating assets and liabilities of $221,823.
 The increase in accounts receivable of $1,426,013 was primarily a result
of slower payments made by our customers under credit terms that have not
changed.  The increase in accounts payable of $2,108,151 was primarily
due to increased inventory levels and, in some cases, the extension of vendor
terms.




Cash
flows used in investing activities were $5,154,470 during the year ended
December 31, 2007 due to $451,095 of purchases of equipment and $4,703,375 cash
payment for the acquisition of S&A, net of cash acquired.




Cash
flows provided by financing activities of $4,246,037 consisted of $4,411,359 in
net borrowings under the credit facility-revolving credit, $13,000 received from
the exercise of stock options and $46,752 received from the issuance of notes
payable.  Cash flows used in financing activities consisted of $215,242 for
repayments of notes payable and $9,832 for the repurchase of common
stock.




We
anticipate S&A Supply to be a profitable subsidiary, therefore, cash flows
provided by operating activities should more than offset future cash flows used
in investing and financing activities, such as purchases of equipment and
increased borrowing under the credit facility.  In addition, the
seasonality of the S&A Supply’s business is similar to the Company’s
seasonality, resulting in cash flow trends of a similar nature.




Equity
Transactions




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, 2007, no shares of redeemable preferred stock were
converted into common stock.  As of December 31, 2007, the number of
convertible preferred shares outstanding was 467,500.




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 for an aggregate purchase price of $9,832 and
approximately $240,168 remains available for repurchase under the
program.  The Company accounted for these transactions utilizing the
constructive retirement method.




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Contractual
Obligations:




The
following table represents certain contractual commitments associated with
operating agreements, obligations to financial institutions and other long-term
debt obligations as of December 31, 2007:




Payment
      Due by Period (in thousands)Less
      than
            
            
            
            
            
            
            
            
            OverTotal
            
            
            1
      Year
            
            
            2-3
      Years
            
            
            4-5
      Years
            
            
            5
      YearsOperating
      leases
            
            $
            20,221
            
            
            $
            3,840
            
            
            $
            6,686
            
            
            $
            5,025
            
            
            $
            4,670Compensation
      agreements
            
            
            1,340
            
            
            
            495
            
            
            
            845
            
            
            
            -
            
            
            
            -Notes
      payable
            
            
            1,564
            
            
            
            296
            
            
            
            1,238
            
            
            
            30
            
            
            
            -Notes
      payable interest
            
            
            106
            
            
            
            36
            
            
            
            70
            
            
            
            -
            
            
            
            -Line
      of credit
            
            
            18,027
            
            
            
            18,027
            
            
            
            -
            
            
            
            -
            
            
            
            -Line
      of credit interest
            
            
            1,262
            
            
            
            1,262
            
            
            
            -
            
            
            
            -
            
            
            
            -Totals
            
            $
            42,520
            
            
            $
            23,956
            
            
            $
            8,839
            
            
            $
            5,055
            
            
            $
            4,670




Notes
payable carry a fixed interest percentage rate per annum, with the exception of
a $750,000 note that accrues interest at the prime rate.  “Notes
payable interest” in the table assumes an average annual prime rate of
7.25%.  The prime rate as of December 31, 2007 was
7.25%.  See Note 6, Notes Payable, of the Financial Statements for the
terms of these notes.




“Line of
credit” in the table is shown as a less than one year obligation because the
lending bank may demand payment at any time.  The line of credit
consists of a revolving credit line that bears interest at .25% below
prime.  “Line of credit interest” in the table assumes that the
principal amount outstanding on the line is paid in full on December 31, 2007,
that the principal amount to be repaid on that date will be $18,027,055 (which
is the principal amount that was outstanding on December 31, 2007), and assumes
that the average prime rate will be 7.25% in 2008.  The prime rate was
7.25% as of December 31, 2007.  See Note 5, Financing Arrangements, of
the Financial Statements for the terms of the line of credit.




Impact of Inflation and
Seasonality




To date,
inflation 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.




Item
7A.Quantitative and Qualitative
Disclosures About Market Risk




Market
risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices.  The Company has no financial
instruments that give it exposure to foreign exchange rates or equity
prices.





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The Company’s pre-tax earnings and
cash flows are exposed to changes in interest rates.  All borrowings
under its credit facility bear interest based on the prime rate less .25%, and a
$750,000 note to Goldman Associates of New York, Inc. bears interest at the
prime rate.  A hypothetical 10% adverse change in such rates would
reduce the pre-tax earnings and cash flows by approximately $131,627 over a
one-year period, assuming the borrowing level remains consistent with the
outstanding borrowings as of December 31, 2007.  The fair value of the
borrowings under the credit facility is not affected by changes in market
interest rates.




The
Company’s remaining interest-bearing obligations are at fixed rates of interest
and as such, do not expose the pre-tax earnings and cash flows to changes in
market interest rates. The change in fair value of the Company’s fixed rate
obligations resulting from a hypothetical 10% adverse change in interest rates
would not be material.




Item 8.Financial
Statements and Supplementary Data




The
consolidated financial statements of the Company, together with the Reports of
Independent Registered Public Accounting Firm thereon of Eisner LLP and Weiser
LLP, appear herein. See Index to Consolidated Financial Statements, appearing on
page F-1.




Item 9.Changes In
and Disagreements With Accountants on Accounting and Financial
Disclosure




None.




Item
9A.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.




Based
on management’s evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2007, 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.




21
 Table of Contents




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, 2007. 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.




Item
9B.  Other Information




On March
27, 2008, the Company amended Convertible Notes dated as of July 29, 2004
payable to each Rita Folger and William Pagano (“Amended Convertible
Notes”).  The Amended Convertible Notes provide for the first maturity
date of each note to be extended from June 1, 2008 to January 1,
2009.




On March
27, 2008, the Company amended the Secured Note dated July 24, 2004 payable to
Goldman Associates of New York, Inc. (“Amended Secured Note”).  The
Amended Secured Note provides for the maturity date of the note to be extended
from June 30, 2008 to January 1, 2009.




For
additional information regarding Rita Folger, William Pagano and Goldman
Associates of New York, Inc., see Part III, Item 13., Certain Relationships and
Related Transactions, and Director Independence, below.




22
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PART
III




Item
10.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
            69
            Director,
      Chairman of Audit CommitteeMelissa
      Goldman-Williams
            40
            DirectorMichael
      Goldman
            69
            Director,
      Chairman of the BoardStuart
      H. Lubow
            50
            Director,
      Chairman of Nominating CommitteeRonald
      H. Miller
            64
            DirectorWilliam
      Pagano
            68
            Director
      and Chief Executive Officer of the Company and President of
      UniversalWilliam
      Salek
            46
            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.




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 Table of Contents





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.  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.




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 for 20 years.  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, 2007 through December
31, 2007, all executive officers, Directors and greater than 10% beneficial
owners, complied with Section 16(a) filing requirements.




24
 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.  Phillip Siegel served on the Committee prior to his
resignation as a Director on January 22, 2007.  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 Item
7(d)(3)(iv) of Schedule 14A.




Item
11.Executive
Compensation




Compensation Discussion and
Analysis




Overview




This
compensation discussion and analysis describes and analyzes the material
elements of compensation awarded to, earned by, or paid to each of our executive
officers who served as named executive officers during the last completed fiscal
year.  This compensation discussion and analysis focuses on the information
contained in the following tables and related footnotes and narrative for
primarily the last completed fiscal year, but we also describe compensation
actions taken before or after the last completed fiscal year to the extent it
enhances the understanding of our executive compensation
disclosure.




Prior to
June 13, 2006, our Board of Directors oversaw and administered our executive
compensation program. The compensation committee currently oversees the design
and administration of our executive compensation program.




The
principal elements of our executive compensation program are base salary, annual
incentive compensation award, stock options and other benefits and perquisites.
 Our other benefits and perquisites consist of automobile payments, related
automobile costs, prescription benefits and reimbursement for Medicare
payments.  Our philosophy is to position the aggregate of these
elements at a level that is commensurate with our size and sustained
performance.




Compensation Program
Objectives and Philosophy




The
objectives of our compensation program are to:




a.
            Attract,
      motivate and retain qualified and dedicated executive
      officers.




b.
            Retain
      talented executives and motivate them to achieve business objectives that
      will enhance stockholder value.




c.
            Provide
      our executive officers with cash incentives to further the interests of
      the Company and our stockholders.




Generally,
the compensation of our executive officers is composed of a base salary, an
annual incentive compensation award and equity awards in the form of stock
options.  In setting base salaries, the compensation committee reviews the
individual contributions of the particular executive.  The annual incentive
compensation award for 2007 is determined by terms set forth in each executive
officer’s employment agreement.  In addition, stock options may be
granted to provide the opportunity for long-term compensation based upon the
performance of our stock over time.




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 Table of Contents





The
following is the compensation committee’s policy for persons who do not have
employment agreements with the Company:




The
compensation committee is responsible for determining the annual salary and
incentive compensation awards, stock awards and other compensation of executive
officers who do not have employment agreements as well as stock awards and other
compensation of executive officers who have employment agreements.  In
its deliberations regarding compensation of executive officers, the compensation
committee considers the following factors:




a.
            Company
      performance, both separately and in relation to similar
      companies;




b.
            The
      individual performance, experience and scope of responsibilities of each
      executive officer;




c.
            Compensation
      and stock award information disclosed in the proxy statements of other
      companies;




d.
            Historical
      compensation levels and stock awards at the
  Company;




e.
            The
      overall competitive environment for executives and the level of
      compensation necessary to attract and retain executive talent;
      and




f.
            The
      recommendations of management.




Compensation
Process




Prior to
June 13, 2006, our Board approved the compensation of our named executive
officers, including the terms of their employment agreements.  Going
forward, for each of our named executive officers, the compensation committee,
in accordance with the terms and conditions of any then effective employment
agreements, reviews and approves all elements of compensation taking into
consideration recommendations from our chief executive officer (for compensation
other than his own), as well as competitive market guidance provided at the
request of the compensation committee.




The
Company’s compensation program for executives consists of three
elements:




i.
            base
      salaries




ii.
            performance-based
      annual incentive compensation
awards




iii.
            periodic
      grants of stock options




Base
Salaries




The
salaries for the executive officers are designed to retain qualified and
dedicated executive officers. The compensation committee reviews salary
recommendations made by the Company’s Chief Executive Officer (other than for
executive officers covered by employment agreements), and evaluates individual
responsibility levels, performance and length of service.




AnnualIncentive Compensation
Awards




Annual
incentive compensation awards provide the Company with a means of rewarding
performance based upon the attainment of corporate profitability during the
year.  Mr. Pagano, pursuant to an employment contract, receives annual
incentive compensation awards based upon a percentage of earnings of the
Company’s subsidiaries.  Mr. Salek, pursuant to an employment contract
that expired December 31, 2007, received annual incentive compensation awards
based upon a percentage of earnings of the Company’s
subsidiaries.  Mr. Pagano and Mr. Salek accrued an incentive
compensation award of $151,778 and $14,235, respectively, for the year ended
December 31, 2007. On March 3, 2008, Mr. Pagano waived his right to receive this
incentive compensation for 2007.




