**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-K**
 
 ý
              
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES
                  EXCHANGE ACT OF 1934****For
                  the fiscal year ended December 31, 2006****or****o**
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES
                  EXCHANGE ACT OF 1934**For
                  the transition period from ____________ to
                  ____________
  Commission
        file number: 11-2037182
 **COLONIAL
        COMMERCIAL CORP.**
 (Exact
        name of registrant as specified in its charter)
 
 **New
                  York**
              
              **11-2037182**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**275
                  Wagaraw Road, Hawthorne, New Jersey**
              
              **07506**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 Registrant’s
        telephone number, including area code **973-427-8224**
  **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  ̈    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  ̈    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 x   No  ̈
 
 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, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 
 Large
                  accelerated filer ̈
              
              Accelerated
                  filer ̈
              
              Non-accelerated
                  filerx
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes  ̈    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, 2006 (the last business day of the registrant’s most
        recently completed second quarter) was $3,906,145.
  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, 2007Common
                  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
                  2.
              Properties
              6Item
                  3.
              Legal
                  Proceedings
              7Item
                  4.
              Submission
                  of Matter to a Vote of Security
                  Holders
              9PART
                  IIItem
                  5.
              Market
                  for the Registrant’s Common Stock, Convertible Preferred
                  Stock and Related Stockholder Matters
              10Item
                  6.
              Selected
                  Financial Data
              12Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              13Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              20Item
                  8.
              Financial
                  Statements and Supplementary Data
              20Item
                  9.
              Changes
                  In and Disagreements With Accountants on Accounting and
                  Financial Disclosure
              20Item
                  9A.
              Controls
                  and Procedures
              20PART
                  IIIItem
                  10.
              Directors,
                  Executive Officers and Corporate
                  Governance
              21Item
                  11.
              Executive
                  Compensation
              23Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management
              33Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              35Item
                  14.
              Principal
                  Accountant Fees and Services
              38PART
                  IVItem
                  15.
              Exhibits
                  and Financial Statements Schedules
              39
  *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”), and
          American/Universal Supply, Inc. (“American”). We distribute heating, ventilating
          and air conditioning equipment (HVAC), parts and accessories, climate control
          systems, appliances, and plumbing fixtures and supplies, primarily, in
          New
          Jersey, New York and portions of eastern Pennsylvania.
  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
          lower
          New York State 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 and bathroom
          fixtures and accessories at our locations in Fishkill, Middletown, New
          Windsor
          and Suffern, New York.
  We
          have
          developed a specialty in the design and sale of energy conservation control
          systems and the fabrication of customized UL listed control panels, and
          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.
  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
          2006,
          2005 and 2004, 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 40%, 40%
          and 42%
          HVAC equipment; 39%, 38% and 38% parts and accessories; and 16%, 16% and
          15%
          climate control systems.
  We
          own no
          patents and have no intellectual property rights or proprietary
          technology.
  We
          carry
          general liability, comprehensive property damage, workers compensation
          and
          product liability insurance in amounts that we consider adequate for our
          business. We maintain $2,000,000 in the aggregate and $1,000,000 per occurrence
          general liability coverage, plus a $15,000,000 umbrella policy.
  No
          material regulatory requirements apply specifically to our
          business.
  2
 *Table
              of Contents*
  As
          of
          December 31, 2006, we had 154 non-union full-time employees. We believe
          that our
          employee relations are satisfactory.
  We
          have
          no foreign operations and operate only in one business segment.
  Distribution,
          Customers and Suppliers
  We
          stock
          inventory in all of our 17 locations. We deliver products to customers
          with our
          fleet of 16 leased and 12 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 6,000
          customers in 2006. No customer accounted for more than 2% of consolidated
          net
          sales in 2006. 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 have
          no
          assured stability in our customer base.
  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.
  Certain
          of our supplier agreements limit the sale of competitive products in designated
          markets that we serve.
  In
          2006,
          two suppliers accounted for 34% of our purchases. The loss of one or both
          of
          these suppliers could have a material adverse effect on our business for
          at
          least a short-term period. We believe that the loss of any one of our other
          suppliers would not have a material adverse effect on our business.
  Competition
  We
          compete with a number of distributors, national chains and national home
          centers, and also with several air conditioning and heating equipment
          manufacturers that distribute a significant portion of their products through
          their own distribution organizations. There is no single manufacturer,
          distributor or national chain or home center that dominates our market.
          Competition is based on product availability, customer service, price and
          quality. We work to maintain a competitive edge by providing in-house training,
          technical sales support to our customers and by employing experienced personnel
          at our point-of-sale locations.
  3
 *Table
              of Contents*
  **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.
  ***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.
  4
 *Table
              of Contents*
  ***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.
  We
          may be
          unable to renew our credit line at the expiration of its term or obtain
          a
          reasonable alternate form of 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
          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.
  5
 *Table
              of Contents*
  ***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, William Salek,
          Chief
          Financial Officer and Secretary and Bernard Korn, a current non-executive
          employee, former Director and former Chief Executive Officer, have entered
          into
          employment agreements with us that expire in 2010, 2007 and 2010, respectively,
          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
          17 locations with approximately 323,000 square feet for showrooms, counter
          sales
          and warehousing. We own no real estate. Our leases expire at various times
          between August 31, 2007 and November 30, 2016. 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.
  **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 16 combination sales and warehouse locations in Hawthorne,
          Bogota, Augusta, North Brunswick, Cedar Knolls, Wharton and Westville,
          New
          Jersey; Willow Grove, Pennsylvania; Elmsford, Hicksville, Middletown, Fishkill,
          New Windsor, Peekskill, Poughkeepsie and Suffern, New York. Additionally,
          the
          Company maintains two separate warehouse locations in Cedar Knolls, New
          Jersey
          and New Hampton, New York. These locations consist of approximately 323,000
          square feet under leases expiring between 2007 and 2016 with current aggregate
          annual rents of approximately $2,744,513. 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.
  The
          premises located at Middletown, Fishkill, New Windsor and Suffern, New
          York also
          include showrooms of kitchen and bathroom fixtures and accessories.
  Our
          premises are suitable and adequate for their intended use and are adequately
          covered by insurance. As of December 31, 2006, we leased all our
          facilities.
  6
 *Table
              of Contents*
  **Item
          3.** **Legal
          Proceedings**
  Universal
          Supply Group, Inc. 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 93 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, seven filed actions in 2006, 15 filed actions in 2005,
          44
          filed actions in 2004, 24 filed actions in 2003, and three filed actions
          in
          2002. There are 108 other plaintiffs that have had their actions dismissed
          and
          eight other plaintiffs that have settled as of December 31, 2006 for a
          total of
          $3,313,000. There has been no judgment against the Predecessor.
  Our
          Universal subsidiary was named by 24 plaintiffs; of these, two filed actions
          in
          1999, one filed an action in 2000, five filed actions in 2001, eleven filed
          actions in 2005 and five filed actions in 2006. Six plaintiffs naming Universal
          have had their actions dismissed and, of the total $3,313,000 of settled
          actions, two 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 16 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, 2006 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.
  7
 *Table
              of Contents*
  The
          Company believes that Rhodes differed
          from the other lawsuits in that plaintiff established that he contracted
          mesothelioma as a result of his occupational exposure to asbestos dust
          and
          fibers and that a predecessor of the Company was a major supplier of the
          asbestos containing products that allegedly caused his disease.
  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.
  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.
  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. To date, no
          insurance company has claimed any contribution for a gap in coverage except
          for
          a claim for $159.64 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 to date defended us and the Predecessor, and have paid all
          settlement amounts and defense costs. Except for $159.64 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.
  8
 *Table
              of Contents*
  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.
  Since
          we
          do not regard as likely 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 involved in other litigation incidental to the operation of
          its
          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.
  9
 *Table
              of Contents*
  **PART
          II**
  **Item
          5.** **Market
          for the Registrant’s Common Stock, Convertible
          Preferred** **Stock 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 2006 and 2005. 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 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
 
 Common
                    Stock
                
                Convertible
                    Preferred Stock2005
                
                High
                
                Low
                
                High
                
                LowFirst
                    Quarter
                
                $
                1.65
                
                $
                1.40
                
                $
                1.68
                
                $
                1.48Second
                    Quarter
                
                
                1.66
                
                
                1.35
                
                
                1.60
                
                
                1.32Third
                    Quarter
                
                
                2.70
                
                
                1.50
                
                
                2.75
                
                
                1.46Fourth
                    Quarter
                
                
                2.75
                
                
                2.00
                
                
                2.55
                
                
                1.85
  (b) Approximate
          number of common and convertible preferred stockholders:
  Title
                    of Class
                
                Approximate
                    Number of Record Holders
                  (As
                    of March 1, 2007)Common
                    stock par value $.05 per share
                
                293Convertible
                    preferred stock par value $.05 per share
                
                851
  10
 *Table
              of Contents*
  (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 as of December 31, 2006 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,
          2006.
  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
                
                
                74,000
                
                $
                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
                
                
                100,000
                
                $
                1.85
                
                
                900,000Equity
                    compensation plans not approved by security holders
                
                
                0
                
                $
                0.00
                
                
                0Total
                
                
                174,000
                
                $
                1.17
                
                
                900,000
  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, 2006, a total of 74,000 options were outstanding under the
          Company’s 1996 Stock Option Plan, which have expiration dates ranging from 2009
          to 2013.
  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.
          As of
          December 31, 2006 all 100,000 options were outstanding. 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 has sixty days from the date of his resignation to exercise his
          10,000
          vested options.
  11
 *Table
              of Contents*
  **Item
          6.** **Selected
          Financial Data**
  Years
                    Ended December 31,2006
                
                2005
                
                2004
                
                2003
                
                2002Sales
                
                $
                71,494,652
                
                $
                66,690,945
                
                $
                61,454,128
                
                $
                44,671,136
                
                $
                36,998,800Operating
                    income
                
                
                1,954,732
                
                
                2,400,424
                
                
                1,717,812
                
                
                1,296,597
                
                
                226,567Income
                    (loss) from continuing operations
                
                
                753,422
                
                
                2,115,631
                
                
                1,661,156
                
                
                1,320,263
                
                
                (106,310
                )Income
                    from operations of discontinued segment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,300,695
                    (1
                )Net
                    income
                
                $
                753,422
                
                $
                2,115,631
                
                $
                1,661,156
                
                $
                1,320,263
                
                $
                3,194,385Income
                    (loss) per common share:Basic:Continuing
                    operations
                
                $
                .16
                
                $
                .49
                
                $
                .49
                
                $
                .67
                
                $
                (0.07
                )Income
                    on discontinued operation
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                2.06Net
                    income per common share
                
                $
                .16
                
                $
                .49
                
                $
                .49
                
                $
                .67
                
                $
                1.99Diluted:Continuing
                    operations
                
                $
                .14
                
                $
                .40
                
                $
                .36
                
                $
                .38
                
                $
                (0.07
                )Income
                    on discontinued operation
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                2.06Net
                    income per common share
                
                $
                .14
                
                $
                .40
                
                $
                .36
                
                $
                .38
                
                $
                1.99
  12
 *Table
              of Contents*
  December
                    31,2006
                
