EXHIBIT 13








                            COLONIAL COMMERCIAL CORP.

                                  ANNUAL REPORT

                                      1998




                                      -28-




<PAGE>



TO OUR SHAREHOLDERS

I am pleased to report that 1998 was a banner year for your Company. The year's
highlights included a healthy increase in earnings from operations, recognition
of substantial gains from the disposition of certain investment assets, and the
simplification of our corporate structure, which should allow investors to more
effectively measure Colonial Commercial Corp.'s ("Colonial") operating
performance in the future.

With net income contributing $3,852,000 in 1998, Colonial's stockholders' equity
stood at approximately $10.8 million as of December 31, 1998, representing an
increase of 20.8% from year-earlier levels. This is equivalent to a book value
of $3.54 per common and convertible preferred share outstanding. The increase in
stockholders' equity resulted from record operating income at our Atlantic
Hardware and Supply Corporation subsidiary ("Atlantic"), the sale of our
investment position in Monroc, Inc. ("Monroc"), a gain on the sale of our
remaining Utah real estate, and the recognition of anticipated income tax
benefits.

Atlantic's operating income increased approximately 54% to $1,780,000 during
1998 compared with operating income of $1,154,000 in 1997. Its sales rose 11.4%
to a record $25.2 million, versus $22.6 million in the previous year. Working
closely with Atlantic's management, we reviewed a number of acquisition
candidates during 1998 and will continue to pursue external growth opportunities
within the door hardware industry, while seeking to optimize Atlantic's
potential for internal growth.

The sale of our remaining Monroc shares generated a pretax gain of approximately
$2.1 million during 1998, while a pretax gain of $827,000 was recognized when we
sold our last parcel of real estate in Utah. These sales increased Colonial's
cash position by $4,535,000 and at year-end our current assets of $15,007,000
exceeded our current liabilities ($4,754,000) by a factor of 3.2-to-1.0. The
disposition of these investment assets simplified the Company's asset structure,
while providing us with sufficient cash and borrowing capacity to acquire more
operating companies.

In this regard, Colonial announced on March 25, 1999 that it had entered into a
definitive agreement to purchase the assets and business of Universal Supply
Group, Inc. ("Universal"), headquartered in Hawthorne, New Jersey. Universal is
a leading distributor of heating and air conditioning equipment and climate
controls in the State of New Jersey. Universal's sales for its fiscal year
ending March 31, 1999 are expected to exceed $26 million, which represents an
increase of more than 40% when compared with $18.6 million in sales for its
previous fiscal year.

Universal markets its products primarily to heating, ventilation and air
conditioning (HVAC) contractors, which in turn sell the products to residential
and commercial/industrial builders and contractors. Approximately 90% of its
products are sold into the renovation/retrofit market, with the balance utilized
in new construction applications. In addition to its 500 different product
lines, Universal also provides technical field support, in-house training and
control system consultation for engineers and installers.

Universal has developed a fine reputation for quality products and service
during the past fifty years, and its experienced management team should
contribute greatly to Colonial's future success. The acquisition will
significantly expand Colonial's capabilities as a distributor of
building-related products and will allow Colonial to diversify into residential
and remodeling markets. It will also complement our Atlantic Hardware and Supply
subsidiary, in that both companies market to contractors and builders, rather
than to end-users of their products.

The proposed acquisition of Universal is consistent with your management's
strategy for enhancing shareholder value. We expect the acquisition to more than
double Colonial's annualized revenues, and it should be accretive to earnings
per share in 1999 and future years. The agreement to acquire the assets and
business of Universal is a binding one and we expect the acquisition to close in
June 1999, however, the agreement is subject to certain terms and conditions and
there can be no assurance that the transaction will be completed.


                                      -29-


<PAGE>




Colonial will continue to seek acquisitions which meet our stringent criteria
for industry compatibility, quality of management and pricing. The outstanding
performance of Atlantic since its acquisition by Colonial reflects the success
of our strategy to date, and we are optimistic that the Universal acquisition
can similarly benefit the Company and its shareholders.

As always, Colonial's management and Board of Directors wish to thank our
employees, customers, vendors and shareholders for their continued support. We
look forward to the future with great confidence, and we expect 1999 to be
another year of significant achievements for your Company.

Respectfully submitted,



Bernard Korn
Chairman of the Board and President
April 9, 1999


                                      -30-






<PAGE>




CORPORATE PROFILE:

     Colonial Commercial Corp. ("Colonial"), through its ownership of Atlantic
Hardware and Supply Corporation ("Atlantic"), distributes door hardware, doors
and door frames, primarily to building contractors and architectural firms. Most
of Atlantic's customers are involved in the design, construction,
rehabilitation, remodeling, and/or maintenance of commercial, residential and
institutional structures, including office buildings, hospitals, hotels,
schools, government facilities and high-rise apartment buildings.