26
 Table of Contents





Stock
Options




Stock
options may be granted to provide the opportunity for long-term compensation
based upon the performance of our stock over time.  During 2007, no
stock options were granted to the Company’s employees, or the executive
officers.




Employee Benefit and Health
Plans




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 provides for matching contributions up to a maximum of 3%
of employees’ qualified wages.




The
Company makes available life and health insurance for full time
employees.  Both the Company and the employees contribute to the
payment of this plan in accordance with a published schedule as described in the
Company’s employment manual.




Summary Compensation
Table




The
following table sets forth information about compensation paid or accrued by the
Company during the fiscal years ended December 31, 2007 and 2006 to Bernard
Korn, 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
            
            
            TotalBernard
      Korn*
            2007
            
            $
            200,000
            
            
            
            -
            
            
            $
            37,888
            
            
            $
            237,8882006
            
            $
            200,000
            
            
            
            -
            
            
            $
            30,699
            
            
            $
            230,699William
      Pagano—Director and Chief
            2007
            
            $
            200,000
            
            
            
            -
            
            
            
            -
            
            
            $
            200,000Executive
      Officer of the Company and,
            2006
            
            $
            200,000
            
            
            $
            260,109
            
            
            
            -
            
            
            $
            460,109President
      of UniversalWilliam
      Salek—Chief Financial Officer
            2007
            
            $
            120,000
            
            
            $
            14,235
            
            
            
            -
            
            
            $
            134,235and
      Secretary of the Company and Vice
            2006
            
            $
            120,000
            
            
            $
            30,958
            
            
            
            -
            
            
            $
            150,958President
      and Secretary of Universal




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 Table of Contents





*Mr. Korn resigned as Director,
Chairman of the Board, and Chief Executive Officer of the Company on April 17,
2006 and served as a non-executive employee of the Company until his death on
December 12, 2007.




Mr.
Korn’s all other compensation for the fiscal years ended 2007 and 2006,
respectively, consists of $9,185 and $11,962 in automobile lease payments,
$3,954 and $3,990 in automobile related costs, $17,291 and $7,289 in
prescription coverage for Mr. Korn and his wife, and $7,458 and $7,458 in
Medicare reimbursements.




During
the fiscal years ended 2007, 2006 and 2005, 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. Korn
was the Chairman of the Board, Director and Chief Executive Officer of the
Company until his resignation as such on April 17, 2006.  Mr. Pagano
was the President and a Director of the Company for 2005 and was appointed Chief
Executive Officer on April 17, 2006. Mr. Salek is the Chief Financial Officer
and Secretary of the Company.




Bernard
Korn




Mr.
Korn’s employment under an employment agreement dated April 17, 2006 was to end
on December 31, 2010, however, Mr. Korn passed away December 12,
2007.  Pursuant to the employment agreement, Mr. Korn’s widow is
entitled to the following two payments: (i) a $5,000 lump sum death benefit and
(ii) $200,000 payable not less frequently than in bi-weekly
installments.




The
agreement provided that until May 31, 2008, Mr. Korn would not without the prior
written consent of the Company (i) knowingly sell any of the Company’s
securities to a 5% shareholder (as defined), or to a person who as a result of
such sale would become a 5% shareholder, unless such person first enters into a
standstill agreement in favor of the Company, (ii) acquire, agree to
acquire or make any proposal to acquire any voting securities or assets of the
Company or any of its affiliates, (iii) propose to enter into any merger,
consolidation, recapitalization, business combination or other similar
transaction involving the Company or any of its affiliates, (iv) make, or in any
way participate in any solicitation of proxies 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, (v) form, join or in any way participate in a
group (as defined) in connection with any of the foregoing or (vi) advise,
assist or encourage any other persons in connection with the
foregoing.  On November 2, 2007, the Company terminated said
Standstill Agreement dated June 21, 2004 between the Company and Bernard
Korn.




28
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William
Pagano




Mr.
Pagano was appointed the Chief Executive Officer of the Company after
Mr.  Korn’s resignation on April 17, 2006.




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 by Amendment No. 1 dated as of October 29, 2002, as further amended by
Amendment No. 2 dated as of June 15, 2005, and as further amended by Amendment
No. 3 dated as of March 12, 2007, pursuant to which the Company employed Mr.
Pagano as President of Universal.  The amended 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. The amended employment
agreement contains confidentiality and non-compete provisions and expires on
December 31, 2010.




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%




29
 Table of Contents





For the
fiscal years ending December 31, 2007 and 2006 the incentive compensation base
was $1,473,150 and $2,375,908, respectively, and the incentive compensation was
computed as follows:




2007Incentive
            
            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
            
            
            
            $
            151,7782006Incentive
            
            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$
            1,375,908
            
            at
      12%
            
            $
            165,109$
            2,375,908
            
            
            
            $
            260,109




Total
incentive compensation for the fiscal years ended December 31, 2007 and 2006 was
$151,778 and $260,109, respectively.  On March 3, 2008, Mr. Pagano
waived his right to receive this 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.




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 Table of Contents





William
Salek




Effective
January 1, 2005, Mr. Salek was employed pursuant to an employment agreement that
expired on December 31, 2007 at a compensation of $120,000 per
annum.  The agreement also provided for additional incentive
compensation based on a percentage of earnings, as defined below, of the
subsidiaries.




For each
of the calendar years 2005 through 2007, Mr. Salek received, 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.




Portion
      of Incentive
            
            Additional
      CompensationCompensation
      Base
            
            PercentagesUp
      to
            
            $    250,000
            
            .25%$    251,000
            to
            $    500,000
            
            .50%$    501,000
            to
            $    750,000
            
            .75%$    751,000
            to
            $
      1,000,000
            
            1.00%$
      1,001,000
            to
            $
      1,250,000
            
            1.25%$
      1,251,000
            to
            $
      1,500,000
            
            1.50%$
      1,501,000
            to
            $
      1,750,000
            
            1.75%$
      1,751,000
            to
            $
      2,000,000
            
            2.00%$
      2,001,000
            
            And
      over
            
            2.25%




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 Table of Contents





For the
fiscal years ending December 31, 2007 and 2006, the incentive compensation base
was $1,563,429 and $2,375,908, respectively, and the incentive compensation was
computed as follows:




2007Incentive
            
            AdditionalCompensation
            
            Compensation
            
            IncentiveBase
            
            Percentages
            
            Compensation$    250,000
            
            .25%
            
            $     625$    250,000
            
            .50%
            
            $  1,250$    250,000
            
            .75%
            
            $  1,875$    250,000
            
            1.00%
            
            $  2,500$    250,000
            
            1.25%
            
            $  3,125$    250,000
            
            1.50%
            
            $  3,750$      63,429
            
            1.75%
            
            $  1,110$
      1,563,429
            
            
            
            $14,2352006Incentive
            
            AdditionalCompensation
            
            Compensation
            
            IncentiveBase
            
            Percentages
            
            Compensation$    250,000
            
            .25%
            
            $     625$    250,000
            
            .50%
            
            $  1,250$    250,000
            
            .75%
            
            $  1,875$    250,000
            
            1.00%
            
            $  2,500$    250,000
            
            1.25%
            
            $  3,125$    250,000
            
            1.50%
            
            $  3,750$    250,000
            
            1.75%
            
            $  4,375$    250,000
            
            2.00%
            
            $  5,000$    375,908
            
            2.25%
            
            $  8,458$
      2,375,908
            
            
            
            $30,958




Total
incentive compensation for the fiscal years ended December 31, 2007 and 2006 was
$14,235 and $30,958, respectively.




Mr.
Salek’s employment agreement expired on December 31, 2007.  Commencing
January 1, 2008, Mr. Salek is employed at a compensation of $130,000 per annum,
plus the following incentive program:




Pre-Tax
      Profit
            
            Incentive
      Award$   800,000
            
            5%   of
      Salary or $  6,500$   900,000
            
            10%
      of Salary or $13,000$1,000,000
            
            15%
      of Salary or $19,500$1,100,000
            
            20%
      of Salary or $26,000$1,200,000
            
            25%
      of Salary or $32,500$1,300,000
            
            30%
      of Salary or $39,000$1,350,000
            
            35%
      of Salary or $45,500




Additionally,
Mr. Salek is entitled to use of a Company owned vehicle and all expenses related
thereto, including gas, repairs and insurance.




Mr.
Salek’ compensation plan will give the Company and the compensation committee
the opportunity to review progress and achievements at the end of 2008 in order
to come to a decision on an appropriate plan and compensation package for
subsequent years.




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 Table of Contents




Outstanding Equity Awards at
Fiscal Year End




On
January 2, 2007 Bernard Korn obtained 52,000 shares of common stock by
exercising 52,000 outstanding stock options.  There were no equity
awards outstanding for the named executive officers as of December 31,
2007.




Potential Payments Upon
Termination or Change In Control




Assuming
the employment of each of our named executive officers were to be terminated on
December 31, 2007 without cause, by death or by change in control, the following
individuals would be entitled to payments in the amounts set forth opposite to
their name in the table below:




Severance
      pay for termination without cause
            
            Termination
      by death
            
            Change
      of controlWilliam
      Pagano
            
            None.
            
            None.
            
            None.William
      Salek
            
            None.
            
            None.
            
            None.




Mr.
Korn’s employment under an employment agreement dated April 17, 2006 was to end
on December 31, 2010, however, Mr. Korn passed away December 12,
2007.  Pursuant to the employment agreement, Mr. Korn’s widow is
entitled to the following two payments: (i) a $5,000 lump sum death benefit and
(ii) $200,000 payable not less frequently than in bi-weekly
installments.




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, 2007.




Name
            
            Fees
      Earned or Paid in
Cash
            
            
            Option Awards*
            
            
            All
      Other Compensation
            
            
            TotalE.
      Bruce Fredrikson
            
            $
            22,000
            
            
            $
            10,122
            
            
            
            -
            
            
            $
            32,122Melissa
      Goldman-Williams
            
            $
            12,000
            
            
            
            -
            
            
            
            -
            
            
            $
            12,000Michael
      Goldman
            
            $
            12,000
            
            
            
            -
            
            
            
            -
            
            
            $
            12,000Stuart
      H. Lubow
            
            $
            12,000
            
            
            $
            10,121
            
            
            
            -
            
            
            $
            22,121Ronald
      H. Miller
            
            $
            12,000
            
            
            $
            10,121
            
            
            
            -
            
            
            $
            22,121Phillip
      Siegel
            
            $
            3,000
            
            
            
            -
            
            
            
            -
            
            
            $
            3,000




*The
dollar amount of stock option awards are recognized for financial statement
reporting purposes with respect to the year ended December 31, 2007, 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.




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Additionally,
effective April 1, 2006, E. Bruce Fredrikson’s annual retainer fee for serving
as a Director and Chairman of the Audit Committee increased from $8,000 to
$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
calendar years beginning 2008, the Company will pay 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: E. Bruce Fredrikson, Stuart H. Lubow, Ronald H. Miller and Phillip
Siegel. 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.  On January 22, 2007,
Phillip Siegel resigned as a Director and his 5,000 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.  Mr. Siegel did not exercise his 10,000 vested options
and said options were forfeited.  Prior to his resignation as
Director, Mr. Siegel served as Chairman of the Compensation Committee and as a
member of the Audit and Nominating Committees.