                2005
                
                2004
                
                2003
                
                2002Total
                    assets
                
                $
                28,775,115
                
                $
                27,537,375
                
                $
                24,515,258
                
                $
                20,618,987
                
                $
                13,686,842Current
                    liabilitiesBorrowings
                    under credit facility
                
                
                13,615,696
                
                
                11,745,985
                
                
                12,325,209
                
                
                12,232,030
                    (1
                )
                
                10,350,889
                    (1
                )Other
                
                
                6,832,504
                
                
                8,216,989
                
                
                6,617,377
                
                
                7,089,276
                    (2
                )
                
                3,953,063
                    (2
                )Long-term
                    liabilities, less current obligations
                
                
                1,317,394
                
                
                1,400,834
                
                
                1,398,774
                
                
                326,700
                
                
                64,775
  (1)
                The
                    amounts shown in the table as “Borrowings under Credit Facility,” as of
                    December 31, 2003 and December 31, 2002, includes $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, a wholly owned subsidiary of the Company, is a discontinued
                    operation with no assets. The release from the $3,300,695 of
                    the guarantee
                    resulted in the recognition of income from discontinued operations
                    in
                    2002.
  (2)
                Amount
                    includes $219,007 of contingent liabilities of Atlantic. This
                    liability
                    was settled in June 2004.
  **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.
  13
 *Table
              of Contents*
  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 fixtures and
          supplies. The Company recognizes revenue after it receives a purchase order
          with
          a fixed determinable price from the customer and shipment of products has
          occurred in accordance with the shipping terms. There are no further obligations
          on the part of the Company subsequent to revenue recognition, except for
          returns
          of defective products from the Company’s customers, which are covered under the
          manufacturer’s warranty. The Company will receive a vendor credit from the  manufacturer
          related to the warranted product in question, at which time credits are
          issued
          to the customer. The Company does not provide a warranty on products sold;
          rather the warranty is provided by the manufacturer.
  The
          Company maintains an allowance for doubtful accounts for estimated losses
          resulting from the inability of its customers to make required payments.
          The
          Company establishes and monitors the allowance for doubtful accounts based
          on
          the credit risk of specific customers, customer concentrations, historical
          trends and other information. The Company had accounts receivable of $9,281,344
          and an allowance for doubtful accounts of $212,043 as of December 31, 2006.
          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.
  14
 *Table
              of Contents*
  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 $3,500 at December 31, 2006, 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, 2006, the Company
          had a deferred tax valuation allowance of approximately $9,000,000.
  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 5.9%, or $1,191,680, to $21,374,856 for the year ended
          December 31, 2006 from $20,183,176 for the same period in 2005. Gross profit
          expressed as a percentage of sales decreased by 0.4% to 29.9% in 2006 compared
          to 30.3% 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.
  15
 *Table
              of Contents*
  Operating
          income decreased by 18.6%, or $445,692, to $1,954,732 for the year ended
          December 31, 2006 from $2,400,424 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 5.9% 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
          46.1%,
          or $750,754, to $877,813 for the year ended December 31, 2006 from $1,628,567
          for the same period in 2005.
  The
          Company’s net income decreased by 64.4%, or $1,362,209, to $753,422 for the year
          ended December 31, 2006, compared to net income of $2,115,631 for the same
          period in 2005. This decrease in net income was caused by the decrease
          in
          pre-tax income of $750,754, 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.
  Comparison
          of Year Ended December 31, 2005 with Year Ended December 31, 2004
  The
          Company’s net income increased 27.4% to $2,115,631 for the year ended December
          31, 2005, compared to net income of $1,661,156 for the same period in
          2004.
  Sales
          increased 8.5% to $66,690,945 for the year ended December 31, 2005 from
          $61,454,128 for the same period in 2004. 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, above
          average temperatures during the summer cooling season, and a continuing
          strong
          demand for residential and light commercial HVAC products and plumbing
          fixtures
          and supplies.
  Gross
          profit increased 9.8% to $20,183,176 for the year ended December 31, 2005
          from
          $18,384,147 for the same period in 2004. The increase in gross profit is
          primarily the result of the mentioned increases in sales, and the Company’s
          improved ability to purchase products at more favorable pricing. Gross
          profit
          expressed as a percentage of sales increased to 30.3% in 2005 compared
          to 29.9%
          for the comparable period in 2004. 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 $421,248 and $325,109 for the years ended December
          31,
          2005 and 2004, respectively.
  16
 *Table
              of Contents*
  Selling,
          general and administrative expenses and cost of operations increased 6.7%
          to
          $17,782,752 for the year ended December 31, 2005 from $16,666,335 for the
          same
          period in 2004. This increase is primarily a result of costs associated
          with the
          increased sales growth, increased utility and fuel costs, general cost
          increases, increased accounting fees, and an increase of certain variable
          expense items based on sales, such as salaries, commissions, marketing
          expenses
          and vehicle costs.
  Other
          income decreased by $47,762 to $272,597 for the year ended December 31,
          2005
          from $320,359 for the same period in 2004. This decrease is primarily the
          result
          of a $58,000 gain from the settlement of a contingent liability of a
          discontinued operation recognized in 2004 with no such gain in 2005, partially
          offset by a $15,994 increase in service charges collected for the year
          ended
          December 31, 2005.
  Interest
          expense, net increased 19.3% to $1,044,454 for the year ended December
          31, 2005
          from $875,683 for the same period in 2004. This increase is primarily the
          result
          of eight increases in prime rate, raising the rate from 5.25% on December
          31,
          2004 to 7.25% on December 31, 2005.
  Income
          tax benefit decreased by $11,604 to a net tax benefit of $487,064 for the
          year
          ended December 31, 2005 from a $498,668 net tax benefit for the same period
          in
          2004. In accordance with FASB Statement Number 109, the Company recorded
          a
          deferred tax benefit of $641,500 for the year ended December 31, 2005 in
          order
          to recognize the expected utilization of available operating loss carryforwards,
          compared to $645,600 in the year ended December 31, 2004. In addition,
          the
          Company recorded a state tax provision of $170,675 for the year ended December
          31, 2005 compared to $137,932 for the year ended December 31, 2004.
  Liquidity
          and Capital Resources
  Credit
          Facility
  The
          Company has a total secured loan facility of $15,000,000 pursuant to a
          credit
          and security agreement (“Agreement”) with Wells Fargo Business Credit, Inc.
          (“Wells”) consisting of a revolving line of credit including a $2,000,000
          two-year term loan. Final payment of the term loan was made in July of
          2006. The
          revolving credit line bears interest at .25% below prime, and the term
          loan bore
          interest at .50% above prime. On May 11, 2006 the Company received a $500,000
          overadvance, payable in equal installments of $12,500 each business day
          commencing July 11, 2006. The overadvance was paid in full on September
          5, 2006.
          Effective June 23, 2006, the Agreement was amended to extend the maturity
          date
          from August 1, 2009 to August 1, 2010. The facility consists of a $15,000,000
          revolving line of credit which expires on August 1, 2010. The Company has
          standby letters of credit, which expire on July 31, 2007 and September
          1, 2007,
          that reduce the credit facility by $300,000 and $100,000, respectively,
          and
          additional reserves determined by the bank that reduce the credit facility
          by
          $100,000. Availability under the revolving credit line is determined by
          a
          percentage of available assets as defined in the Agreement, less letters
          of
          credit and reserves, and was $142,216 as of December 31, 2006. The balance
          outstanding under the revolving line of credit was $13,615,696 as of December
          31, 2006. The interest rate on the revolving credit facility, as of December
          31,
          2006 was 8.0%.
  17
 *Table
              of Contents*
  Substantially
          all of the assets of the Company, as well as a pledge of the stock of Colonial
          Commercial Corp.’s operating subsidiaries, collateralize the loans. The facility
          contains covenants relating to the financial condition of the Company,
          its
          business operations, and restricts the payment of dividends, subordinated
          debt,
          purchase of securities, and capital expenditures. The Company must maintain
          a
          tangible net worth of approximately $3.8 million for the fiscal year ending
          December 31, 2006. In addition, the Company is required to maintain certain
          levels of net income and cash flows, as defined in the agreement. All loans
          are
          due on demand by the bank, and accordingly, have been classified as current
          liabilities. In the event that Mr. Pagano no longer performs the duties
          of the
          President of Universal or the Vice President of RAL or American for any
          reason
          other than death or disability, the Company will be considered in default
          of its
          credit agreement with Wells Fargo Business Credit, Inc. unless a waiver
          is
          obtained.
 
 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.
  As
          of
          December 31, 2006, the Company had $482,251 in cash compared with $613,456
          at
          December 31, 2005.
  Net
          cash
          used in operating activities was $1,409,274 for the year ended December
          31,
          2006.  The net cash used in operating activities for the 2006 period is
          primarily a result of net income of $753,422 and non-cash charges of $768,545,
          offset by cash used in operating assets and liabilities of $2,931,241.
 The
          increase in accounts receivable of $701,615 was a direct correlation to
          the
          increase in sales compared to the prior year. Accounts payable decreased
          by
          $1,272,786 as a reflection of the reduced purchase requirements for the
          warmer
          months of November and December and $400,000 additional cash that became
          available as a result of the final payment of the term loan in July of
          2006.
  Cash
          flows used in investing activities were $450,129 during the year ended
          December
          31, 2006 due to $300,504 in purchases of equipment and $149,625 in the
          purchase
          of Speed Queen assets from Goldman Associates of NY, Inc.
  Cash
          flows provided by financing activities of $1,728,198 consisted of $2,432,688
          in
          borrowings under the credit facility-revolving credit, $500,000 in borrowings
          under the credit facility-overadvance, $8,000 received from the exercise
          of
          stock options and $13,073 from the issuance of notes payable. Cash flows
          used in
          financing activities consisted of $562,977 for repayments under the credit
          facility-term loan, $500,000 repayments under the credit facility-overadvance
          and $162,586 for repayments on notes payable.
  Equity
          Transactions
  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.
  18
 *Table
              of Contents*
  The
          Company’s reports on Form 8-K and Form 8-K/A filed on April 21, 2006 and April
          25, 2006, respectively, refer to sales of common stock by former Directors
          of
          the Company to two current Directors and other investors. Concurrently
          with
          these transactions, Messrs. Bernard Korn, William Koon, Jack Rose and Carl
          Sussman resigned as Directors of the Company, and Mr. Korn also resigned
          as
          Chief Executive Officer and Chairman of the Board.
  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, 2006, the number of convertible preferred
          shares outstanding was 467,500. As a result of this reduction in the number
          of
          outstanding shares of convertible preferred stock, commencing at the 2006
          annual
          meeting of stockholders, the holders of common and convertible preferred
          stock
          vote together as one class to elect one class of Directors.
  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, 2006:
  Payment
                    Due by Period (in thousands)Total
                