     Atlantic was founded in 1946 and its revenues for the year ended December
31, 1998 increased 11.4% to a record $25.2 million. Headquartered in New York
City, Atlantic also has offices in Georgia, Illinois and Pennsylvania.

     Colonial also seeks to enhance shareholder values through strategic
investments and the acquisition of companies or businesses which can expand the
Company's capabilities as a distributor of building-related products. On March
25, 1999, Colonial entered into a definitive agreement to purchase the assets
and business of Universal Supply Group, Inc. ("Universal"), which is
headquartered in Hawthorne, New Jersey. Universal is a leading distributor of
heating and air conditioning equipment and climate controls in the State of New
Jersey. For its fiscal year ending March 31, 1999, Universal's sales are
expected to exceed $26 million, which represents an increase of more than 40%
when compared with sales of $18.6 million in the previous fiscal year.
Approximately 90% of Universal's products are used in the renovation/remodeling
of residential, commercial and industrial buildings.

     For the year ended December 31, 1998, Colonial Commercial Corp. reported
total net income of $3,851,753, or $1.23 per diluted share, and sales of $25.2
million. As of December 31, 1998, the Company's capital structure consisted of
$10.8 million in shareholders' equity (equivalent to $3.54 per common and
convertible preferred share outstanding) and there was substantially no
long-term debt outstanding.




                                      -31-



<PAGE>



Market Price of Company's Common Stock, Convertible Preferred Stock and Related
Security Holder Matters:

(a)      Price Range of Common Stock and Preferred Stock

         The Company's common stock and convertible preferred stock are traded
on the Nasdaq small capitalization automated quotation system. The following
table sets forth the quarterly high and low bid prices during 1998 and 1997. The
quotations set forth below, which give effect to a five-to-one reverse stock
split that was effective January 30, 1998, represent inter-dealer quotations
which exclude retail markups, markdowns and commissions and do not necessarily
reflect actual transactions.
<TABLE>
<CAPTION>


                           Common Stock              Convertible Preferred Stock
                                                       
                       High              Low           High                Low
                       ----              ---           ----                ---

1998

<S>                  <C>              <C>             <C>              <C>  
First Quarter        $2   11/16       $1   7/8        $2   11/16       $1   3/4
Second Quarter        3   1/2          2   3/8         3   1/2          2
Third Quarter         2   1/2          2   3/32        2   3/8          2   1/16
Fourth Quarter        2   15/16        2   3/32        2   7/8          2   3/32
                                                                           

1997

First Quarter        $3   7/16        $2   3/16       $3   7/16        $2   3/16
Second Quarter        3   7/16         2   1/32        3   9/32         2   1/32
Third Quarter         4   1/16         2   3/16        3   29/32        2   3/16
Fourth Quarter        2   13/16        1   7/8         2   21/32        1   7/8
</TABLE>


(b) Approximate number of common and convertible preferred stockholders

                                           Approximate Number of Record Holders
Title Of Class                                    (as of March 17, 1999)
--------------                             ------------------------------------

Common stock par value $.05 per share                         845
Convertible preferred stock par value $.05 per share        7,136

(c ) Dividends

      The Company does not contemplate common stock dividend payments in the
near future.


                                      -32-


<PAGE>



Management's Discussion And Analysis Of Financial Condition And Results Of
Operations
--------------------------------------------------------------------------------

Results of Operations 1998-1997

The Company reported net income of $3,851,753 for the 1998 year compared to net
income of $672,356 for the year 1997. The 1998 income consisted of net income of
$1,291,552 from Atlantic compared to $727,448 for 1997, a $2,101,853 gain on the
sale of the Company's remaining shares of Monroc, Inc. stock compared to a 1997
gain of $238,033 and a gain on sale of $826,797 on the Company's last parcel of
Utah land compared with gain on sale of land of $196,066 in 1997. Interest
income decreased to $181,206 in 1998 from $191,473 in 1997 principally due to a
reduction in interest received on notes receivable partially offset by an
increase in interest received on invested cash balances. Other income decreased
to $114,899 in 1998 from $178,231 in 1997 principally due to a reduction in the
amount of unclaimed 6% notes which reverted back to the Company, and a reduction
in consulting fees received from Monroc, Inc.