Compensation Committee
Interlocks and Insider Participation




The
Company did not have a Compensation Committee or any other committee of the
Board of Directors performing equivalent functions until June 13, 2006. Prior to
this date, decisions regarding compensation of named executive officers of the
Company were made by the Board of Directors. Two of the company’s executive
officers, Bernard Korn and William Pagano, were Directors of the
Company.  Mr. Korn was the Chairman of the Board and Chief Executive
Officer of the Company until his resignation as Chief Executive Officer,
Director and Chairman of the Board on April 17, 2006.  Until June 13,
2006, each of these individuals participated in deliberations of the Board
during the fiscal year ended December 31, 2006 concerning named executive
officer compensation, except that they abstained from deliberations and voting
regarding their own compensation.




On June
13, 2006, the Board of Directors appointed Phillip Siegel as Chairman of the
Compensation Committee and E. Bruce Fredrikson and Stuart H. Lubow to serve on
the Compensation Committee.  On August 8, 2006 the Board of Directors
adopted a Compensation Committee Charter.  Phillip Siegel resigned as
a Director on January 22, 2007 and has not served on the Compensation Committee
since that date.




Compensation Committee
Report




The
following report of the Compensation Committee does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other Company filing under the Securities Act of 1933 or the Securities Exchange
Act of 1934, except to the extent the Company specifically incorporates this
Report by reference therein.




The Compensation Committee has reviewed and discussed the
Compensation Discussion and Analysis with management and recommended to the
Board of Directors that the Compensation Discussion and Analysis be included in
this Annual Report on Form 10-K for the fiscal year ended December 31, 2007, for
filing with the Securities and Exchange Commission.  Phillip Siegel
resigned as a Director on January 22, 2007, has not served on the Compensation
Committee since that date, and did not participate in these
recommendations.




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 Table of Contents




Members of the Compensation
Committee




E. Bruce
Fredrikson




Stuart H.
Lubow




Item
12.Security Ownership of
Certain Beneficial Owners and Management




The
following table sets forth, as of March 1, 2008, 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
              
              
              
              
              
              Nature
      ofBeneficial
              
              
              Percent
      of
              
              
              Beneficial
              
              
              Percent
      ofName
      of Beneficial Owner
              
              Ownership*
              
              
              Class
              
              
              Ownership*
              
              
              ClassOfficers and
      Directors***:E.
      Bruce Fredrikson
              
              
              25,600
              (1)
              
              
              **
              
              
              
              500
              (1)
              
              
              **Melissa
      Goldman-Williams
              
              
              5,400
              
              
              
              **
              
              
              
              0
              
              
              
              **Michael
      Goldman
              
              
              1,312,255
              (2)
              
              
              27.41
              %
              
              
              0
              
              
              
              **Stuart
      H. Lubow
              
              
              15,000
              (3)
              
              
              **
              
              
              
              0
              
              
              
              **Ronald
      H. Miller
              
              
              16,054
              (4)
              
              
              **
              
              
              
              0
              
              
              
              **William
      Pagano
              
              
              767,973
              (5)
              
              
              16.44
              %
              
              
              0
              
              
              
              **William
      Salek
              
              
              61,667
              (6)
              
              
              1.32
              %
              
              
              0
              
              
              
              **All Officers and
      Directors as a Group:
              
              
              2,203,949
              
              
              
              45.15
              %
              
              
              500
              
              
              
              **Holders of over 5% of
      a class of stock who are not Officers or Directors:Rita
      C. Folger
              
              
              578,719
              (7)
              
              
              12.39
              %
              
              
              0
              
              
              
              **Goldman
      Associates of New York, Inc.
              
              
              1,129,255
              (8)
              
              
              23.59
              %
              
              
              0
              
              
              
              **




The
beneficial owners listed above have all given a business address of 275 Wagaraw
Road, Hawthorne, New Jersey 07506.




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* 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.




***On
January 22, 2007, Phillip Siegel resigned as a Director and his 10,000 shares of
Common Stock issuable upon exercise of his options expired sixty days after his
resignation.




(1)  E.
Bruce Fredrikson’s beneficial ownership consists of 10,600 shares of Common
Stock, 15,000 shares of Common Stock issuable upon exercise of his options, and
500 shares of Common Stock issuable at any time upon conversion of 500 shares of
Convertible Preferred Stock.




(2)  Michael
Goldman is the President and majority shareholder of Goldman Associates of New
York, Inc. (“Goldman Associates”). Goldman Associates is the owner of 979,255
shares of Common Stock (“Goldman Shares”) and a warrant (“Warrant”) to purchase
150,000 shares of Common Stock at an exercise price of $3.00 per
share.  The Warrant is exercisable at any time prior to its expiration
on December 31, 2008.  Mr. Goldman is the owner of 183,000 shares of
Common Stock and the beneficial owner of the Warrant and 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 15,000 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
15,000 shares of Common Stock issuable upon exercise of his
options.




(5)  William
Pagano’s beneficial ownership consists of 734,640 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
16,667 shares of Common Stock issuable upon conversion of a $50,000 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
acted as legal counsel for the Company through April 20, 2005.  Oscar
and Jeffrey Folger acted as legal consultants for the Company from April 21,
2005 through December 31, 2005 and each became an employee of the Company as
Vice President-Chief Legal Counsel and Assistant Vice President-Legal,
respectively, on January 1, 2006 until March 31, 2007.  As of April 1,
2007, Oscar and Jeffrey Folger ceased to act as employees of the Company, but
Oscar Folger’s law firm 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.




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 Table of Contents





(8)  The
beneficial ownership of Goldman Associates of New York, Inc. consists of 979,255
shares of Common Stock and a warrant to purchase 150,000 shares of Common Stock
at an exercise price of $3.00 per share.  See Footnote 2, above, for
information relating to beneficial ownership of these securities held by Michael
Goldman.




Item
13.Certain Relationships and
Related Transactions, and Director
Independence




Related Party Transaction
Policies and Procedures




Policy




It is the
policy of the Board of Directors of Colonial Commercial Corp. (the “Company”)
that all Interested Transactions with Related Parties, as those terms are
defined in this policy, shall be subject to approval or ratification in
accordance with the procedures set forth below.




Procedures




The Board
of Directors of the Company, or, if directed by the Board of Directors, the
Audit Committee or any other independent committee appointed by the Board of
Directors, shall review the material facts of all Interested Transactions that
require the Committee’s approval and either approve or disapprove of the entry
into the Interested Transaction, subject to the exceptions described
below.  If advance Board or committee approval of an Interested
Transaction is not feasible, then the Interested Transaction shall be considered
and, if the Board or committee determines it to be appropriate, ratified at the
Board’s or committee’s next regularly scheduled meeting.  In
determining whether to approve or ratify an Interested Transaction, the Board or
committee will take into account, among other factors it deems appropriate,
whether the Interested Transaction is on terms no less favorable than terms
generally available to an unaffiliated third-party under the same or similar
circumstances and the extent of the Related Person’s interest in the
transaction.




The Board
of Directors and the Audit Committee have reviewed the Interested Transactions
described below in “Standing Pre-Approval for Certain Interested Transactions”
and determined that each of the Interested Transactions described therein shall
be deemed to be pre-approved or ratified (as applicable) by the Board and the
Audit Committee under the terms of this policy.




No
Director shall participate in any discussion or approval of an Interested
Transaction for which he or she is a Related Party, except that the Director
shall provide all material information concerning the Interested Transaction to
the Board or the committee.




If an
Interested Transaction will be ongoing, the Board may establish guidelines for
the Company’s management to follow in its ongoing dealings with the Related
Party.  Thereafter, the Board, on at least an annual basis, shall
review and assess ongoing relationships with the Related Party to see that they
are in compliance with these guidelines and that the Interested Transaction
remains appropriate.




Definitions




An
“Interested Transaction” is any transaction, arrangement or relationship or
series of similar transactions, arrangements or relationships (including any
indebtedness or guarantee of indebtedness) in which (1) the aggregate amount
involved will or may be expected to exceed $120,000 in any calendar year, (2)
the Company is a participant, and (3) any Related Party has or will have a
direct or indirect material interest (other than solely as a result of being a
director or a less than 10 percent beneficial owner of another
entity).




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 Table of Contents





A
“Related Party” is any (a) person who is or was (since the beginning of the last
fiscal year for which the Company has filed a Form 10-K and proxy statement,
even if they do not presently serve in that role) an executive officer, Director
or nominee for election as a Director, (b) greater than 5 percent beneficial
owner of the Company’s common stock, or (c) immediate family member of any of
the foregoing.  Immediate family member includes a person’s spouse,
parents, stepparents, children, stepchildren, siblings, mothers- and
fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law and
anyone residing in such person’s home (other than a tenant or
employee).




Standing Pre-Approval for
Certain Interested Transactions




The Board
and the Audit Committee have reviewed the types of Interested Transactions
described below and determined that each of the following Interested
Transactions shall be deemed to be pre-approved by the Committee, even if the
aggregate amount involved will exceed $120,000.




1.
            Employment
      of executive officers.  Any employment by the Company of an
      executive officer of the Company
if:




a.
            the
      related compensation is required to be reported in the Company’s proxy
      statement under Item 402 of the Securities and Exchange Commission’s
      (“SEC’s”) compensation disclosure requirements (generally applicable to
      “named executive officers”); or




b.
            the
      executive officer is not an immediate family member of another executive
      officer or Director of the Company, the related compensation would be
      reported in the Company’s proxy statement under Item 402 of the SEC’s
      compensation disclosure requirements if the executive officer was a “named
      executive officer”, and the Company’s Compensation Committee approved (or
      recommended that the Board approve) such
  compensation.




2.
            Director
      compensation.  Any compensation paid to a Director if the
      compensation is required to be reported in the Company’s proxy statement
      under Item 402 of the SEC’s compensation disclosure
      requirements;




3.
            Certain
      transactions with other companies.  Any transaction with another
      company at which a Related Person’s only relationship is as an employee
      (other than an executive officer), Director or beneficial owner of less
      than 10% of that company’s shares;




4.
            Transactions
      where all shareholders receive proportional benefits.  Any
      transaction where the Related Person’s interest arises solely from the
      ownership of the Company’s common stock and all holders of the Company’s
      common stock received the same benefit on a pro rata basis (e.g.
      dividends);




5.
            Transactions
      involving competitive bids.  Any transaction involving a Related
      Party where the rates or charges involved are determined by competitive
      bids.




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 Table of Contents





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 $234,866, $224,885 and $215,674
      during the years ended December 31, 2007, 2006 and 2005,
      respectively.  The Company owes Mr. Hildebrandt $80,000 pursuant
      to two notes: (a) a subordinated note in the amount of $150,000, paid
      $30,000 annually commencing December 31, 2004 and (b) a $50,000
      convertible note due 50% on June 1, 2008 and 50% on 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)
            Goldman
      Associates of New York, Inc. (“Goldman Associates”) has 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.  Michael Goldman is the beneficial owner of the
      shares held by Goldman Associates.