                Less
                    than 1 Year
                
                2-3
                    Years
                
                4-5
                    Years
                
                Over
                    5 YearsOperating
                    leases
                
                $
                13,438
                
                $
                3,288
                
                $
                4,524
                
                $
                2,679
                
                $
                2,947Compensation
                    agreements
                
                
                2,460
                
                
                770
                
                
                1,090
                
                
                600
                
                
                -Notes
                    payable
                
                
                1,454
                
                
                137
                
                
                1,311
                
                
                6
                
                
                -Notes
                    payable interest
                
                
                214
                
                
                127
                
                
                87
                
                
                -
                
                
                -Line
                    of credit
                
                
                13,616
                
                
                13,616
                
                
                -
                
                
                -
                
                
                -Line
                    of credit interest
                
                
                1,089
                
                
                1,089
                
                
                -
                
                
                -
                
                
                -Totals
                
                $
                32,271
                
                $
                19,027
                
                $
                7,012
                
                $
                3,285
                
                $
                2,947
  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 8.25%. The prime
          rate as of December 31, 2006 was 8.25%. 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 $13,616,000 (which is the principal amount that was
          outstanding on December 31, 2006), and assumes that the average prime rate
          will
          be 8.25% in 2007. The prime rate was 8.25% as of December 31, 2006. See
          Note 5,
          Financing Arrangements, of the Financial Statements for the terms of the
          line of
          credit.
  19
 *Table
              of Contents*
  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 rate or equity price risk.
  The
          Company’s pre-tax earnings and cash flows are exposed to changes in interest
          rates as all borrowings under its credit facility bear interest based on
          the
          prime rate less .25%, and the $750,000 note to Goldman Associates of NY,
          Inc.
          bears interest at the prime rate. A hypothetical 10% adverse change in
          such
          rates would reduce the pre-tax earnings and cash flow for the year ended
          December 31, 2006 by approximately $115,113 over a one-year period, assuming
          the
          borrowing level remains consistent with the outstanding borrowings as of
          December 31, 2006. 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 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 Report
          of
          Independent Registered Public Accounting Firm thereon of 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
  An
          evaluation has been carried out under the supervision and with the participation
          of our management, including our Chief Executive Officer and Chief Financial
          Officer, of the effectiveness of the design and the operation of our "disclosure
          controls and procedures" (as such term is defined in Rule 13a-15(e) under
          the
          Securities Exchange Act of 1934) as of December 31, 2006 (“Evaluation Date”).
          Based on such evaluation, our Chief Executive Officer and Chief Financial
          Officer have concluded that, as of the Evaluation Date, the disclosure
          controls
          and procedures are reasonably designed and effective to ensure that (i)
          information required to be disclosed by us in the reports we file or submit
          under the Securities Exchange Act of 1934 is recorded, processed, summarized
          and
          reported within the time periods specified in the SEC's rules and forms,
          and
          (ii) 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.
  20
 *Table
              of Contents*
  **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:E.
                    Bruce Fredrikson
                
                68
                
                Director,
                    Chairman of Audit CommitteeMelissa
                    Goldman-Williams
                
                38
                
                DirectorMichael
                    Goldman
                
                68
                
                Director,
                    Chairman of the BoardStuart
                    H. Lubow
                
                49
                
                Director,
                    Chairman of Nominating CommitteeRonald
                    H. Miller
                
                63
                
                DirectorWilliam
                    Pagano
                
                67
                
                Director
                    and Chief Executive Officer of the Company and President of UniversalWilliam
                    Salek
                
                45
                
                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 of Track Data Corporation, a financial services
          company. 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 has been the Chief Operating Officer of Goldman Associates
          of
          NY, Inc., an appliance distributor, since 1996, and is also a member of
          the
          Board of Directors of said company. Mrs. Goldman-Williams holds a B.A.
          from
          Lehigh University and a Masters Degree in Environmental Management from
          Duke
          University. Previously, she was employed as an Environmental Consultant
          for a
          private consulting firm.
  21
 *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. Mr. Goldman has been
          the
          Chief Executive Officer and Chairman of the Board of Directors of Goldman
          Associates of NY, Inc., an appliance distributor, since 1987. 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,
          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 has been engaged in the practice of law since 1969 and as a sole
          practitioner since 1988. 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 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 and is an attorney at law licensed in the State of New
          Jersey.
  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, 2006 through December
          31, 2006, all executive officers, Directors and greater than 10% beneficial
          owners, complied with Section 16(a) filing requirements.
  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.
  22
 *Table
              of Contents*
  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 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 Board generally reviewed (and going
          forward the compensation committee will review) the individual contributions
          of
          the particular executive. The annual incentive compensation award for 2006
          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.
  The
          following is the compensation committee’s policy for persons who do not have
          employment agreements with the Company:
  23
 *Table
              of Contents*
  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 will,
          in
          accordance with the terms and conditions of any then effective employment
          agreements, review and approve 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:
  a.
                base
                    salaries
  b.
                performance-based
                    annual incentive compensation
                    awards
  c.
                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.
  Annual
          Incentive 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 and Mr. Salek, pursuant to their employment contracts,
          receive
          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 $260,109 and $30,958, respectively, for the year
          ended
          December 31, 2006.
  Stock
          Options
  S tock
          options may be granted to provide the opportunity for long-term compensation
          based upon the performance of our stock over time. During
          2006, no stock options were granted to the Company’s employees, or the executive
          officers.
  24
 *Table
              of Contents*
  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 year ended December 31, 2006 to Bernard Korn,
          William
          Pagano and William Salek, the only named executive officers of the Company
          whose
          compensation exceeded $100,000.
 Name
                    and Principal Position
                
                Year
                
                Salary
                
                Non-Equity
                    Incentive PlanCompensation
                
                All
                    OtherCompensation
                
                TotalBernard
                    Korn*
                
                
                2006
                
                $
                200,000
                
                
                -
                
                $
                30,699
                
                $
                230,699William
                    Pagano—Director and Chief
                
                
                2006
                
                $
                200,000
                
                $
                260,109
                
                
                -
                
                $
                460,109Executive
                    Officer of the Company and President of UniversalWilliam
                    Salek—Chief Financial Officer and Secretary of the Company and Vice
                    President of Universal
                
                
                2006
                
                $
                120,000
                
                $
                30,958
                
                
                -
                
                $
                150,958
  * Mr.
          Korn
          resigned as Director, Chairman of the Board, and Chief Executive Officer
          of the
          Company on April 17, 2006. Currently, Mr. Korn is a non-executive employee
          of
          the Company.
  Mr.
          Korn’s all other compensation consists of $11,962 in automobile lease payments,
          $3,990 in automobile related costs, $7,289 in prescription coverage for
          Mr. Korn
          and his wife, and $7,458 in Medicare reimbursements.
  During
          the fiscal years ended 2006, 2005 and 2004, no stock awards, option awards,
          bonuses or nonqualified deferred compensation earnings were earned by the
          named
          executive officers.
  25
 *Table
              of Contents*
  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
  Concurrently
          with Mr. Korn’s sale of 426,743 shares of common stock and his resignation as Chief
          Executive Officer, Director and Chairman of the Board on April
          17, 2006, the Company entered into an employment agreement with Bernard
          Korn
          that cancelled and superseded a prior employment agreement.
  Mr.
          Korn’s employment under the new agreement is to end on December 31, 2010. Mr.
          Korn is required to perform duties
          that are reasonably assigned to him with his approval that he may not
          unreasonably withhold. Until December 31, 2008, he is required to devote
          his
          best efforts and significant time to his duties. During the balance of
          the term,
          Mr. Korn is required to devote reasonable efforts, consistent with his
          personal
          and business commitments, to the performance of his duties. The
          agreement provides for a salary of $200,000 per year, reduced by any amounts
          payable to Mr. Korn 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,
          and
          designated fringe benefits. The agreement contains confidentiality and
          non-compete provisions.
  The
          agreement provides that until
          May
          31, 2008, Mr. Korn may 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.
  See
          “Potential Payments Upon Termination or Change in Control” below for a
          discussion relating to payments payable to Mr. Korn upon termination or
          upon a
          change in control.
  26
 *Table
              of Contents*
  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., a wholly owned subsidiary of the Company (“Universal”), 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 year 2005 and for each of the calendar years 2006 through 2010,
          Mr.
          Pagano shall 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 Compensation Base
                
                Additional
                    Compensation 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
                %
  27
 *Table
              of Contents*
  For
          the
          fiscal year ending December 31, 2006 the incentive compensation base was
          $2,422,225 and the additional compensation was computed as follows:
  Incentive
                    Compensation Base
                
                Additional
                    Compensation Percentages
                
                Incentive
                    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 year ended December 31, 2006 was
          $260,109.
  In
          the
          event that Mr. Pagano no longer performs the duties of the President of
          Universal or the Vice President of RAL or American for any reason other
          than
          death or disability, the Company will be considered in default of its credit
          agreement with Wells Fargo Business Credit, Inc. unless a waiver is
          obtained.
  William
          Salek
  Effective
          January 1, 2005, Mr. Salek is employed pursuant to an employment agreement
          expiring on December 31, 2007 at a compensation of $120,000 per annum.
          The
          agreement also provides 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 shall 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.
  Portion
                    of Incentive Compensation Base
                
                Additional
                    Compensation 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
                %
  28
 *Table
              of Contents*
  For
          the
          fiscal year ending December 31, 2006 the incentive compensation base was
          $2,422,225 and the additional compensation was computed as follows:
  Incentive
                    Compensation Base
                
                Additional
                    Compensation Percentages
                
                Incentive
                    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 year ended December 31, 2006 was
          $30,958.
  Outstanding
          Equity Awards at Fiscal Year End
  The
          following table sets forth information about equity awards outstanding
          as of
          December 31, 2006.
  Name
                
                Number
                    of Securities UnderlyingUnexercised
                    Options Exercisable
                
                Option
                    Exercise Price
                
                OptionExpiration
                    DateBernard
                    Korn
                
                52,000
                
                $
                    0.25
                
                February
                    11, 2013
  On
          January 2, 2007 Bernard Korn obtained 52,000 shares of common stock by
          exercising 52,000 outstanding stock options. Following said transaction,
          there
          are no equity awards outstanding for the named executive
          officers.
  29
 *Table
              of Contents*
  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, 2006 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 controlBernard
                    Korn
                
                $800,000
                    lump sum payment equal to the four total remaining $200,000 payments
                    payable to Mr. Korn under his employment agreement ; commencing
                    30 days
                    after demand therefor, interest accrues on such lump sum obligation
                    at the
                    annual rate of 10% per annum and is payable on demand.
                
                Mr.
                    Korn’s widow shall be entitled to the following two payments:
                  (1)
                    $5,000 lump sum tax-free death benefit and (2) $200,000 payable
                    not less
                    frequently than in bi-weekly installments.
                
                None.*William
                    Pagano
                
                None.
                
                None.
                
                None.William
                    Salek
                
                None.
                
                None.
                