The
Company owes Goldman Associates, a private Company controlled by Michael
Goldman, $750,000 pursuant to a secured note which is subordinate to the
borrowings under the credit facility. The note bears interest at the prime rate
and is due on January 1, 2009.




For
calendar years beginning 2008, the Company will pay the premiums for Michael
Goldman's COBRA health insurance.  In January 2008, the
Company paid $13,221 for this premium for 2008.




(c)
            Oscar
      and Jeffrey Folger acted as legal counsel for the Company through April
      20, 2005.  Oscar and Jeffrey Folger acted as legal consultants
      for the Company from April 21, 2005 through December 31, 2005 and each
      became an employee of the Company as Vice President-Chief Legal Counsel
      and Assistant Vice President-Legal, respectively, on January 1, 2006 until
      March 31, 2007.  As of April 1, 2007, Oscar and Jeffrey Folger
      ceased to act as employees of the Company, but Oscar Folger’s law firm
      remains as counsel to the Company.  Mrs. Folger is the wife of
      Oscar Folger and the mother of Jeffrey Folger.  Professional
      fees paid to Oscar Folger’s law firm for the years ended 2007, 2006 and
      2005 were $115,412, $89,826 and $79,973, respectively.  Jeffrey
      Folger is an associate of Oscar Folger’s law
      firm.  Additionally, in 2006, $12,000 was paid to each Oscar and
      Jeffrey Folger as part time employees of the
  Company.




39
 Table of Contents





(d)
            William
      Pagano is employed pursuant to an employment agreement that provides for 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.
      The amended employment agreement contains confidentiality and non-compete
      provisions and expires on December 31, 2010. William Pagano’s total
      incentive compensation for the fiscal years ended December 31, 2007, 2006
      and 2005 was $151,778, $260,109 and $317,924, respectively.  On
      March 3, 2008, Mr. Pagano waived his right to receive this 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.




(e)
            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 was set to expire in
      September 2008, subject to renewal options, and provided for a current
      aggregate annual rent of $133,500.  Pioneer is the landlord
      under the Lease pursuant to an assignment and assumption agreement dated
      April 12, 2005.




On
February 21, 2007, the Lease was further amended by a Third Modification of
Lease Agreement to provide, among other things, for 25,947 square feet of the
leased premises, a net increase of 14,443 square feet, and for $245,844 total
annual fixed rent, an increase of $106,740 per annum.  The
effectiveness of the Third Modification of Lease Agreement commenced in August
2007.  The
term of the lease expires on March 31, 2017, subject to two five-year renewal
options.




Additionally,
on February 21, 2007, Pioneer granted the Company an option (“Option”) to
purchase the Premises for (i) an exercise price equal to Pioneer’s total
financial investment in the Premises through the date of exercise and (ii) the
release of Mr. Pagano (and any other guarantors) from guaranties of mortgage
loans secured by the Premises.  The Option expired on July 31,
2007.




William
Pagano has a 55% interest in Pioneer and each of Rita Folger and Jeffrey Folger
has an 8% interest in Pioneer Realty Partners I, LLC, which has a 40% interest
in Pioneer.  Oscar Folger and Jeffrey Folger are counsel to the
Company.  The Company paid Pioneer Realty Holdings, LLC $176,556 and
$137,239 in rent during the years ended December 31, 2007 and 2006,
respectively.




(f)
            Each
      of Messrs. Goldman, Korn, Pagano, Rozzi, and Mrs. Folger had agreed that
      until May 31, 2008 he or she will not purchase any stock of the Company
      without written consent from the Company and that he or she will not sell
      any stock to any person if the sale would create a new 5% shareholder
      within the meaning of Internal Revenue Code Section 382 unless the buyer
      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.




40
 Table of Contents





(g)
            Mr.
      Pagano, Mr. Salek, Mrs. Folger and the wife of Michael Goldman are holders
      of convertible unsecured notes in the amounts of $100,000, $50,000,
      $100,000 and $25,000, respectively, issued pursuant to the terms of a
      private placement made on July 29,
2004.




(h)
            On
      September 5, 2006, the Company was appointed a non-exclusive distributor
      of Speed Queen home laundry equipment in the New York metropolitan area,
      and in portions of Connecticut, Delaware and Eastern
      Pennsylvania.  The Company succeeded Goldman Associates of New
      York, Inc. in this distributorship and, on August 31, 2006, purchased
      Goldman Associates’ Speed Queen accounts receivable, inventory and related
      assets at fair value for $149,625.  Goldman Associates is a
      private Company controlled by Michael Goldman who is the Chairman of
      Colonial.  The Company also established a “Goldman Universal”
      division to distribute the Speed Queen home laundry system line and other
      appliances.




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 E. Bruce Fredrikson, Stuart
H. Lubow and Ronald H. Miller.




Item 14.Principal Accountant Fees
and Services




Audit
Fees




Audit
fees for 2007 and 2006 were $233,100 and $270,723, 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 2007 and Weiser LLP in
2006 in connection with statutory and regulatory filings or
engagements.




Audit Related
Fees




The
Company did not incur audit related fees from Eisner LLP in 2007 or Weiser LLP
in 2006.  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 2007 or Weiser LLP in
2006.  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 year 2007 were $37,000.  There were no other fees for
professional services rendered to the Company by Weiser LLP during the fiscal
year 2006, other than the services reported above.




41
 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).  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.




PART
IV




Item
15.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-33,
      attached




(3)
            Exhibits




INDEX TO
EXHIBITS




Incorporated
      ByFiled
              
              
              
              Date
      Filed
              
              ReferenceExhibit
              
              Exhibit Name
              
              Herewith
              
              Form
              
              With SEC
              
              From 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)
  42
 Table of Contents
  (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)(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)
  43
 Table of Contents
  (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)(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)
  44
 Table of Contents
  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)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
              
              Yes(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
              
              Yes10.14
              
              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.
              
              Yes10.15
              
              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)
  45
 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.
              
              Yes10.18
              
              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—Eisner
LLP
              
              Yes23.02
              
              Consent
      of Registered Independent Public Accounting Firm—Weiser
LLP
              
              Yes
  46
 Table of Contents
  31.01
              
              Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
              
              Yes31.02
              
              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
  47
 Table of Contents




COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES


Index to
Consolidated Financial Statements




CONTENTSPageReport
      of Independent Registered Public Accounting Firm: Eisner
    LLP
            F-2Report
      of Independent Registered Public Accounting Firm: Weiser
    LLP
            F-3Consolidated
      Balance Sheets as of December 31, 2007 and 2006
            F-4Consolidated
      Statements of Operations for the Years Ended December 31, 2007, 2006 and
      2005
            F-5Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2007,
      2006 and
      2005
            F-6Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
      2005
            F-7Notes
      to the Consolidated Financial Statements
            F-8Schedule
      II – Valuation and Qualifying Accounts
            F-33All
      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 sheet of Colonial Commercial Corp.
and subsidiaries (the "Company") as of December 31, 2007 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit 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 audit includes 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
audit provides 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, 2007, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.




We have
also audited the financial statement Schedule II (Valuation and Qualifying
Accounts) for the year ended December 31, 2007.  In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.






/s/ Eisner
LLP  New York,
New York


March 31,
2008





F-2
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM









To the
Board of Directors and Stockholders of Colonial Commercial Corp. and
Subsidiaries:




We have audited the accompanying
consolidated balance sheet of Colonial Commercial Corp. and Subsidiaries (the
"Company") as of December 31, 2006 and the related consolidated statements of
operations, stockholders’ equity and cash flows for the years ended December 31,
2006 and 2005.  These financial statements and financial statement
schedule are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
financial statement 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 audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Colonial Commercial
Corp. and Subsidiaries as of December 31, 2006 and the consolidated results of
their operations and their cash flows for the years ended December 31, 2006 and
2005, in conformity with U.S. generally accepted accounting
principles.




As
discussed in Note 1(j) to the consolidated financial statements, in 2006, the
Company changed its method of accounting for stock-based
compensation.  Also, the accompanying 2006 and 2005 consolidated
financial statements have been restated to correct the accounting for vendor
rebates and the computation of diluted earnings per share.




We have
also audited the financial statement Schedule II (Valuation and Qualifying
Accounts) for the years ended December 31, 2006 and 2005. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.









/s/Weiser
LLP




New York,
NY




March 22,
2007, except for the effects of the restatements, dated August 13, 2007,
discussed in the second preceding paragraph.







F-3
 Table of Contents








PART I. FINANCIAL
      INFORMATIONItem
      1.  Financial StatementsCOLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
      Balance SheetsDecember
      31,
            
            
            December
      31,2007
            
            
            2006AssetsCurrent
      assets:Cash
            
            $
            622,723
            
            
            $
            482,251Accounts
      receivable, net of allowance for doubtful accounts of $478,857 in
      2007 and $212,043 in 2006
            
            
            11,364,038
            
            
            
            9,069,301Inventory
            
            
            17,282,661
            
            
            
            12,854,317Prepaid
      expenses and other current assets
            
            
            1,107,623
            
            
            
            1,057,099Deferred
      tax asset - current portion
            
            
            532,500
            
            
            
            420,000Total
      current assets
            
            
            30,909,545
            
            
            
            23,882,968Property
      and equipment
            
            
            1,799,689
            
            
            
            1,512,666Goodwill
            
            
            1,628,133
            
            
            
            1,628,133Other
      intangibles
            
            
            366,376
            
            
            
            3,500Other
      assets - noncurrent
            
            
            227,478
            
            
            
            202,177Deferred
      tax asset - noncurrent
            
            
            1,176,000
            
            
            
            1,288,500$
            36,107,221
            
            
            $
            28,517,944Liabilities
      and Stockholders' EquityCurrent
      liabilities:Trade
      payables
            
            $
            7,774,988
            
            
            $
            4,719,160Accrued
      liabilities
            
            
            1,970,396
            
            
            
            1,975,175Income
      taxes payable
            
            
            2,576
            
            
            
            1,630Borrowings
      under credit facility - revolving credit
            
            
            18,027,055
            
            
            
            13,615,696Convertible
      notes payable, includes related party notes of $62,500 in 2007 and $0
      in 2006
            
            
            137,500
            
            
            
            -Notes
      payable - current portion; includes related party notes of $30,000 in
      2007 and $30,000 in 2006
            
            
            158,827
            
            
            
            136,539Total
      current liabilities
            
            
            28,071,342
            
            
            
            20,448,200Convertible
      notes payable, includes related party notes of $262,500 in 2007 and
      $325,000 in 2006
            
            
            337,500
            
            
            
            525,000Notes
      payable, excluding current portion; includes related party notes
      of $750,000 in 2007 and $683,125 in 2006
            
            
            929,814
            
            
            
            792,394Total
      liabilities
            
            
            29,338,656
            
            
            
            21,765,594Commitments
      and contingenciesStockholders'
      equity:Redeemable
      convertible preferred stock, $.05 par value, 2,500,000
      shares authorized, 467,500 shares issued and outstanding in 2007 and
      2006, liquidation preference of $2,337,500 in 2007 and
2006
            
            
            23,375
            
            
            
            23,375Common
      stock, $.05 par value, 20,000,000 shares authorized,  4,637,530
      and 4,593,680 shares issued and outstanding in 2007 and 2006,
      respectively
            
            
            231,876
            
            
            
            229,684Additional
      paid-in capital
            
            
            10,773,451
            
            
            
            10,707,791Accumulated
      deficit
            
            
            (4,260,137
            )
            
            
            (4,208,500
            )Total
      stockholders' equity
            
            
            6,768,565
            
            
            
            6,752,350$
            36,107,221
            
            
            $
            28,517,944The
      accompanying notes are an integral part of these consolidated financial
      statements.








F-4
 Table of Contents


COLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
      Statements of OperationsFor
      the Years Ended December 31,2007
                
                
                2006
                
                
                2005Sales
                
                $
                82,425,865
                
                
                $
                71,494,652
                
                
                $
                66,690,945Cost
      of sales
                
                
                58,870,973
                
                
                
                50,057,446
                
                
                
                46,560,548Gross
      profit
                
                
                23,554,892
                
                
                
                21,437,206
                
                
                
                20,130,397Selling,
      general and administrative expenses, net
                
                
                22,295,941
                
                
                
                19,420,124
                
                
                
                17,782,752Operating
      income
                
                
                1,258,951
                
                
                
                2,017,082
                
                
                
                2,347,645Other
      income
                
                
                297,218
                
                
                
                277,866
                
                
                
                272,597Interest
      expense, net; includes related party interest of $101,770 in
      2007, $104,485 in 2006 and $93,154 in 2005
                
                
                (1,502,319
                )
                
                
                (1,354,785
                )
                
                
                (1,044,454
                )Income
      from operations before income tax expense (benefit)
                
                
                53,850
                
                
                
                940,163
                
                
                
                1,575,788Income
      tax expense (benefit)
                
                
                105,487
                
                
                
                124,391
                
                
                
                (487,064
                )Net
      (loss) income
                
                $
                (51,637
                )
                
                
                815,772
                
                
                $
                2,062,852(Loss)
      income per common share:Basic
                
                $
                (0.01
                )
                
                $
                0.18
                
                
                $
                0.48Diluted
                
                $
                (0.01
                )
                
                $
                0.16
                
                
                $
                0.40Weighted
      average shares outstanding:Basic
                
                
                4,645,186
                
                
                
                4,579,129
                
                
                
                4,295,697Diluted
                
                
                4,645,186
                
                
                
                5,125,646
                
                
                
                5,293,114The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-5
 Table of Contents






Consolidated
      Statements of Stockholders' EquityFor
      the Years Ended December 31, 2007, 2006 and 2005Number
      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, 2004
            
            
            790,439
            
            
            
            4,158,441
            
            
            $
            39,522
            
            
            $
            207,922
            
            
            $
            10,746,836
            
            
            $
            (7,087,124
            )
            
            $
            3,907,156Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,062,852
            
            
            
            2,062,852Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (74,450
            )
            
            
            
            
            
            
            (74,450
            )Conversion
      of shares of
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -preferred
      stock to common stock
            
            
            (298,018
            )
            
            
            298,018
            
            
            
            (14,901
            )
            
            
            14,901
            
            
            
            
            
            
            
            
            
            
            
            -Retirement
      of preferred stock
            
            
            (7,700
            )
            
            
            
            
            
            
            (385
            )
            
            
            
            
            
            
            (15,015
            )
            
            
            
            
            
            
            (15,400
            )Options
      exercised
            
            
            
            
            
            
            88,000
            
            
            
            
            
            
            
            4,400
            
            
            
            17,600
            
            
            
            
            
            
            
            22,000Tax
      effect of options exercised
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (48,112
            )
            
            
            
            
            
            
            (48,112
            )Balance
      at December 31, 2005
            
            
            484,721
            
            
            
            4,544,459
            
            
            
            24,236
            
            
            
            227,223
            
            
            
            10,626,859
            
            
            
            (5,024,272
            )
            
            
            5,854,046Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            815,772
            
            
            
            815,772Conversion
      of shares of
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -preferred
      stock to common stock
            
            
            (17,221
            )
            
            
            17,221
            
            
            
            (861
            )
            
            
            861
            
            
            
            
            
            
            
            
            
            
            
            -Options
      exercised
            
            
            
            
            
            
            32,000
            
            
            
            
            
            
            
            1,600
            
            
            
            6,400
            
            
            
            
            
            
            
            8,000Options
      issued
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            53,412
            
            
            
            
            
            
            
            53,412Tax
      effect of options exercised
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            21,120
            
            
            
            
            
            
            
            21,120Balance
      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
            )
            
            $
            6,768,565The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-6
 Table of Contents




COLONIAL COMMERCIAL CORP. AND
      SUBSIDIARIESConsolidated
      Statements of Cash FlowsFor
      The Year Ended2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      (loss) income
            
            $
            (51,637
            )
            
            $
            815,772
            
            
            $
            2,062,852Adjustments
      to reconcile net (loss) income to net cash provided by (used in)
      operating activities:Deferred
      tax benefit
            
            
            -
            
            
            
            -
            
            
            
            (641,500
            )Stock-based
      compensation
            
            
            30,364
            
            
            
            53,412
            
            
            
            (74,450
            )Provision
      for doubtful accounts
            
            
            652,468
            
            
            
            191,357
            
            
            
            101,724Depreciation
            
            
            554,076
            
            
            
            457,322
            
            
            
            387,719Amortization
      of intangibles
            
            
            11,954
            
            
            
            7,834
            
            
            
            16,166Accretion
      of debt discount
            
            
            39,183
            
            
            
            37,500
            
            
            
            37,500Tax
      effect of options exercised
            
            
            34,320
            
            
            
            21,120
            
            
            
            (48,112
            )Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            (1,426,013
            )
            
            
            (701,615
            )
            
            
            (816,853
            )Inventory
            
            
            (821,110
            )
            
            
            (867,398
            )
            
            
            (1,159,168
            )Prepaid
      expenses and other current assets
            
            
            (34,833
            )
            
            
            (2,321
            )
            
            
            (200,926
            )Other
      assets - noncurrent
            
            
            (25,301
            )
            
            
            (66,345
            )
            
            
            47,351Trade
      payables
            
            
            2,108,151
            
            
            
            (1,272,786
            )
            
            
            1,270,156Accrued
      liabilities
            
            
            (23,663
            )
            
            
            (71,984
            )
            
            
            303,153Income
      taxes payable
            
            
            946
            
            
            
            (11,142
            )
            
            
            (23,544
            )Net
      cash provided by (used in) operating activities
            
            
            1,048,905
            
            
            
            (1,409,274
            )
            
            
            1,262,068Cash
      flows from investing activities:Acquisition
      of S&A Supply Inc.
            
            
            (4,703,375
            )
            
            
            -
            
            
            
            -Acquisition
      of Speed Queen assets from Goldman Associates of NY,
    Inc.
            
            
            -
            
            
            
            (149,625
            )
            
            
            -Additions
      to property and equipment
            
            
            (451,095
            )
            
            
            (300,504
            )
            
            
            (401,054
            )Net
      cash used in investing activities
            
            
            (5,154,470
            )
            
            
            (450,129
            )
            
            
            (401,054
            )Cash
      flows from financing activities:Issuance
      of common stock and exercise of stock options
            
            
            13,000
            
            
            
            8,000
            
            
            
            22,000Retirement
      of preferred stock
            
            
            -
            
            
            
            -
            
            
            
            (15,400
            )Repurchase
      of common stock
            
            
            (9,832
            )
            
            
            -
            
            
            
            -Repayments
      of notes payable: includes related party repayments of $30,000 in 2007,
      $60,389 in 2006 and $48,091 in 2005
            
            
            (215,242
            )
            
            
            (162,586
            )
            
            
            (141,292
            )Issuance
      of notes payable
            
            
            46,752
            
            
            
            13,073
            
            
            
            155,699Repayments
      under credit facility – term loan/overadvance
            
            
            -
            
            
            
            (562,977
            )
            
            
            (1,103,690
            )Borrowings
      under credit facility - revolving credit, net
            
            
            4,411,359
            
            
            
            2,432,688
            
            
            
            524,466Net
      cash provided by (used in) financing activities
            
            
            4,246,037
            
            
            
            1,728,198
            
            
            
            (558,217
            )Increase
      (decrease) in cash
            
            
            140,472
            
            
            
            (131,205
            )
            
            
            302,797Cash
      - beginning of period
            
            
            482,251
            
            
            
            613,456
            
            
            
            310,659Cash
      - end of period
            
            $
            622,723
            
            
            $
            482,251
            
            
            $
            613,456The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-7
 Table of Contents





COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES


Notes to
Consolidated Financial Statements


December
31, 2007, 2006 and 2005




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”), RAL Supply Group, Inc. (“RAL”),
American/Universal Supply Inc. (“American”) 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 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.




(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, 2007 and 2006.




F-8
 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 $545,985, $431,780 and $421,248 for the
years ended December 31, 2007, 2006 and 2005, respectively.




The
Company’s reserve for slow-moving and obsolete inventory at December 31, 2007
amounted to $432,000, a decrease of $9,137 during the year ended December 31,
2007.




(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-9
 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




Prior to
January 1, 2006, the Company used the intrinsic-value method of accounting for
stock-based awards granted to employees.  In accordance with SFAS No.
148, “Accounting for Stock Based Compensation – Transition and Disclosure,” the
following table presents the effect on net income and net income per share, had
compensation cost for the Company’s stock plans been determined consistent with
SFAS No. 123, “Accounting for Stock-Based Compensation”.




On
January 1, 2006, the Company adopted the modified prospective application method
of SFAS No. 123(R), “Share-Based Payment”, which establishes 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. This eliminates the exception to account for
such awards using the intrinsic method previously allowable under APB Opinion
No. 25. SFAS No. 123 (R) was effective for the first period after December 31,
2005.




The
following table illustrates the effect on net income if the fair-value-based
method had been applied to all outstanding and unvested awards for
2005.




2005Net
      income, as reported
            
            $
            2,062,852Add:
      Stock-based compensation related to option repricing
            
            
            (74,450
            )Pro
      forma
            
            $
            1,988,402Basic
      net income per common shareAs
      reported
            
            $
            0.48Pro
      forma
            
            $
            0.46Diluted
      net income per common shareAs
      reported
            
            $
            0.40Pro
      forma
            
            $
            0.38


There
were no common stock equivalents excluded from the above diluted net income per
share calculations.




F-10
 Table of Contents




COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


(k)  Net (Loss) Income 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.




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.  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 1993, 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.




F-11
 Table of Contents




COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


(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 and income taxes and valuation of
goodwill.  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 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  The adoption of SFAS 157 is not expected to have
a material impact on the Company’s financial position, results of operations or
cash flows.