                None.
  *
          If a
          change in control, as defined below, shall occur at any time from and after
          January 1, 2009, then the Company shall pay Mr. Korn in a lump sum, and
          without
          present value discount, the entire aggregate amount which would have been
          payable by the Company to Mr. Korn had Mr. Korn been employed for the entire
          term. Commencing thirty days after demand therefore, interest shall accrue
          on
          such lump sum obligation at the annual rate if 10% per annum and shall
          be
          payable on demand.
  A “change
          of control” shall be deemed to have occurred if the stockholders of the Company
          approve a merger of the Company, or a plan of complete liquidation of the
          Company, or an agreement for the sale or disposition by the Company of
          all or
          substantially all of its assets, or any other business combination of the
          Company with any other corporation, other than any such merger or business
          combination which would result in the voting securities of the Company
          outstanding immediately prior thereto continuing to represent (either by
          remaining outstanding or by being converted into voting securities of the
          surviving entity) at least 50% of the total voting power represented by
          the
          voting securities of the Company or such surviving entity outstanding
          immediately after such merger or business combination.
  30
 *Table
              of Contents*
  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, 2006.
  Name
                
                Fees
                    Earned or Paidin
                    Cash
                
                Option
                    Awards
                
                All
                    OtherCompensation
                
                TotalE.
                    Bruce Fredrikson
                
                $
                19,500
                
                $
                17,804
                
                
                -
                
                $
                37,304Melissa
                    Goldman-Williams
                
                $
                12,000
                
                
                -
                
                
                -
                
                $
                12,000Michael
                    Goldman
                
                $
                12,000
                
                
                -
                
                
                -
                
                $
                12,000William
                    Koon
                
                $
                6,000
                
                
                -
                
                $
                3,000
                
                $
                9,000Stuart
                    H. Lubow
                
                $
                7,681
                
                $
                17,804
                
                
                -
                
                $
                25,485Ronald
                    H. Miller
                
                $
                12,000
                
                $
                17,804
                
                
                -
                
                $
                29,804Jack
                    Rose
                
                $
                6,000
                
                
                -
                
                $
                3,000
                
                $
                9,000Phillip
                    Siegel
                
                $
                7,681
                
                
                -
                
                
                -
                
                $
                7,681Carl
                    Sussman
                
                $
                6,000
                
                
                -
                
                $
                3,000
                
                $
                9,000
  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.
  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.
  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 has
          sixty
          days from the date of his resignation to exercise his 10,000 vested options.
          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.
  Messrs.
          Koon, Rose and Sussman resigned as Directors of the Company on April 17,
          2006
          and each received other compensation in the amount of $3,000 for and in
          consideration of their duties and service to the Company.
  31
 *Table
              of Contents*
  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.
  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, 2006, 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.
  Members
          of the Compensation Committee
  E.
          Bruce
          Fredrikson
  Stuart
          H.
          Lubow
  32
 *Table
              of Contents*
  **Item
          12.** **Security
          Ownership of Certain Beneficial Owners and
          Management**
  The
          following table sets forth, as of March 1, 2007, 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
                    StockName
                    of Beneficial Owner
                
                Amount
                    and Nature of Beneficial Ownership*
                
                
                
                Percent
                    of Class
                
                Amount
                    and Nature of Beneficial Ownership*
                
                
                
                Percent
                    of ClassOfficers
                    and Directors***:E.
                    Bruce Fredrikson
                
                
                16,000
                
                
                (1)
                
                
                **
                
                
                500
                
                
                (1)
                
                
                **Melissa
                    Goldman-Williams
                
                
                5,400
                
                
                
                
                
                **
                
                
                0
                
                
                
                
                
                **Michael
                    Goldman
                
                
                1,282,255
                
                
                (2)
                
                
                26.74
                %
                
                0
                
                
                
                
                
                **Stuart
                    H. Lubow
                
                
                10,000
                
                
                (3)
                
                
                **
                
                
                0
                
                
                
                
                
                **Ronald
                    H. Miller
                
                
                11,054
                
                
                (4)
                
                
                **
                
                
                0
                
                
                
                
                
                **William
                    Pagano
                
                
                767,973
                
                
                (5)
                
                
                16.41
                %
                
                0
                
                
                
                
                
                **William
                    Salek
                
                
                61,667
                
                
                (6)
                
                
                1.32
                %
                
                0
                
                
                
                
                
                **All
                    Officers and Directors as a Group:
                
                
                2,154,349
                
                
                
                
                
                44.19
                %
                
                500
                
                
                
                
                
                **Holders
                    of over 5% of a class of stock who are not Officers or
                    Directors:Rita
                    C. Folger
                
                
                578,719
                
                
                (7)
                
                
                12.37
                %
                
                0
                
                
                
                
                
                **Goldman
                    Associates of NY, Inc.
                
                
                1,099,255
                
                
                (8)
                
                
                22.92
                %
                
                0
                
                
                
                
                
                **
  The
          beneficial owners listed above have all given a business address of 275
          Wagaraw
          Road, Hawthorne, New Jersey 07506.
  *
          For the
          purposes of this table, “Beneficial Ownership” is defined as set forth in rule
          13d-3 under the Securities Exchange Act of 1934, as amended. Except as
          set forth
          in the following notes, each person listed in the table has sole voting
          and sole
          investment power with respect to the shares of Common Stock listed in the
          table.
  **
          Represents beneficial ownership of less than one percent of the Company’s
          outstanding securities.
  33
 *Table
              of Contents*
  ***
          William Koon, Bernard Korn, Jack Rose and Carl Sussman resigned as Directors
          of
          the Company on April 17, 2006 and their beneficial ownership as of said
          date
          consisted of -0-, 202,512, 122,668 and 49,607 shares of Common Stock,
          respectively. On January 22, 2007, Phillip Siegel resigned as a Director
          and his
          10,000 shares of Common Stock issuable upon exercise of his options expire
          sixty
          days after his resignation. Each of Messrs. Koon, Sussman and Siegel’s
          beneficial ownership represent less than one percent of the Company’s
          outstanding securities. Each of Messrs. Korn and Rose’s beneficial ownership
          represented 4.37% and 2.68%, respectively, of the Company’s outstanding
          securities.
  (1)
          E.
          Bruce Fredrikson’s beneficial ownership consists of 6,000 shares of Common
          Stock, 10,000 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 NY, Inc. ("Goldman Associates"). Goldman Associates is the owner of
          949,255
          shares of Common Stock ("Goldman Shares") and warrants ("Warrants") to
          purchase
          150,000 shares of Common Stock at an exercise price of $3.00 per share.
          The
          Warrants are exercisable at any time prior to their expiration on December
          31,
          2008. Mr. Goldman is the owner of 183,000 shares of Common Stock and the
          beneficial owner of the Warrants and the Goldman Shares. Mr. Goldman’s
          beneficial ownership excludes 20,000 shares of Common Stock owned by his
          wife,
          of which Goldman Associates of New York, Inc. 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 10,000 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 10,000 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 since January 1, 2006 have been employed by the Company as,
          respectively, Vice President-Chief Legal Counsel and Assistant Vice
          President-Legal. Mr. Folger’s beneficial ownership consists of 5,000 shares of
          Common Stock issuable at any time upon exercise of his options. Mr. Folger
          disclaims beneficial ownership of his wife’s shares, and Mrs. Folger disclaims
          beneficial ownership of her husband’s shares.
  (8)
          The
          beneficial ownership of Goldman Associates of NY, Inc. consists of 949,255
          shares of Common Stock and 150,000 warrants 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.
  34
 *Table
              of Contents*
  **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).
  35
 *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.
  36
 *Table
              of Contents*
  Certain
          Relationships and Related Transactions
  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 $224,885 during the year ended December 31, 2006. The Company owes
          Mr.
          Hildebrandt $110,000 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 from July 2004 to January
          2005.
  Goldman
          Associates of NY, 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.
  Each
          of
          Messrs. Goldman, Korn, Pagano, Rozzi, and Mrs. Folger has 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.
  In
          the
          event that Mr. Pagano no longer performs the duties of the President of
          Universal or the Vice President of RAL or American for any reason other
          than
          death or disability, the Company will be considered in default of its credit
          agreement with Wells Fargo Business Credit, Inc. unless a waiver is
          obtained.
  The
          Company owes Goldman Associates, a private Company controlled by Michael
          Goldman, $750,000 pursuant to a secured note which is subordinate to the
          Company’s senior secured lender. The note bears interest at the prime rate and
          is due on June 30, 2008.
  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.
  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 book 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.
  37
 *Table
              of Contents*
  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 expired 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, for $245,844 total
          annual
          fixed rent, an increase of $106,740 per annum. The effectiveness of the
          Third
          Modification of Lease Agreement commences on the date of issuance of a
          certificate of occupancy for the Premises that are currently undergoing
          reconstruction. 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 expires 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 the Vice President-Chief
          Legal
          Counsel and Assistant Vice President-Legal, respectively. The Company paid
          Pioneer Realty Holdings, LLC $137,239 in rent during the year ended December
          31,
          2006.
  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. Mrs. Folger is the wife of Oscar Folger
          and
          the mother of Jeffrey Folger. Professional fees paid to the Oscar Folger’s law
          firm for the years ended 2006, 2005 and 2004 were $89,826, $79,973 and
          $71,115,
          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.
  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 2006 and 2005 were $207,500 and $227,385, 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 are normally
          provided
          by Weiser LLP in connection with statutory and regulatory filings or
          engagements.
  38
 *Table
              of Contents*
  Audit
          Related Fees
  The
          Company did not incur audit related fees from Weiser in 2006 and 2005.
          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 Weiser in 2006 and 2005. 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
  There
          were no other fees for professional services rendered to the Company during
          the
          fiscal years 2006 and 2005, other than the service reported above.
  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 formal verbal 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. Index to Financial
                    Statements
  (2)
                Financial
                    Statement Schedules. See F-1 through F-28,
                    attached
  (3)
                Exhibits
  INDEX
          TO
          EXHIBITS
 Exhibit
                      Exhibit
                          Name
                      FiledHerewith
                      Form
                      Date
                          FiledWith SEC
                      Incorporated
                          By ReferenceFrom Exhibit3.01
                      Restated
                          Certificate of Incorporation of Registrant dated January
                          6,
                          1983
                      
                      10-K
                      03-30-06
                      3.01(a)
                      Certificate
                          of Amendment of the Certificate of Incorporation dated
                          October 31,
                          1986
                      
                      10-K
                      03-30-06
                      3.01(a)(b)
                      Certificate
                          of Amendment of the Certificate of Incorporation dated
                          June 24,
                          1988
                      
                      10-K
                      03-30-06
                      3.01(b)(c)
                      Certificate
                          of Amendment of the Certificate of Incorporation dated
                          January 13,
                          1998
                      
                      10-K
                      03-30-06
                      3.01(c)(d)
                      Certificate
                          of Amendment of the Certificate of Incorporation dated
                          January 13,
                          1998
                      
                      10-K
                      03-30-06
                      3.01(d)(e)
                      Certificate
                          of Amendment of the Certificate of Incorporation dated
                          September 29,
                          2006
                      
                      10-Q
                      11-13-06
                      3.013.02
                      By-Laws
                          of Registrant
                      
                      10-K
                      03-30-06
                      3.02(a)
                      Amended
                          and Restated By-Laws of Registrant, ratified and adopted
                          June 13,
                          2006
                      
                      8-K
                      06-19-06
                      3.01
  39
 *Table
              of Contents*
 
 4.01
                Specimen
                    of Common Stock Certificate
                
                10-K
                03-30-06
                4.014.02
                Specimen
                    of Convertible Preferred Stock Certificate
                
                10-K
                03-30-06
                4.0210.01
                Employment
                    Agreement dated as of January 1, 1998 between Registrant and
                    Bernard
                    Korn
                
                10-KSB
                03-31-98
                10(a)(a)
                Amendment
                    Number 1 dated April 1, 1999 to Employment Agreement dated as
                    of January
                    1, 1998 between Registrant and Bernard Korn
                
                10-K
                04-11-01
                10(a)(i)(b)
                Amendment
                    Number 2 dated April 1, 2000 to Employment Agreement dated as
                    of January
                    1, 1998 between Registrant and Bernard Korn
                
                10-K
                04-11-01
                10(a)(ii)(c)
                Amendment
                    Number 3 dated October 29, 2002 to Employment Agreement dated
                    as of
                    January 1, 1998 between Registrant and Bernard Korn
                
                10-K
                11-18-03
                10(a)(iii)(d)
                Amendment
                    Number 4 dated October 29, 2002 to Employment Agreement dated
                    as of
                    January 1, 1998 between Registrant and Bernard Korn
                
                10-K
                11-18-03
                10(a)(iv)(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
                10.01
  40
 *Table
              of Contents*
 
 10.06
                Purchase
                    Agreement dated March 25, 1999 for business and assets subject
                    to certain
                    liabilities of Universal Supply Group, Inc.
                
                10-KSB
                03-30-99
                10(g)(a)
                Amendment
                    Number 1 dated June 25, 1999 to Purchase Agreement dated March
                    25,
                    1999
                
                8-K
                07-09-99
                10(a)(ii)(b)
                Loan
                    and Security Agreement dated June 24, 1999 between LaSalle Bank
                    National
                    Association and Universal Supply Group, Inc.
                
                8-K
                07-09-99
                10(a)(iv)(c)
                Demand
                    Note dated June 24, 1999 between LaSalle Bank National Association
                    and
                    Colonial Commercial Sub Corp.
                
                8-K
                07-09-99
                10(a)(v)(d)
                Guaranty
                    of All Liabilities and Security Agreement of Colonial Commercial
                    Sub Corp.
                    by Colonial Commercial Corp. to LaSalle Bank National Association
                    dated
                    June 24, 1999
                
                8-K
                07-09-99
                10(a)(vi)(e)
                Waiver
                    and Tenth Amendment dated November 21, 2002 to the Loan and Security
                    Agreement dated June 24, 1999 between LaSalle Bank National Association
                    and Universal Supply Group, Inc.
                
                10-K
                11-18-03
                10(e)(vi)(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
                10.0210.08
                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)
  41
 *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
                4.210.14
                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
                4.610.15
                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)10.16
                RAL
                    Closing Statement dated September 30, 2003
                
                8-K
                10-15-03
                10(a)(ii)
  42
 *Table
              of Contents*
 
 10.17
                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
                10.0510.18
                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—Weiser,
                    LLP
                Yes31.01
                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
  43
 *Table
              of Contents*
  **** **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
  Index
          to
          Consolidated Financial Statements
  CONTENTSPageReport
                    of Independent Registered Public Accounting Firm: Weiser
                    LLP
                F-2Consolidated
                    Balance Sheets as of December 31, 2006 and 2005
                F-3Consolidated
                    Statements of Operations for the Years Ended December 31, 2006,
                    2005 and
                    2004
                F-4Consolidated
                    Statements of Stockholders’ Equity for the Years Ended December 31,2006,
                    2005 and 2004
                F-5Consolidated
                    Statements of Cash Flows for the Years Ended December 31, 2006,
                    2005 and
                    2004
                F-6Notes
                    to the Consolidated Financial Statements
                F-7Schedule
                    II - Valuation and Qualifying Accounts
                F-28All
                    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 of Colonial Commercial Corp. and
          Subsidiaries:
  We
          have
          audited the accompanying consolidated balance sheets of Colonial Commercial
          Corp. and Subsidiaries (the "Company") as of December 31, 2006 and 2005
          and the
          related consolidated statements of operations, stockholders’ equity and cash
          flows for the years ended December 31, 2006, 2005 and 2004. 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 2005 and the consolidated
          results of their operations and their cash flows for the years ended December
          31, 2006, 2005 and 2004, in conformity with U.S. generally accepted accounting
          principles.
  We
          have
          also audited the financial statement Schedule II (Valuation and Qualifying
          Accounts) for the years ended December 31, 2006, 2005 and 2004. 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
  F-2
 *Table
              of Contents*
  COLONIAL
                    COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
                    Balance SheetsDecember
                    31,
                  2006
                
                December
                    31,
                  2005AssetsCurrent
                    assets:Cash
                
                $
                482,251
                
                $
                613,456Accounts
                    receivable, net of allowance for doubtful accounts of $212,043
                    in 2006 and
                    $185,971 in 2005
                
                
                9,069,301
                
                
                8,489,717Inventory
                
                
                13,111,488
                
                
                12,214,261Prepaid
                    expenses and other current assets
                
                
                1,057,099
                
                
                1,066,658Deferred
                    tax asset - current portion
                
                
                420,000
                
                
                637,500Total
                    current assets
                
                
                24,140,139
                
                
                23,021,592Property
                    and equipment
                
                
                1,512,666
                
                
                1,669,484Goodwill
                
                
                1,628,133
                
                
                1,628,133Other
                    intangibles
                
                
                3,500
                
                
                11,334Other
                    assets - noncurrent
                
                
                202,177
                
                
                135,832Deferred
                    tax asset - noncurrent
                
                
                1,288,500
                
                
                1,071,000$
                28,775,115
                
                $
                27,537,375Liabilities
                    and Stockholders' EquityCurrent
                    liabilities:Trade
                    payables
                
                $
                4,719,160
                
                $
                5,991,946Accrued
                    liabilities
                
                
                1,975,175
                
                
                2,047,159Income
                    taxes payable
                
                
                1,630
                
                
                12,772Borrowings
                    under credit facility - revolving credit
                
                
                13,615,696
                
                
                11,183,008Borrowings
                    under credit facility - term loan/overadvance
                
                
                -
                
                
                562,977Notes
                    payable - current portion; includes related party notes of $30,000
                    in 2006
                    and $60,389 in 2005
                
                
                136,539
                
                
                165,112Total
                    current liabilities
                
                
                20,448,200
                
                
                19,962,974Notes
                    payable, excluding current portion; includes related party notes
                    of
                    $1,008,125 in 2006 and $1,000,625 in 2005
                
                
                1,317,394
                
                
                1,400,834Total
                    liabilities
                
                
                21,765,594
                
                
                21,363,808Commitments
                    and contingenciesStockholders'
                    equity:Redeemable
                    convertible preferred stock, $.05 par value, 2,500,000 shares
                    authorized,
                    467,500 in 2006 and 484,721 in 2005 shares issued and outstanding,
                    liquidation preference of $2,337,500 in 2006 and $2,423,605 in
                    2005
                
                
                23,375
                
                
                24,236Common
                    stock, $.05 par value, 20,000,000 shares authorized, 4,593,680
                    in 2006 and
                    4,544,459 in 2005 shares issued and outstanding
                
                
                229,684
                
                
                227,223Additional
                    paid-in capital
                
                
                10,707,791
                
                
                10,626,859Accumulated
                    deficit
                
                
                (3,951,329
                )
                
                (4,704,751
                )Total
                    stockholders' equity
                
                
                7,009,521
                
                
                6,173,567$
                28,775,115
                
                $
                27,537,375
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-3
 *Table
              of Contents*
  COLONIAL
                    COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
                    Statements of OperationsFor
                    the Years Ended December 31,2006
                
                2005
                
                2004Sales
                
                $
                71,494,652
                
                $
                66,690,945
                
                $
                61,454,128Cost
                    of sales
                
                
                50,119,796
                
                
                46,507,769
                
                
                43,069,981Gross
                    profit
                
                
                21,374,856
                
                
                20,183,176
                
                
                18,384,147Selling,
                    general and administrative expenses, net
                
                
                19,420,124
                
                
                17,782,752
                
                
                16,666,335Operating
                    income
                
                
                1,954,732
                
                
                2,400,424
                
                
                1,717,812Other
                    income
                
                
                277,866
                
                
                272,597
                
                
                320,359Interest
                    expense, net; includes related party interest of $104,485 in
                    2006, $94,703
                    in 2005 and $45,007 in 2004
                
                
                (1,354,785
                )
                
                (1,044,454
                )
                
                (875,683
                )Income
                    from operations before income tax expense (benefit)
                
                
                877,813
                
                
                1,628,567
                
                
                1,162,488Income
                    tax expense (benefit)
                
                
                124,391
                
                
                (487,064
                )
                
                (498,668
                )Net
                    income
                
                $
                753,422
                
                $
                2,115,631
                
                $
                1,661,156Income
                    per common share:Basic
                
                $
                0.16
                
                $
                0.49
                
                $
                0.49Diluted
                
                $
                0.14
                
                $
                0.40
                
                $
                0.36Weighted
                    average shares outstanding:Basic
                
                
                4,579,129
                
                
                4,295,697
                
                
                3,403,152Diluted
                
                
                5,300,646
                
                
                5,293,114
                
                
                4,587,966
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-4
 *Table
              of Contents*
  COLONIAL
                      COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
                      Statements of Stockholders' EquityFor
                      the Years Ended December 31, 2006, 2005, and 2004Number
                      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, 2003
                  
                  
                  1,466,792
                  
                  
                  2,403,318
                  
                  $
                  73,340
                  
                  $
                  120,166
                  
                  $
                  9,259,013
                  
                  $
                  (8,481,538
                  )
                  $
                  970,981Net
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,661,156
                  
                  
                  1,661,156Stock-based
                      compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  -
                  
                  
                  62,025
                  
                  
                  -
                  
                  
                  62,025Conversion
                      of shares of preferred stock to common stock
                  
                  
                  (83,623
                  )
                  
                  83,623
                  
                  
                  (4,181
                  )
                  
                  4,181
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Retirement
                      of preferred stock
                  
                  
                  (592,730
                  )
                  
                  -
                  
                  
                  (29,637
                  )
                  
                  -
                  
                  
                  (326,002
                  )
                  
                  -
                  
                  
                  (355,639
                  )Issuance
                      of common stock
                  
                  
                  -
                  
                  
                  1,620,000
                  
                  
                  -
                  
                  
                  81,000
                  
                  
                  1,554,000
                  
                  
                  -
                  
                  
                  1,635,000Options
                      exercised
                  
                  
                  -
                  
                  
                  51,500
                  
                  
                  -
                  
                  
                  2,575
                  
                  
                  10,300
                  
                  
                  -
                  
                  
                  12,875Warrant
                      value
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  187,500
                  
                  
                  -
                  
                  
                  187,500Balance
                      at December 31, 2004
                  
                  
                  790,439
                  
                  
                  4,158,441
                  
                  
                  39,522
                  
                  
                  207,922
                  
                  
                  10,746,836
                  
                  
                  (6,820,382
                  )
                  
                  4,173,898Net
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,115,631
                  
                  
                  2,115,631Stock-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
                  
                  
                  (4,704,751
                  )
                  
                  6,173,567Net
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  753,422
                  
                  
                  753,422Conversion
                      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
                  
                  $
                  (3,951,329
                  )
                  $
                  7,009,521
  The
            accompanying notes are an integral part of these consolidated financial
            statements.
  F-5
 *Table
              of Contents*
  COLONIAL
                    COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
                    Statements of Cash FlowsFor
                    The Years Ended December 31,2006
                