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.  The adoption of SFAS 159 is not expected to 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 is not
expected to 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.  The adoption of FASB 141R is not expected to have
a material impact on the Company’s financial position.





F-12
 Table of Contents





COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued




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.




(p) Reclassification




Certain
prior year amounts have been reclassified to conform with the current year
presentation of financial statements.  This reclassification has no
impact on the Company’s financial statements.




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 $1,425
month-to-month tenancy with a non-related party for a location in North Adams,
Massachusetts.




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.





F-13
 Table of Contents




COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


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.  The Asset Purchase Agreement
provides for adjustments to be made on or about January 18, 2008 related to
differences between the book value of accounts receivable and inventory on the
date of acquisition and amounts ultimately realized.  On March 26,
2008, the Asset Purchase Agreement was amended to extend the date for making
adjusting payments to April 30, 2008 (“Amendment Number 1”).




Based on
a third party valuation, the purchase price, including acquisition costs,
resulted in the recognition of $373,000 of other intangible assets.




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




F-14
 Table of Contents





COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued




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 31,2007
            
            
            2006Net
      Sales
            
            $
            91,753,435
            
            
            $
            86,461,466Operating
      income
            
            
            970,451
            
            
            
            2,285,082Net
      (loss) income
            
            $
            (559,972
            )
            
            $
            793,002(Loss)
      income per common share:Basic:
            
            $
            (0.12
            )
            
            $
            0.17Diluted:
            
            $
            (0.12
            )
            
            $
            0.15


3.
            Property and
      Equipment




Property
and equipment consists of the following at December 31:




2007
            
            
            2006Computer
      hardware and software
            
            $
            1,259,181
            
            
            $
            1,040,441Furniture
      and fixtures
            
            
            177,077
            
            
            
            91,558Leasehold
      improvements
            
            
            1,552,898
            
            
            
            1,410,425Showroom
      fixtures and displays
            
            
            29,958
            
            
            
            79,606Automobiles
            
            
            950,814
            
            
            
            550,8293,969,928
            
            
            
            3,172,859Less
      accumulated depreciation and amortization
            
            
            (2,170,239
            )
            
            
            (1,660,193
            )$
            1,799,689
            
            
            $
            1,512,666




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, 2007
            
            
            December
      31, 2006EstimatedGross
            
            
            
            
            
            Net
            
            
            Gross
            
            
            
            
            
            Net
            
            
            UsefulCarrying
            
            
            Accumulated
            
            
            Carrying
            
            
            Carrying
            
            
            Accumulated
            
            
            Carrying
            
            
            LifeAmount
            
            
            Amortization
            
            
            Amount
            
            
            Amount
            
            
            Amortization
            
            
            Amount
            
            
            (Years)Covenants
      Not to Compete
            
            $
            251,667
            
            
            $
            (241,000
            )
            
            $
            10,667
            
            
            $
            241,667
            
            
            $
            (238,167
            )
            
            $
            3,500
            
            
            
            3-5Customer
      List
            
            $
            291,864
            
            
            $
            (8,209
            )
            
            $
            283,655
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10Trade
      Name
            
            $
            72,966
            
            
            $
            (912
            )
            
            $
            72,054
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            20Total
            
            $
            616,497
            
            
            $
            (250,121
            )
            
            $
            366,376
            
            
            $
            241,667
            
            
            $
            (238,167
            )
            
            $
            3,500




Amortization
expense amounted to $11,954, $7,834 and $16,166 for the years ended December 31,
2007, 2006 and 2005, respectively.





F-15
 Table of Contents




COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


Estimated
Amortization
Expense:




For
      the Years Ended December 31,2008
            
            $
            34,5002009
            
            
            33,0002010
            
            
            33,0002011
            
            
            33,0002012
            
            
            33,000Thereafter
            
            
            199,876$
            366,376


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 maturity 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.  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.  At December
31, 2007, the Company had a standby letter of credit, which expires on July 31,
2008.  The standby letter of credit reduces the availability of the
credit facility by $300,000 and additional reserves determined by the bank
further reduce the availability of the credit facility by
$100,000.  Borrowings under the credit facility are secured by the
available assets of the Company, as defined in the
Agreement.  Availability under the revolving credit line was $718,583
as of December 31, 2007 and is determined by a percentage of available assets as
defined in the Agreement, less letters of credit and reserves.  The
balance outstanding under the revolving line of credit was $18,027,055 as of
December 31, 2007.  The interest rate on the revolving credit facility
as of December 31, 2007 was 7.0%.




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, 2007,
the Company was in default of its monthly and quarterly net income and quarterly
cash flow covenants; however, Wells has waived this event of default and reset
the financial covenants for 2008 for a fee of $35,000.  This waiver
applies to the quarter ended December 31, 2007 and does not extend beyond this
period.




F-16
 Table of Contents




COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


In
addition to this fee, Wells stated that they may require the Company to delay
the repayment of a $750,000 note to Goldman Associates of New York, Inc.
(“Goldman Associates”) which was due on June 30, 2008.  Goldman
Associates has extended the term of payment of this note to January 1,
2009.  Michael Goldman, Chairman of the Board of the Company, is the
beneficial owner of Goldman Associates.  For additional information
regarding Mr. Goldman and Goldman Associates, see Note 17. Related Party
Transactions, below.




6.
            Notes
      Payable




Notes
payable consist of the following at December 31:




2007
            
            
            2006Various
      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 $13,043 and $6,378 for 2007 and 2006,
      respectively, bearing interest between .9% to 5.9%
            
            $
            336,333
            
            
            $
            155,808Subordinated
      term note payable to a private individual, $30,000 annual principal
      payment, interest at 9% payable monthly.*
            
            
            30,000
            
            
            
            60,000Subordinated
      term note payable to an investment company, $30,000 annual principal
      payments, interest at 9% payable monthly.
            
            
            30,000
            
            
            
            60,000Term
      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 91,666
      shares in 2007 and 108,333 shares in 2006 of common stock at $3.00 per
      share during the term of the notes.**
            
            
            275,000
            
            
            
            325,000Term
      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 January 1, 2009 and the
      balance on June 1, 2009.  The notes are convertible into 66,667
      shares in 2007 and 66,667 shares in 2006 of common stock at $3.00 per
      share during the term of the notes.***
            
            
            200,000
            
            
            
            200,000Term
      note payable of $750,000 to a corporation, subordinated secured note
      payable, bearing interest at the prime rate and payable quarterly,
      principal payable on January 1, 2009 and warrants to purchase 150,000
      shares of common stock at $3.00 per share expiring 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 $39,183 and $37,500
      in interest expense during 2007 and 2006, respectively, related to the
      warrant.****
            
            
            692,308
            
            
            
            653,1251,563,641
            
            
            
            1,453,933Less
      current installments
            
            
            (296,327
            )
            
            
            (136,539
            )$
            1,267,314
            
            
            $
            1,317,394




*The term
note payable bearing interest at 9% is to Paul Hildebrandt, who is a related
party.




F-17
 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 three notes
considered to be related party transactions; $50,000 term note payable to
William Salek, Chief Financial Officer and Secretary of the Company, $25,000
term note payable to Eileen Goldman, the wife of Michael Goldman and $50,000
term note payable to Paul Hildebrandt.




***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.




****The
term note payable bearing interest at prime rate is to Goldman Associates of New
York, Inc., in which Michael Goldman is President, is also considered a related
party. 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.




Maturities
of notes payable are as follows:




2008
            
            $
            296,3272009
            
            
            1,183,3562010
            
            
            53,9532011
            
            
            21,8782012
            
            
            8,127$
            1,563,641


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.




The
voting rights of the common stockholders and preferred stockholders are based
upon the number of shares of convertible preferred stock
outstanding.  There are currently less than 600,000 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, 2007, the number of
preferred shares outstanding was 467,500; accordingly, the Board of Directors to
be elected at the 2008 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.







F-18
 Table of Contents




COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued




At
December 31, 2007, there were 872,833 shares of common stock reserved for
conversion of preferred stock and for the exercise of vested stock options,
convertible notes and warrants.




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, 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, 2006, the Company issued 32,000 shares of common
stock pursuant to the exercise of stock options.  On April 3, 2006,
Ronald H. Miller obtained 12,000 shares of common stock, by exercising 12,000
outstanding stock options.  Mr. Miller is a Director of the Company.
On April 17, 2006, Jack Rose obtained 12,000 shares of common stock, by
exercising 12,000 outstanding stock options.  Mr. Rose was a Director
of the Company at the time of the transaction.  On May 16, 2006, a
non-executive employee of the Company obtained 4,000 shares of common stock by
exercising 4,000 outstanding stock options.  On May 31, 2006, a
non-executive employee of the Company obtained 4,000 shares of common stock by
exercising 4,000 outstanding stock options.




During
the year ended December 31, 2007, no shares of redeemable preferred stock were
converted into common stock.  During the year ended December 31, 2006,
holders of a total of 17,221 shares of redeemable convertible preferred stock
converted these shares into 17,221 shares of Common Stock.  As of
December 31, 2007 and 2006, the number of convertible preferred shares
outstanding was 467,500.




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 approximately $240,168 remains available for repurchase under the
program.  The Company accounted for these transactions utilizing the
constructive retirement method.




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, 2007, a total of 22,000 options were
outstanding under the 1996 Plan, which expire in June 2009.





F-19
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


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, 2007, 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.




On
January 22, 2007, Phillip Siegel resigned as a Director 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.  Mr. Siegel did not exercise his
10,000 vested options and said options were forfeited.




No
options were granted during the year ended December 31, 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.




F-20
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


The fair
value of each option granted on December 6, 2006 under the 2006 Stock Plan of
$1.78 was estimated using the Black-Scholes option pricing method using the
following assumptions:




2006Historical
      stock price volatility
            
            
            160.50
            %Risk-free
      interest rate
            
            
            4.44
            %Expected
      life (in years)
            
            
            6.34Dividend
      yield
            
            
            0.00




The
valuation assumptions were determined as follows:




Historical
stock price volatility: The Company used the daily closing stock prices to
calculate historical annualized volatility.




Risk-free
interest rate: The Company bases the risk-free interest rate on the interest
rate payable on U.S. Treasury securities in effect at the time of the grant for
a period that is commensurate with the assumed expected option
life.




Expected
life: The expected life of the options represents the period of time options are
expected to be outstanding.  The Company uses historical data of
previously issued options to estimate expected option life.




Dividend
yield: The estimate for dividend yield is 0.00, because the Company has not
historically paid, and does not intend for the foreseeable future to pay, a
dividend.