                2005
                
                2004Cash
                    flows from operating activities:Net
                    income
                
                $
                753,422
                
                $
                2,115,631
                
                $
                1,661,156Adjustments
                    to reconcile net income to net cash (used in) provided by operating
                    activities:Deferred
                    tax benefit
                
                
                -
                
                
                (641,500
                )
                
                (645,600
                )Stock-based
                    compensation
                
                
                53,412
                
                
                (74,450
                )
                
                62,025Provision
                    for doubtful accounts
                
                
                191,357
                
                
                101,724
                
                
                225,183Depreciation
                
                
                457,322
                
                
                387,719
                
                
                366,223Amortization
                    of intangibles
                
                
                7,834
                
                
                16,166
                
                
                26,667Accretion
                    of debt discount
                
                
                37,500
                
                
                37,500
                
                
                15,625Tax
                    effect of options exercised
                
                
                21,120
                
                
                (48,112
                )
                
                -Changes
                    in operating assets and liabilitiesAccounts
                    receivable
                
                
                (701,615
                )
                
                (816,853
                )
                
                (1,745,871
                )Inventory
                
                
                (805,048
                )
                
                (1,211,947
                )
                
                (1,219,492
                )Prepaid
                    expenses and other current assets
                
                
                (2,321
                )
                
                (200,926
                )
                
                (245,054
                )Other
                    assets - noncurrent
                
                
                (66,345
                )
                
                47,351
                
                
                (183,183
                )Trade
                    payables
                
                
                (1,272,786
                )
                
                1,270,156
                
                
                (574,089
                )Accrued
                    liabilities
                
                
                (71,984
                )
                
                303,153
                
                
                230,428Income
                    taxes payable
                
                
                (11,142
                )
                
                (23,544
                )
                
                (139,298
                )Net
                    cash (used in) provided by operating activities
                
                
                (1,409,274
                )
                
                1,262,068
                
                
                (2,165,280
                )Cash
                    flows from investing activities:Additions
                    to property and equipment
                
                
                (300,504
                )
                
                (401,054
                )
                
                (507,241
                )Acquisition
                    of Speed Queen assets from Goldman Associates of NY, Inc.
                
                
                (149,625
                )
                
                -
                
                
                -Net
                    cash used in investing activities
                
                
                (450,129
                )
                
                (401,054
                )
                
                (507,241
                )Cash
                    flows from financing activities:Issuance
                    of common stock and exercise of stock options
                
                
                8,000
                
                
                22,000
                
                
                1,647,875Retirement
                    of preferred stock
                
                
                -
                
                
                (15,400
                )
                
                (355,639
                )Repayments
                    of notes payable: includes related party repayments of $60,389
                    in 2006,
                    $48,091 in 2005 and $30,000 in 2004.
                
                
                (162,586
                )
                
                (141,292
                )
                
                (105,883
                )Issuance
                    of notes payable: includes related party notes of $0.00 in 2006,
                    $48,480
                    in 2005 and $1,075,000 in 2004.
                
                
                13,073
                
                
                155,699
                
                
                1,173,392Issuance
                    of warrants
                
                
                -
                
                
                -
                
                
                187,500Repayments
                    under credit facility - term loan/overadvance
                
                
                (562,977
                )
                
                (1,103,690
                )
                
                (572,333
                )Borrowings
                    under credit facility - revolving credit
                
                
                2,432,688
                
                
                524,466
                
                
                665,512Net
                    cash provided by (used in) financing activities
                
                
                1,728,198
                
                
                (558,217
                )
                
                2,640,424(Decrease)
                    increase in cash
                
                
                (131,205
                )
                
                302,797
                
                
                (32,097
                )Cash
                    - beginning of period
                
                
                613,456
                
                
                310,659
                
                
                342,756Cash
                    - end of period
                
                $
                482,251
                
                $
                613,456
                
                $
                310,659
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-6
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006, 2005 and 2004**
  **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”) and
          American/Universal Supply Inc. (“American”) (together, the “Company”), is a
          distributor of heating, ventilation and air conditioning (HVAC), climate
          control
          products, plumbing fixtures and supplies and appliances to building contractors
          and other users, which the Company considers its only industry segment.
          The
          Company’s products are marketed primarily to HVAC contractors, which, 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 and portions of eastern Pennsylvania. 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 assured stability in
          its
          customer base. The Company has no material long term agreements with any
          supplier. Certain supplier agreements limit the sale of competitive products
          in
          designated markets that the Company serves.
  (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, generally upon shipment
          of
          products in accordance with shipping terms. There are no further obligations
          on
          the part of the Company subsequent to revenue recognition, except for returns
          of
          defective products from the Company’s customers, which are covered under the
          manufacturer’s warranty. The Company will receive a vendor credit from the  manufacturer
          related to the warranted product in question, at which time credits are
          issued
          to the customer. The Company does not provide a warranty on products sold
          other
          than the warranty 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, 2006 and 2005.
  (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-7
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  (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 $431,780, $421,248 and $325,109 for the years ended December
          31,
          2006, 2005 and 2004, respectively.
  (g) 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.
  (h) Goodwill
          and Other Intangible Assets
  Statement
          of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
          Assets," requires that goodwill be tested for impairment at least annually.
          Intangible assets determined to have finite lives are amortized over their
          remaining useful lives. The Company has determined Universal and RAL are
          reporting units.
  (i) 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) will be effective for the first period after December
          31, 2005.
  F-8
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  The
          following table illustrates the effect on net income if the fair-value-based
          method had been applied to all outstanding and unvested awards in each
          period.
  2005
                
                2004Net
                    income, as reported
                
                $
                2,115,631
                
                $
                1,661,156Add:
                    Stock-based compensation related to option repricing
                
                
                (74,450
                )
                
                62,025Pro
                    forma
                
                $
                2,041,181
                
                $
                1,723,181Basic
                    net income per common shareAs
                    reported
                
                $
                .49
                
                $
                .49Pro
                    forma
                
                $
                .48
                
                $
                .51Diluted
                    net income per common shareAs
                    reported
                
                $
                .40
                
                $
                .36Pro
                    forma
                
                $
                .39
                
                $
                .38
  (j) Net
          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.
  (k) 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.
  F-9
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  (l) 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.
  (m) 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. Actual results could differ from those
          estimates.
  (n) Recent
          Issued Accounting Pronouncements
  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
          provisions of FIN 48 are effective as of the beginning of the Company’s 2007
          fiscal year, with the cumulative effect of the change in accounting principle
          recorded as an adjustment to opening retained earnings. The Company is
          currently
          evaluating the impact of adopting FIN 48 on the Company’s consolidated financial
          statements.
  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.
  **2.** **Business
          Acquisitions and Discontinued Operations** ****
  On
          January 28, 2002, Atlantic, a wholly-owned Subsidiary of the Company, filed
          a
          voluntary petition with the U. S. Bankruptcy Court for the Eastern District
          of
          New York to reorganize under Chapter 11 of the U. S. Bankruptcy Code. On
          May 18,
          2005, the United States Bankruptcy Court for the Eastern District of New
          York
          dismissed the petition. Atlantic is a discontinued operation and has no
          assets.
          Neither Colonial Commercial Corp. nor any of its other subsidiaries were
          part of
          the Chapter 11 filing.
  The
          Company’s investment in Atlantic’s common stock was recognized at a cost value
          of $219,007 of guaranteed liabilities as of December 31, 2002. Colonial
          recognized the $219,007 of guaranteed liabilities of Atlantic until June
          2004,
          at which time the Company settled the claim for $161,000 and recognized
          a gain
          of $58,007.
  F-10
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  **3.** **Property
          and Equipment**
  Property
          and equipment consists of the following at December 31:
  2006
                
                2005Computer
                    hardware and software
                
                $
                1,040,441
                
                $
                884,011Furniture
                    and fixtures
                
                
                91,558
                
                
                85,180Leasehold
                    improvements
                
                
                1,410,425
                
                
                1,361,620Showroom
                    fixtures and displays
                
                
                79,606
                
                
                0Automobiles
                
                
                550,829
                
                
                560,4843,172,859
                
                
                2,891,295Less
                    accumulated depreciation and amortization
                
                
                1,660,193
                
                
                1,221,811$
                1,512,666
                
                $
                1,669,484
  **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, 2006
                
                December
                    31, 2005Gross
                    Carrying Amount
                
                Accumulated
                    Amortization
                
                Net
                    Carrying Amount
                
                Gross
                    Carrying Amount
                
                Accumulated
                    Amortization
                
                Net
                    Carrying Amount
                
                Estimated
                    Useful Life(Years)Covenants
                    Not to Compete
                
                $
                241,667
                
                $
                (238,167
                )
                $
                3,500
                
                $
                241,667
                
                $
                (230,333
                )
                $
                11,334
                
                
                5
    Amortization
          expense amounted to $7,834, $16,166 and $26,667 for the years ended December
          31,
          2006, 2005 and 2004, respectively.
  Estimated
          Amortization Expense:
  For
                    the Years Ended December 31,2007
                
                $
                2,0002008
                
                
                1,500$
                3,500
  F-11
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  **5.** **Financing
          Arrangements**
  The
          Company has a total
          secured loan facility of $15,000,000
          pursuant to a credit and security agreement (“Agreement”) with Wells Fargo
          Business Credit, Inc. (“Wells”) consisting of a revolving line of credit
          including a $2,000,000 two-year term loan. Final payment of the term loan
          was
          made in July of 2006. The revolving credit line bears interest at .25%
          below
          prime, and the term loan bore interest at .50% above prime. On May 11,
          2006 the
          Company received a $500,000 overadvance, payable in equal installments
          of
          $12,500 each business day commencing July 11, 2006. The overadvance was
          paid in
          full on September 5, 2006. Effective June 23, 2006, the Agreement was amended
          to
          extend the maturity date from August 1, 2009 to August 1, 2010. The facility
          consists of a $15,000,000 revolving line of credit which expires on August
          1,
          2010. The Company has standby letters of credit which expire on July 31,
          2007
          and September 1, 2007, that reduce the credit facility by $300,000 and
          $100,000,
          respectively, and additional reserves determined by the bank that reduce
          the
          credit facility by $100,000. Availability under the revolving credit line
          is
          determined by a percentage of available assets as defined in the Agreement,
          less
          letters of credit and reserves, and was $142,216 as of December 31, 2006.
          The
          balance outstanding under the revolving line of credit was $13,615,696
          as of
          December 31, 2006. The interest rate on the revolving credit facility,
          as of
          December 31, 2006 was 8.0%.
  Substantially
          all of the assets of the Company, as well as a pledge of the stock of Colonial
          Commercial Corp.’s operating subsidiaries, collateralize the loans. The facility
          contains covenants relating to the financial condition of the Company,
          its
          business operations, and restricts the payment of dividends, subordinated
          debt,
          purchase of securities, and capital expenditures. The Company must maintain
          a
          tangible net worth of approximately $3.8 million for the fiscal year ending
          December 31, 2006. In addition, the Company is required to maintain certain
          levels of net income and cash flows, as defined in the agreement. All loans
          are
          due on demand by the bank, and accordingly, have been classified as current
          liabilities. In the event that Mr. Pagano no longer performs the duties
          of the
          President of Universal or the Vice President of RAL or American for any
          reason
          other than death or disability, the Company will be considered in default
          of its
          credit agreement with Wells Fargo Business Credit, Inc. unless a waiver
          is
          obtained.
  F-12
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  **6.** **Notes
          Payable**
  Notes
          payable consist of the following at December 31:
 2006
                
                2005Various
                    term notes payable, (collateralized by the equipment purchased)
                    with
                    aggregate monthly principal and interest installments of $6,378
                    and $8,760
                    for 2006 and 2005, respectively, bearing interest between .9%
                    to
                    5.9%*
                
                $
                155,808
                
                $
                245,321Subordinated
                    term note payable to a private individual, $30,000 annual principal
                    payment, interest at 9% payable monthly.**
                
                
                60,000
                
                
                90,000Subordinated
                    term note payable to an investment company, $30,000 annual principal
                    payments, interest at 9% payable monthly.
                
                
                60,000
                
                
                90,000Term
                    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 175,000
                    shares of
                    common stock at $3.00 per share during the term of the
                    notes.***
                
                
                525,000
                
                
                525,000Term
                    note payable of $750,000 to a corporation, subordinated secured
                    note
                    payable, bearing interest at the prime rate and payable quarterly,
                    principal payable on June 30, 2008 and warrants to purchase 150,000
                    shares
                    of common stock at $3.00 per share expiring June 30, 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 $37,500 and
                    $37,500 in
                    interest expense during 2006 and 2005, respectively, related
                    to the
                    warrant.****
                
                
                653,125
                
                
                615,6251,453,933
                
                
                1,565,946Less
                    current installments
                
                
                136,539
                
                
                165,112$
                1,317,394
                
                $
                1,400,834
  *Included
          in 2005 in the above term note payable is $30,389 bearing interest at 9%
          to a
          company owned by Paul Hildebrandt, who is a related party.
  **The
          term note payable bearing interest at 9% is to Paul Hildebrandt, who is
          a
          related party.
  ***Included
          in the above term note payable bearing interest at 11%, are five notes
          considered to be related party transactions; $100,000 term note payable
          to
          William Pagano, President of Universal and Director of the Company, $50,000
          term
          note payable to William Salek, Chief Financial Officer and Secretary of
          the
          Company, $100,000 term note payable to Rita Folger, beneficial owner of
          greater
          than 5% 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.
  F-13
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  ****The
          term note payable bearing interest at prime rate is to Goldman Associates
          of NY,
          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:
  2007
                
                $
                136,5392008
                
                
                1,033,3842009
                
                
                277,9912010
                
                
                6,019$
                1,453,933
  **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, 2006,
          the
          number of preferred shares outstanding was 467,500; accordingly, the Board
          of
          Directors to be elected at the 2007 annual shareholders’ meeting will consist of
          one class of Directors elected by the holders of common stock and convertible
          preferred stock voting together as one class on a share for share
          basis.
  At
          December 31, 2006, there were 906,500 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.
  F-14
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  **8.** **Equity
          Transactions**
  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, 2006, holders of a total of 17,221 shares of
          redeemable convertible preferred stock converted these shares into 17,221
          shares
          of Common Stock.
  **9.** **Stock
          Option Plans**
  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 ability to grant options under this plan expired on December
          31, 2005.
  At
          December 31, 2006, a total of 74,000 options were outstanding under the
          Company’s 1996 Stock Option Plan, which have expiration dates ranging from 2009
          to 2013.
  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, 2006, 900,000 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.
  F-15
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  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.
  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.
  The
          fair
          value of each option granted on December 6, 2006 under the 2006 Stock Plan
          was
          estimated using the Black-Scholes option pricing model and 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-16
 *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, 2003
                
                
                245,500
                
                
                0.25Options
                    Exercised
                
                
                (51,500
                )
                
                0.25Balance
                    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
                
                $
                330,600Exercisable
                    at December 31, 2006
                
                
                114,000
                
                
                0.81
                
                $
                216,600
  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 and 2004 were 43,000 and
          110,000, respectively, which caused the Company to incur additional stock-based
          compensation income (expense) of $74,450 and $(62,025) for the years ended
          December 31, 2005 and 2004, respectively. 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).
  The
          Company did incur stock-based compensation expense of $53,412 and unearned
          compensation of $80,118 which is expected to be recognized over of period
          of
          three years as of December 31, 2006 under the modified prospective application
          method of SFAS No. 123(R) for options granted on December 6, 2006.
  On
          January 22, 2007, a Director resigned and his 10,000 shares of Common Stock
          issuable upon exercise of his options expire 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-17
 *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,
          2006:
  Options
                    Outstanding and ExercisableRange
                    ofExercise Prices
                
                Shares
                
                Weighted
                    Average RemainingContractual Life
                
                Weighted
                    AverageExercise Price$
                .25
                
                
                74,000
                
                
                5.03
                
                $
                .25$
                1.85
                
                
                40,000
                
                
                9.94
                
                $
                1.85Options
                    Outstanding and Non-exercisable$
                1.85
                
                
                60,000
                
                
                9.94
                
                $
                1.85
  **10.** **Net
          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:
  2006
                
                2005
                
                2004Net
                    income (numerator)
                
                $
                753,422
                
                $
                2,115,631
                
                $
                1,661,156Weighted
                    average common shares (denominator for basic income per
                    share)
                
                
                4,579,129
                
                
                4,295,697
                
                
                3,403,152Effect
                    of dilutive securities:Convertible
                    preferred stock
                
                
                472,451
                
                
                683,695
                
                
                918,778Convertible
                    notes
                
                
                175,000
                
                
                175,000
                
                
                72,931Employee
                    stock options
                
                
                74,066
                
                
                138,722
                
                
                193,105Weighted
                    average common and potential common shares outstanding (denominator
                    for
                    diluted income per share)
                
                
                5,300,646
                
                
                5,293,114
                
                
                4,587,966Basic
                    net income per share
                
                $
                .16
                
                $
                .49
                
                $
                .49Diluted
                    net income per share
                
                $
                .14
                
                $
                .40
                
                $
                .36
  F-18
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  **11.** **Income
          Taxes**
  The
          provision for income taxes consists of the following:
  2006
                
                2005
                
                2004Federal
                
                State
                    AndLocal
                
                Total
                
                Federal
                
                State
                    AndLocal
                
                Total
                
                Federal
                
                State
                    AndLocal
                
                TotalCurrent
                
                $
                17,699
                
                $
                106,695
                
                $
                124,394
                
                $
                (16,239
                )
                $
                170,675
                
                $
                154,436
                
                $
                9,000
                
                $
                137,932
                
                $
                146,932Deferred
                
                
                -
                
                
                -
                
                
                -
                
                
                (641,500
                )
                
                -
                
                
                (641,500
                )
                
                (645,600
                )
                
                -
                
                
                (645,600
                )Total
                    tax expense(benefit)
                
                $
                17,699
                
                $
                106,695
                
                $
                124,394
                
                $
                (657,739
                )
                $
                170,675
                
                $
                (487,064
                )
                $
                (636,600
                )
                $
                137,932
                
                $
                (498,668
                )
  The
          components of deferred income tax benefit are as follows:
  2006
                
                2005
                
                2004Deferred
                    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
                
                
                (641,500
                )
                
                (645,600
                )Generation
                    of continuing operations net operating loss carryforward
                
                
                0
                
                
                0
                
                
                0$
                0
                
                $
                (641,500
                )
                $
                (645,600
                )
  A
          reconciliation of the provision for income taxes computed at the Federal
          statutory rate to the reported provision for income taxes follows:
  2006
                
                2005
                
                2004Tax
                    provision at Federal statutory rate
                
                
                34.00
                %
                
                34.00
                %
                
                34.00
                %Utilization
                    of net operating loss
                
                
                (34.00
                )%
                
                (34.00
                )%
                
                (34.00
                )%State
                    income taxes, net of federal benefit
                
                
                8.02
                %
                
                6.90
                %
                
                6.00
                %Change
                    in valuation allowance for deferred tax assets
                
                
                0.00
                %
                
                (39.3
                )%
                
                (49.70
                )%Permanent
                    differences
                
                
                1.67
                %
                
                1.70
                %
                
                0.00
                %Other
                
                
                4.48
                %
                
                0.80
                %
                
                0.80
                %Total
                
                
                14.17
                %
                
                (29.90
                )%
                
                (42.90
                )%
  F-19
 *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, 2006 and 2005 are presented
          below.
  2006
                
                2005Current
                    Deferred Tax Assets:Federal
                    net operating loss carryforwards
                
                $
                420,000
                
                $
                637,500Current
                    Deferred Tax Assets
                
                $
                420,000
                
                $
                637,500Non-current
                    Deferred Tax Assets:Federal
                    net operating loss carryforwards
                
                $
                9,937,591
                
                $
                10,718,325State
                    net operating loss carryforwards
                
                
                75,121
                
                
                64,435Allowance
                    for doubtful accounts
                
                
                107,647
                
                
                114,837Additional
                    costs inventoried for tax purposes
                
                
                553,991
                
                
                562,998Alternative
                    Minimum Tax Credit Carryforward
                
                
                47,467
                
                
                46,243Compensation
                
                
                206,031
                
                
                204,428Rent
                
                
                64,557
                
                
                57,320Non-current
                    Deferred Tax Assets
                
                
                10,992,405
                
                
                11,768,586Non-current
                    Deferred Tax Liabilities:Goodwill
                
                
                (755,542
                )
                
                (667,224
                )Depreciation
                
                
                (47,483
                )
                
                (162,985
                )Non-current
                    Deferred Tax Liabilities
                
                
                (803,025
                )
                
                (830,209
                )Non-current
                    Deferred Tax Assets
                
                
                10,189,380
                
                
                10,938,377Less
                    Valuation Allowance
                
                
                (8,900,880
                )
                
                (9,867,377
                )Net
                    Non-Current Deferred Tax Assets
                
                $
                1,288,500
                
                $
                1,071,000
  As
          of
          December 31, 2005, management reassessed its future income projections
          and
          increased the deferred tax asset by $641,500 to $1,708,500. As of December
          31,
          2006, management once again assessed the deferred tax asset and determined
          that
          the net asset should remain unchanged and that the valuation allowance
          should be
          reduced by approximately $970,000.
  As
          of
          December 31, 2006, the Company’s net operating loss carryforwards for federal
          income tax purposes were approximately $28,589,000. Various amounts of
          net
          operating loss carryforwards will expire from 2007 through 2022. Approximately
          $4.3 million net operating loss expired during the fiscal year ended
          2006.
  Expiration
                    Year
                