F-21
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


Changes
in options outstanding are as follows:




Shares
      Subject to Option
            
            
            Weighted
      Average Exercise Price
            
            
            Aggregate
              Intrinsic
              ValueBalance
      at December 31, 2004
            
            
            194,000
            
            
            
            0.25Options
      Exercised
            
            
            (88,000
            )
            
            
            0.25Balance
      at December 31, 2005
            
            
            106,000
            
            
            
            0.25Options
      Exercised
            
            
            (32,000
            )
            
            
            0.25Options
      Granted
            
            
            100,000
            
            
            
            1.85Balance
      at December 31, 2006
            
            
            174,000
            
            
            
            1.17
            
            
            $
            330,600Options
      Exercised
            
            
            (52,000
            )
            
            
            0.25Options
      Forfeited
            
            
            (25,000
            )
            
            
            1.85Balance
      at December 31, 2007
            
            
            97,000
            
            
            
            1.49
            
            
            $
            24,200Exercisable
      at December 31, 2006
            
            
            114,000
            
            
            
            0.81
            
            
            $
            216,600Exercisable
      at December 31, 2007
            
            
            67,000
            
            
            
            1.32
            
            
            $
            24,200




Prior to
January 1, 2006, the Company used the intrinsic method previously allowed under
APB Opinion No. 25 to value options. The number of options outstanding under the
variable pricing method as of December 31, 2005 was 43,000, which caused the
Company to incur additional stock-based compensation income of $74,450 for the
year ended December 31, 2005.  As of January 1, 2006 all options
outstanding were fully vested therefore the Company was not required to make a
stock compensation expense entry under the rules of SFAS No.
123(R).




In 2006,
the Company incurred stock-based compensation expense of $53,412 and, as of
December 31, 2006, had unrecognized compensation of $80,118 which was expected
to be recognized over a period of three years under the modified prospective
application method of SFAS No. 123(R) for options granted on December 6,
2006.  In 2007, the Company incurred $30,364 in stock-based
compensation expense and as of December 31, 2007 had unrecognized compensation
of $49,754.




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-22
 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,
2007:




Options
      Outstanding and ExercisableWeighted
      AverageRange
      of
            
            
            
            
            
            Remaining
            
            
            Weighted
      AverageExercise Prices
            
            
            Shares
            
            
            Contractual Life
            
            
            Exercise Price$
            .25
            
            
            
            22,000
            
            
            
            1.47
            
            
            $
            .25$
            1.85
            
            
            
            45,000
            
            
            
            8.94
            
            
            $
            1.85Options
      Outstanding and Non-exercisable$
            1.85
            
            
            
            30,000
            
            
            
            8.95
            
            
            $
            1.85




The
Company expects all 30,000 outstanding and unvested options to
vest.




10.
            Net (Loss) Income Per
      Common Share




Basic net
income per share is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding. Diluted earnings
per share reflect, in periods in which they have a dilutive effect, the impact
of common shares issuable upon exercise of stock options.




A
reconciliation between the numerators and denominators of the basic and diluted
income per common share is as follows:




2007
            
            
            2006
            
            
            2005Net
      (loss) income (numerator for basic  income per
      share)
            
            $
            (51,637
            )
            
            $
            815,772
            
            
            $
            2,062,852Interest
      expense on convertible notes (net of tax)
            
            
            -
            
            
            
            -
            
            
            
            51,513Adjusted
      net (loss) income (numerator for diluted  income per
      share)
            
            $
            (51,637
            )
            
            $
            815,772
            
            
            $
            2,114,365Weighted
      average common shares(denominator
      for basic income per share)
            
            
            4,645,186
            
            
            
            4,579,129
            
            
            
            4,295,697Effect
      of dilutive securities:Convertible
      preferred stock
            
            
            -
            
            
            
            472,451
            
            
            
            683,695Convertible
      notes
            
            
            -
            
            
            
            -
            
            
            
            175,000Employee
      stock options
            
            
            -
            
            
            
            74,066
            
            
            
            138,722Weighted
      average common and potential common sharesoutstanding
      (denominator for diluted income per share)
            
            
            4,645,186
            
            
            
            5,125,646
            
            
            
            5,293,114Basic
      net (loss) income per share
            
            $
            (0.01
            )
            
            $
            0.18
            
            
            $
            0.48Diluted
      net (loss) income per share
            
            $
            (0.01
            )
            
            $
            0.16
            
            
            $
            0.40







F-23
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


Employee
stock options totaling 97,000 for the year ended December 31, 2007 were not
included in the net loss per share calculation because their effect would have
been anti-dilutive.  Convertible preferred stock, convertible into
467,500 shares of common stock for the year ended December 31, 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 $475,000
and $525,000, convertible into 158,333 and 175,000 shares of common stock,
respectively, were not included in the net loss per share calculation for the
years ended December 31, 2007 and 2006, respectively, because their effect would
have been anti-dilutive. There were no common stock equivalents excluded from
the above diluted net income per share calculations for 2005.




11.
            Income
      Taxes




The
provision for income taxes consists of the following:




2007
            
            
            2006
            
            
            2005State
            
            
            
            
            
            
            
            
            State
            
            
            
            
            
            
            
            
            StateAnd
            
            
            
            
            
            
            
            
            And
            
            
            
            
            
            
            
            
            AndFederal
            
            
            Local
            
            
            Total
            
            
            Federal
            
            
            Local
            
            
            Total
            
            
            Federal
            
            
            Local
            
            
            TotalCurrent
            
            $
            22,751
            
            
            $
            82,736
            
            
            $
            105,487
            
            
            $
            17,698
            
            
            $
            106,693
            
            
            $
            124,391
            
            
            $
            (16,239
            )
            
            $
            170,675
            
            
            $
            154,436Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (641,500
            )
            
            
            -
            
            
            
            (641,500
            )Total
      tax expense(benefit)
            
            $
            22,751
            
            
            $
            82,736
            
            
            $
            105,487
            
            
            $
            17,698
            
            
            $
            106,693
            
            
            $
            124,391
            
            
            $
            (657,739
            )
            
            $
            170,675
            
            
            $
            (487,064
            )


The
components of deferred income tax benefit are as follows:




2007
            
            
            2006
            
            
            2005Deferred
      tax expense (benefit), exclusive of the effects of the other components
      listed below
            
            $
            0
            
            
            $
            0
            
            
            $
            0Decrease
      in beginning-of-the-year balance of the valuation allowance for deferred
      tax assets
            
            
            0
            
            
            
            0
            
            
            
            (641,500
            )Generation
      of continuing operations net operating loss carryforward
            
            
            0
            
            
            
            0
            
            
            
            0$
            0
            
            
            $
            0
            
            
            $
            (641,500
            )




A
reconciliation of the provision for income taxes computed at the Federal
statutory rate to the reported provision for income taxes follows:




2007
            
            
            2006
            
            
            2005Tax
      provision at Federal statutory rate
            
            
            34.00
            %
            
            
            34.00
            %
            
            
            34.00
            %Utilization
      of net operating loss
            
            
            0.00
            %
            
            
            (34.00
            )%
            
            
            (34.00
            )%Alternative
      minimum tax
            
            
            42.25
            %State
      income taxes, net of federal benefit
            
            
            100.09
            %
            
            
            7.08
            %
            
            
            7.15
            %Change
      in valuation allowance for deferred tax assets
            
            
            (10.06
            )%
            
            
            0.00
            %
            
            
            (40.71
            )%Permanent
      differences
            
            
            26.12
            %
            
            
            1.67
            %
            
            
            1.59
            %Other
            
            
            3.49
            %
            
            
            4.48
            %
            
            
            1.05
            %Total
            
            
            195.89
            %
            
            
            13.23
            %
            
            
            (30.92
            )%





F-24
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2007 and 2006 are presented
below.




2007
            
            
            2006Current
      Deferred Tax Assets:Federal
      net operating loss carryforwards
            
            $
            532,500
            
            
            $
            420,000Current
      Deferred Tax Assets
            
            $
            532,500
            
            
            $
            420,000Non-current
      Deferred Tax Assets:Federal
      net operating loss carryforwards
            
            $
            7,481,331
            
            
            $
            9,937,591State
      net operating loss carryforwards
            
            
            136,501
            
            
            
            75,121Allowance
      for doubtful accounts
            
            
            253,514
            
            
            
            107,647Additional
      costs inventoried for tax purposes
            
            
            702,761
            
            
            
            553,991Alternative
      Minimum Tax Credit Carryforward
            
            
            49,436
            
            
            
            47,467Compensation
            
            
            125,625
            
            
            
            206,031Rent
            
            
            67,484
            
            
            
            64,557Non-current
      Deferred Tax Assets
            
            
            8,816,652
            
            
            
            10,992,405Non-current
      Deferred Tax Liabilities:Goodwill
            
            
            (874,415
            )
            
            
            (755,542
            )Depreciation
            
            
            (13,251
            )
            
            
            (47,483
            )Non-current
      Deferred Tax Liabilities
            
            
            (887,666
            )
            
            
            (803,025
            )Non-current
      Deferred Tax Assets
            
            
            7,928,986
            
            
            
            10,189,380Less
      Valuation Allowance
            
            
            (6,752,986
            )
            
            
            (8,900,880
            )Net
      Non-Current Deferred Tax Assets
            
            $
            1,176,000
            
            
            $
            1,288,500




As of
December 31, 2006 and 2007, management reassessed the net deferred tax asset and
determined that the net deferred tax asset should remain unchanged and that the
valuation allowance should be reduced by approximately $970,000 and $2,147,894,
respectively.




As of
December 31, 2007, the Company’s net operating loss carryforwards for federal
income tax purposes were approximately $23,644,000.  Various amounts
of net operating loss carryforwards will expire from 2008 through
2022.  Approximately $4.7 million net operating loss expired during
the fiscal year ended 2007.




Expiration Year
            
            Net Operating Losses2008
            
            $
            415,0002020
            
            
            5,960,0002021
            
            
            2,737,0002022
            
            
            14,532,000$
            23,644,000




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.




Several
of the Company’s subsidiaries are under examination for sales tax in various
states.  At this time, the Company has concluded that there will be an
immaterial assessment and has not provided for an adjustment to
income.




F-25
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


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:
            
            2007
            
            
            2006
            
            
            2005Interest
            
            $
            1,443,514
            
            
            $
            1,290,724
            
            
            $
            971,629Income
      taxes
            
            $
            87,773
            
            
            $
            104,932
            
            
            $
            308,585




Non-cash
transactions:




During
2007, 2006 and 2005, there were 0, 17,221 and 298,018 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 provides
for matching contributions up to a maximum of 3% of employees’ qualified
wages.  In 2007, 2006 and 2005, $185,186, $180,712 and $183,269,
respectively, of matching contributions were made to the plan.




15.
            Business and Credit
      Concentrations




The
Company purchases products from a large number of suppliers.  The same
two suppliers accounted for 30%, 34% and 37% of the Company’s purchases for the
years 2007, 2006 and 2005, respectively.  As of December 31, 2007, the
Company’s outstanding balance payable to these two suppliers was
$1,558,510.  The loss of one or both of these suppliers could have a
material adverse effect upon its business for a short-term period.