                Net
                    Operating Losses2007
                
                $
                4,945,0002008
                
                
                415,0002020
                
                
                5,960,0002021
                
                
                2,737,0002022
                
                
                14,532,000$
                28,589,000
  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.
  Universal’s
          Sales and Use Tax audit conducted by the State of New Jersey, Department
          of
          Treasury, Division of Taxation, for Sales and Use Tax for the years 2001,
          2002,
          2003 and 2004 was completed in June 2006. The State assessed the Company
          $111,686 which included interest and penalties. Of this amount, $50,000
          was
          charged against the Company’s tax reserve that was set in 2005, $41,382 was
          invoiced to customers who were responsible for this tax and the Company
          incurred
          a charge for the balance of $20,304 in 2006.
  F-20
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  Universal
          was recently under examination for New York State income tax for the years
          2003
          through 2005. The State auditors have concluded that there will be no income
          tax
          adjustments related to this examination.
  American
          recently closed a sales tax examination with an amount of $2,398 for additional
          taxes and interest due for the period of March 1, 2003 through May 31,
          2006.
  In
          addition, RAL is scheduled for examination for New York State sales tax
          for the
          period March 1, 2004 through February 28, 2007. The audit has not yet begun
          and
          the Company does not expect there to be significant exposure.
  **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,
          with the exception of the notes payable, because of the short term nature
          of
          these instruments.
  The
          fair
          value of long-term debt is based on current rates at which the Company
          could
          borrow funds with similar remaining maturities. The Company believes the
          fair
          value of long-term debt approximates the book value.
  **13.** **Supplemental
          Cash Flow Information**
  The
          following is supplemental information relating to the consolidated statements
          of
          cash flows:
  Cash
                    paid during the years for:
                
                2006
                
                2005
                
                2004Interest
                
                $
                1,290,724
                
                $
                971,629
                
                $
                852,288Income
                    taxes
                
                $
                104,932
                
                $
                308,585
                
                $
                173,665
  Non-cash
          transactions:
  During
          2006, 2005 and 2004, there were 17,221, 298,018 and 83,623 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 2006, 2005 and 2004, $180,712, $183,269 and $169,319, respectively,
          of
          contributions were made to the plan.
  **15.** **Business
          and Credit Concentrations**
  The
          Company purchases products from primarily 275 suppliers. In 2006, two suppliers
          accounted for 34% of the Company’s purchases. The loss of one or both of these
          suppliers could have a material adverse effect upon its business for a
          short-term period. In 2005, two suppliers accounted for 37% of the Company’s
          purchases. In 2004, two suppliers accounted for 38% of the Company’s purchases.
  F-21
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  **16.** **Commitments
          and Contingencies** ****
  (a) Compensation
  The
          Company has employment contracts with two officers and various employees
          with
          remaining terms ranging from one to four years. The amounts due under these
          contracts are $770,000, $545,000, $545,000, and $400,000 in the years ended
          December 31, 2007, 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 $3,098,491, $2,997,887 and $2,705,911 for the years ended
          December 31, 2006, 2005 and 2004, respectively. At December 31, 2006, future
          minimum lease payments in the aggregate and for each of the five succeeding
          years are as follows:
  2007
                
                $
                3,287,8452008
                
                
                2,660,3072009
                
                
                1,863,6142010
                
                
                1,482,6482011
                
                
                1,196,571Thereafter
                
                
                2,946,864Total
                
                $
                13,437,849
  (c) Private
          Placement
  On
          July
          30, 2004, the Company completed a private placement with Michael Goldman
          and
          Goldman Associates of New York, Inc. pursuant to Regulation D of the Securities
          Exchange Act of 1933. For total consideration of $1,500,000, the Company
          issued
          to Goldman Associates of New York, Inc. 600,000 shares of common stock
          at $1.25
          per share, a $750,000 subordinated secured note payable, earning interest
          at the
          prime rate, interest payable quarterly, principal payable June 30, 2008,
          and
          warrants to purchase 150,000 shares of common stock at $3.00 per share
          expiring
          June 30, 2008. The $187,500 estimated value of the warrants was accounted
          for as
          an increase to additional paid in capital and as a discount to the note
          payable.
  On
          July
          29, 2004, the Company completed a private placement, pursuant to Regulation
          D of
          the Securities Exchange Act of 1933. The Company raised $1,050,000 through
          the
          issuance of 420,000 shares of common stock at $1.25 per share and the issuance
          of $525,000 of subordinated unsecured convertible notes payable (“Notes”),
          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 175,000 shares of common stock at $3.00 per share during
          the
          term of the Notes.
  On
          February 12, 2004, the Company completed a private placement, pursuant
          to
          Regulation D of the Securities Act of 1933. The Company raised $360,000
          through
          the issuance of 600,000 shares of common stock at $0.60 per share. Bernard
          Korn
          (Chairman and President of the Company), purchased 165,000 shares, William
          Pagano (Director of the Company and President of Universal), purchased
          165,000
          shares, Michael Goldman (appointed Director of the Company on September
          29,
          2004) purchased 170,000 shares and Rita Folger (a private investor, who
          owned
          9.42% of the Company as of that date), purchased 100,000
          shares.
  F-22
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  The
          Company has used substantially all of the proceeds from the February 12,
          2004
          private placement to purchase 592,730 shares of escheated convertible preferred
          stock at $0.60 per share from the State of Ohio. The Company has retired
          these
          convertible preferred shares.
  The
          stock
          from the private placement cannot be sold, transferred or otherwise disposed
          of,
          unless subsequently registered under the Securities Act of 1933 and applicable
          state or Blue Sky laws, or pursuant to an exemption from such registration,
          which is available at the time of desired sale, and bears a legend to that
          effect.
  (d) Litigation
  Universal
          Supply Group, Inc. 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 93 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, seven filed actions in 2006, 15 filed actions in 2005,
          44
          filed actions in 2004, 24 filed actions in 2003, and three filed actions
          in
          2002. There are 108 other plaintiffs that have had their actions dismissed
          and
          eight other plaintiffs that have settled as of December 31, 2006 for a
          total of
          $3,313,000. There has been no judgment against the Predecessor.
  Our
          Universal subsidiary was named by 24 plaintiffs; of these, two filed actions
          in
          1999, one filed an action in 2000, five filed actions in 2001, eleven filed
          actions in 2005 and five filed actions in 2006. Six plaintiffs naming Universal
          have had their actions dismissed and, of the total $3,313,000 of settled
          actions, two 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 16 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.
  F-23
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  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, 2006 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.
  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.
  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.
  F-24
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  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. To date, no
          insurance company has claimed any contribution for a gap in coverage except
          for
          a claim for $159.64 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 to date defended us and the Predecessor, and have paid all
          settlement amounts and defense costs. Except for $159.64 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.
  Since
          we
          do not regard as likely 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 involved in other litigation incidental to the operation of
          its
          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.
  (e) Standby
          Letters of Credit
  The
          Company has standby letters of credit in the amount of $300,000 and $100,000,
          which expire on July 31, 2007 and September 1, 2007,
          respectively.
  F-25
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  **17.** **Related
          Party Transactions**
  Universal
          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 $224,885, $215,674 and
          $206,097 during the years ended December 31, 2006, 2005 and 2004, respectively.
  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. 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 2006, 2005 and 2004 were $89,826, $79,973 and $71,115,
          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, 2006, there is $3,975
          in
          outstanding liabilities to Oscar Folger. As of December 31, 2005, there
          was
          $2,775 in outstanding liabilities to Oscar Folger. There were no outstanding
          liabilities at December 31, 2004.
  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 expired 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 the 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, for $245,844 total
          annual
          fixed rent, an increase of $106,740 per annum. The Third Modification of
          Lease
          Agreement commences on the date of issuance of a certificate of occupancy
          for
          the Premises that are currently undergoing reconstruction. 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 expires 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. Mrs. Folger is the beneficial owner of more than 5% of the
          outstanding shares of the Company and is the wife of Oscar Folger and the
          mother
          of Jeffrey Folger. Oscar Folger and Jeffrey Folger are the Vice President-Chief
          Legal Counsel and Assistant Vice President-Legal, respectively. The Company
          paid
          Pioneer Realty Holdings, LLC $137,239 in rent during the year ended December
          31,
          2006.
  See
          Notes
          6 and 7 for additional related party transactions.
  F-26
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements, Continued**
  **18.** **Quarterly
          Results (Unaudited)**
  The
          following table sets forth selected unaudited quarterly financial data
          of the
          Company for the years ended December 31, 2006 and 2005:
 
 QUARTER
                    ENDEDMarch
                    31
                
                June
                    30
                
                September
                    30
                
                December
                    31(Dollars
                    in thousands, except per share data)2006Net
                    sales
                
                $
                14,884
                
                $
                18,156
                
                $
                19,218
                
                $
                19,237Gross
                    profit
                
                
                4,587
                
                
                5,441
                
                
                5,713
                
                
                5,634Net
                    (loss) income
                
                
                (423
                )
                
                342
                
                
                529
                
                
                305(Loss)
                    income per common share:Basic:Net
                    (loss) income
                
                
                (0.09
                )
                
                0.07
                
                
                0.12
                
                
                0.07Diluted:Net
                    (loss) income
                
                
                (0.09
                )
                
                0.06
                
                
                0.10
                
                
                0.062005Net
                    sales
                
                $
                13,347
                
                $
                17,502
                
                $
                17,378
                
                $
                18,464Gross
                    profit
                
                
                4,253
                
                
                5,132
                
                
                5,092
                
                
                5,706Net
                    (loss) income
                
                
                (199
                )
                
                520
                
                
                1,019
                
                
                776(Loss)
                    income per common share:Basic:Net
                    (loss) income
                
                
                (0.05
                )
                
                0.12
                
                
                0.24
                
                
                0.17Diluted:Net
                    (loss) income
                
                
                (0.05
                )
                
                0.10
                
                
                0.19
                
                
                0.15
  F-27
 *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
  AdditionsDescription
                
                Balance
                    at Beginningof
                    Year
                
                Charged
                    to Costs andExpenses
                
                Charged
                    to OtherAccounts
                
                Deductions
                
                Balance
                    atEnd of YearFor
                    the year ended December 31, 2006 Allowance for doubtful
                    accounts
                
                $
                185,971
                
                $
                191,357
                
                $
                90,405
                    (a
                )
                $
                (255,690)
                    (b
                )
                $
                212,043For
                    the year ended December 31, 2005 Allowance for doubtful
                    accounts
                
                $
                290,448
                
                $
                101,724
                
                $
                69,144
                    (a
                )
                $
                (275,345)
                    (b
                )
                $
                185,971For
                    the year ended December 31, 2004 Allowance for doubtful
                    accounts
                
                $
                284,829
                
                $
                225,183
                
                $
                14,862
                    (a
                )
                $
                (234,426)
                    (b
                )
                $
                290,448
  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-28
 *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 Pagano
 William
          Pagano,
 Chief
          Executive Officer and Director
  By: /s/
          William Salek
 William
          Salek,
 Chief
          Financial Officer & Principal Accounting Officer
  Dated:
          March 22, 2007
   Pursuant
          to the requirements of the Securities Exchange Act of 1934, this Report
          has been
          duly signed below on March 22, 2007 by the following persons on behalf
          of the
          Registrant and in the capacities indicated:
  By: /s/
          E.
          Bruce Fredrikson
 E.
          Bruce
          Fredrikson, Director
  By : /s/
          Melissa Goldman-Williams
 Melissa
          Goldman-Williams, Director
  By: /s/
          Michael Goldman
 Michael
          Goldman, Chairman of the Board
  By: /s/
          Stuart H. Lubow
 Stuart
          H.
          Lubow, Director
  By: /s/
          Ronald H. Miller
 Ronald
          H.
          Miller, Director
  By: /s/
          William Pagano
 William
          Pagano,
 Chief
          Executive Officer and Director