F-26
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


16.
            Commitments and
      Contingencies




(a) Compensation




The
Company has employment agreements with the Chief Executive Officer (see Note 17,
below) and various employees.  The employment agreement with the Chief
Executive Officer was amended on March 12, 2007.  In addition, in
connection with the acquisition of S&A, the Company entered into certain
employment agreements with the former shareholders of S&A (see Note 2,
above).  Including the effect of these new and amended agreements, the
remaining terms of the employment agreements as of December 31, 2007 range from
one to three years, and amounts due under these contracts are $495,000,
$495,000, and $350,000 in the years ended December 31, 2008, 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 $3,277,520, $3,098,491 and $2,997,887 for the years
ended December 31, 2007, 2006 and 2005, respectively.  At December 31,
2007, future minimum lease payments in the aggregate and for each of the five
succeeding years, including the effect of the new leases entered into in
connection with the acquisition of S&A (see Note 2, above), are as
follows:




2008
            
            $
            3,840,1612009
            
            
            3,558,7702010
            
            
            3,127,3992011
            
            
            2,818,6652012
            
            
            2,206,818Thereafter
            
            
            4,669,921Total
            
            $
            20,221,734


(c) Litigation




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 “Predecessor.”  The majority
shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
Hildebrandt.




The
Company understands that 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. Currently, there exist 86 plaintiffs
in these lawsuits relating to alleged sales of asbestos products, or products
containing asbestos, by the Predecessor. The Company never sold any asbestos
related products.





F-27
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


Of the
existing plaintiffs as of December 31, 2007, 15 filed actions in 2007, 7 filed
actions in 2006, 14 filed actions in 2005, 33 filed actions in 2004, 15 filed
actions in 2003, and 2 filed actions in 2002. There are 126 other plaintiffs
that have had their actions dismissed and 12 other plaintiffs that have settled
as of December 31, 2007 for a total of $3,357,500. There has been no judgment
against the Predecessor.  Subsequent to December 31, 2007, one of the
existing cases was dismissed by summary judgment.




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.  Six
plaintiffs naming Universal have had their actions dismissed and, of the total
$3,357,500 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
currently exist 28 plaintiffs that name Universal.




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 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, 2007 is
material, and that the only material litigation that was brought against
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.




On April
29, 2005, prior to the Rhodes case trial, the Predecessor filed a third party
complaint against Sid Harvey Industries (“Third Party Complaint”) in an action
demanding contributor payment in connection with the Settlement. Sid Harvey
Industries moved successfully for summary judgment.  The Predecessor
filed an appeal as to the dismissal of Predecessor’s Third Party
Complaint.  In a decision dated December 29, 2006, the Superior Court
of New Jersey, Appellate Division, reversed the dismissal of Predecessor’s Third
Party Complaint and remanded the matter for further proceedings as to
Predecessor’s claim for contribution.




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.




Indemnification




John A.
Hildebrandt, Paul Hildebrandt and the 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-28
 Table of Contents


C OLONIAL
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.




Insurance




The
assets that the 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 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 Predecessor and the Company under the contested policies.




There are
periods during the years from 1940 to 1999 in which our 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, 2007, 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 Predecessor in 1995.  The Predecessor
asserted that it had no obligation to pay this amount and did not make any
payment.




Insurance
companies have, as of December 31, 2007, defended us and the 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 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.




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 Predecessor
companies. We expressly disclaimed the assumption of any liabilities when we
purchased the assets of the 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 claim limitations on their liabilities by
reason of gaps in coverage or otherwise.




F-29
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


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.




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.




(d) Standby Letter of
Credit




The Company has a standby letter of
credit in the amount of $300,000 which expires on July 31, 2008.




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 $234,866, $224,885 and $215,674
      during the years ended December 31, 2007, 2006 and 2005,
      respectively.  The Company owes Mr. Hildebrandt $80,000 pursuant
      to two notes: (a) a subordinated note in the amount of $150,000, paid
      $30,000 annually commencing December 31, 2004 and (b) a $50,000
      convertible note due 50% on June 1, 2008 and 50% on 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)
            Goldman
      Associates of New York, Inc. (“Goldman Associates”) has 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.  Michael Goldman is the beneficial owner of the
      shares held by Goldman Associates.




The
Company owes Goldman Associates, a private Company controlled by Michael
Goldman, $750,000 pursuant to a secured note which is subordinate to borrowings
under the credit facility. The note bears interest at the prime rate and is due
on January 1, 2009.




For
calendar years beginning 2008, the Company will pay the premiums for Michael
Goldman's COBRA health insurance.  In January 2008, the
Company paid $13,221 for this premium for 2008.




F-30
 Table of Contents




COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


(c)
            Oscar
      and Jeffrey Folger acted as legal counsel for the Company through April
      20, 2005.  Oscar and Jeffrey Folger acted as legal consultants
      for the Company from April 21, 2005 through December 31, 2005 and each
      became an employee of the Company as Vice President-Chief Legal Counsel
      and Assistant Vice President-Legal, respectively, on January 1, 2006 until
      March 31, 2007.  As of April 1, 2007, Oscar and Jeffrey Folger
      ceased to act as employees of the Company, but Oscar Folger’s law firm
      remains as counsel to the Company.  Mrs. Folger is the wife of
      Oscar Folger and the mother of Jeffrey Folger.  Professional
      fees paid to Oscar Folger’s law firm for the years ended 2007, 2006 and
      2005 were $115,412, $89,826 and $79,973, respectively.  Jeffrey
      Folger is an associate of Oscar Folger’s law
      firm.  Additionally, in 2006, $12,000 was paid to each Oscar and
      Jeffrey Folger as part time employees of the Company. As of December 31,
      2007, there is $1,000 in outstanding liabilities to Oscar
      Folger.  As of December 31, 2006 and 2005, there was $3,975 and
      $2,775, respectively, in outstanding liabilities to Oscar
      Folger.




(d)
            William
      Pagano is employed pursuant to an employment agreement that provides for 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.
      The amended employment agreement contains confidentiality and non-compete
      provisions and expires on December 31, 2010. William Pagano’s total
      incentive compensation for the fiscal years ended December 31, 2007, 2006
      and 2005 was $151,778, $260,109 and $317,924, respectively.  On
      March 3, 2008, Mr. Pagano waived his right to receive this 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.




(e)
            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 was set to expire in
      September 2008, subject to renewal options, and provided for a current
      aggregate annual rent of $133,500.  Pioneer is the landlord
      under the Lease pursuant to an assignment and assumption agreement dated
      April 12, 2005.




On
February 21, 2007, the Lease was further amended by a Third Modification of
Lease Agreement to provide, among other things, for 25,947 square feet of the
leased premises, a net increase of 14,443 square feet, and for $245,844 total
annual fixed rent, an increase of $106,740 per annum.  The
effectiveness of the Third Modification of Lease Agreement commenced in August
2007.  The
term of the lease expires on March 31, 2017, subject to two five-year renewal
options.




Additionally,
on February 21, 2007, Pioneer granted the Company an option (“Option”) to
purchase the Premises for (i) an exercise price equal to Pioneer’s total
financial investment in the Premises through the date of exercise and (ii) the
release of Mr. Pagano (and any other guarantors) from guaranties of mortgage
loans secured by the Premises.  The Option expired on July 31,
2007.




F-31
 Table of Contents


COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements, Continued


William
Pagano has a 55% interest in Pioneer and each of Rita Folger and Jeffrey Folger
has an 8% interest in Pioneer Realty Partners I, LLC, which has a 40% interest
in Pioneer.  Oscar Folger and Jeffrey Folger are counsel to the
Company.  The Company paid Pioneer Realty Holdings, LLC $176,556 and
$137,239 in rent during the years ended December 31, 2007 and 2006,
respectively.




(f)
            Each
      of Messrs. Goldman, Korn, Pagano, Rozzi, and Mrs. Folger had agreed that
      until May 31, 2008 he or she will not purchase any stock of the Company
      without written consent from the Company and that he or she will not sell
      any stock to any person if the sale would create a new 5% shareholder
      within the meaning of Internal Revenue Code Section 382 unless the buyer
      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.




(g)
            Mr.
      Pagano, Mr. Salek, Mrs. Folger and the wife of Michael Goldman are holders
      of convertible unsecured notes in the amounts of $100,000, $50,000,
      $100,000 and $25,000, respectively, issued pursuant to the terms of a
      private placement made on July 29,
2004.




(h)
            On
      September 5, 2006, the Company was appointed a non-exclusive distributor
      of Speed Queen home laundry equipment in the New York metropolitan area,
      and in portions of Connecticut, Delaware and Eastern
      Pennsylvania.  The Company succeeded Goldman Associates of New
      York, Inc. in this distributorship and, on August 31, 2006, purchased
      Goldman Associates’ Speed Queen accounts receivable, inventory and related
      assets at fair value for $149,625.  Goldman Associates is a
      private Company controlled by Michael Goldman who is the Chairman of
      Colonial.  The Company also established a “Goldman Universal”
      division to distribute the Speed Queen home laundry system line and other
      appliances.




18.
            Quarterly Results
      (Unaudited)




The
following table sets forth selected unaudited quarterly financial data of the
Company for the years ended December 31, 2007 and 2006.




QUARTER
      ENDEDMarch 31
            
            
            June 30
            
            
            September 30
            
            
            December 31(Dollars
      in thousands, except per share data)2007Net
      sales
            
            $
            16,042
            
            
            $
            22,129
            
            
            $
            20,522
            
            
            $
            23,733Gross
      profit
            
            
            4,872
            
            
            
            6,103
            
            
            
            5,981
            
            
            
            6,599Net
      (loss) income
            
            
            (390
            )
            
            
            407
            
            
            
            134
            
            
            
            (203
            )(Loss)
      income per common share:Basic:Net
      (loss) income
            
            
            (0.08
            )
            
            
            0.09
            
            
            
            0.03
            
            
            
            (0.04
            )Diluted:Net
      (loss) income
            
            
            (0.08
            )
            
            
            0.08
            
            
            
            0.03
            
            
            
            (0.04
            )2006Net
      sales
            
            $
            14,884
            
            
            $
            18,156
            
            
            $
            19,218
            
            
            $
            19,237Gross
      profit
            
            
            4,685
            
            
            
            5,438
            
            
            
            5,659
            
            
            
            5,655Net
      (loss) income
            
            
            (325
            )
            
            
            338
            
            
            
            476
            
            
            
            327(Loss)
      income per common share:Basic:Net
      (loss) income
            
            
            (0.07
            )
            
            
            0.07
            
            
            
            0.10
            
            
            
            0.07Diluted:Net
      (loss) income
            
            
            (0.07
            )
            
            
            0.06
            
            
            
            0.09
            
            
            
            0.06





F-32
 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, 2007Allowance
      for doubtful accounts
            
            $
            212,043
            
            
            $
            652,468
            
            
            $
            65,937
            (a)
            
            $
            (451,591
            )
      (b)
            
            $
            478,857For
      the year ended December 31, 2006Allowance
      for doubtful accounts
            
            $
            185,971
            
            
            $
            191,357
            
            
            $
            90,405
            (a)
            
            $
            (255,690
            )
      (b)
            
            $
            212,043For
      the year ended December 31, 2005Allowance
      for doubtful accounts
            
            $
            290,448
            
            
            $
            101,724
            
            
            $
            69,144
            (a)
            
            $
            (275,345
            )
      (b)
            
            $
            185,971


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-33
 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
    Salek,Chief
      Financial Officer & Principal Accounting OfficerDated: March 31,
      2008
   Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
duly signed below on March 31, 2008 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