Sales increased $2,591,126 (11.4%) to $25,233,909 in 1998 as compared to
$22,642,783 in 1997 due mainly to increased sales in the New York-New Jersey
metropolitan area, where new construction activity remains strong due to
favorable economic conditions. This increase was offset partially by a decrease
in sales from the Company's Pennsylvania office in which the Company made
operational changes during the first half of 1998. The December 31, 1998 backlog
was $11,865,000, as compared to $8,871,000 at December 31, 1997. The $2,994,000
increase is a result of the continued strong construction activity in the New
York-New Jersey market and increased bookings from the Company's Pennsylvania
office. It is anticipated that approximately 95% of the backlog will be shipped
during 1999.

Gross profit increased $838,337 to $6,676,140 (26.5% as a percentage of sales)
in 1998 compared to $5,837,803 (25.8% as a percentage of sales) in 1997 due
principally to increased sales and to a reduction in cost of sales resulting
from greater purchase discounts utilized by the Company.

Selling, general and administrative expenses increased $317,643 to $5,769,507 in
1998 compared to $5,451,864 due principally to increased expenses related to
professional fees, insurance, employee benefits, depreciation and to other
expenses related to increased sales. However, as a percentage of sales such
expenses decreased from 24.1% in 1997 to 22.9% in 1998 due to operating
efficiencies. Operating income increased $906,399 to $906,633 in 1998 compared
to $234 in 1997 as a result of improved gross margin offset partially by
increased expenses. Interest expense decreased due to lower average borrowings
and a lower average interest rate during 1998.

The 1998 net income includes a net $194,000 deferred tax benefit. The net
$194,000 benefit is the result of a $500,000 adjustment recorded in the fourth
quarter of 1998 to reduce the valuation allowance in order to recognize a
deferred tax asset based upon projected future taxable income offset by the
utilization of the $306,000 deferred tax asset established in 1997. The Company
has provided for state taxes of $202,422 in 1998, primarily for the income
generated by Atlantic, as compared to a state tax provision of $150,300 in 1997.

The Company continues to seek the acquisition of, or merger with, companies
whose businesses generate a recurring stream of income. Reported earnings in the
near term will be affected by the operating results of Atlantic and the timing
and size of any acquisitions.

Results Of Operations 1997-1996
-------------------------------

The Company reported net income of $672,356 for the 1997 year compared to net
income of $547,675 for the year 1996. The 1997 income consisted of net income of
$727,448 from Atlantic, as compared to $964,439 for 1996. Gain on sale of land
was $196,066 in 1997, as compared to $258,651 in 1996. In 1997, the Company
realized a $238,033 gain on the sale of 50,000 shares of Monroc, Inc. stock
while none were sold in 1996. The Company held 328,071 shares representing 7.2%
of the outstanding common stock of Monroc, Inc. Interest income increased to
$191,473 in 1997 from $121,781 in 1996 principally due to the settlement and
collection of a $1,000,000 note which had been in litigation since January 1996.
Other income increased to $178,231 in 1997 from $13,064 in 1996 principally due
to the reversion to the Company of approximately $150,000 of unclaimed payments
made on the Company's 6% notes, in accordance with the opinion of counsel.


                                      -33-


<PAGE>


Sales decreased $2,416,709 (9.6%) to $22,642,783 in 1997 compared to $25,059,492
principally due to a decrease in the availability of larger projects in the New
York metropolitan area. The December 31, 1997 backlog was $8,871,000, as
compared to $9,630,000 at December 31, 1996. The $759,000 decrease in backlog is
principally due to the merger of Atlantic's Long Island office with its New York
City office and a reduced sales effort in the Long Island market. It is
anticipated that approximately 95% of the backlog will be shipped during 1998.

Gross profit decreased $653,420 to $5,837,803 in 1997 compared to $6,491,223
principally due to decreased sales.

Selling, general and administrative expenses decreased $435,017 to $5,451,864 in
1997, compared to $5,886,881 in 1996 due to cost reductions made in response to
lower sales and the closing of Atlantic's Long Island office. Write-off of
deferred expenses for abandoned acquisition relates to the Company's terminated
effort to acquire U.S. Computer Group, Inc. Operating income decreased $604,108
to $234 in 1997 compared to $604,342 in 1996 as a result of a reduction in
sales, the write-off of deferred expenses for an abandoned acquisition which was
partially offset by an increase in the gross profit margins. The 1997 net income
included a $306,000 tax benefit for the anticipated use of net operating loss
carry-forwards.

Forward-looking Statements
--------------------------

This Report on Form 10-KSB contains forward-looking statements relating to such
matters as anticipated financial performance and business prospects. When used
in this Report, the words "anticipates," "expects," "may", "intend" 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, 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.

Impact of Changing Prices

The Company was not materially affected by changing prices in 1998.

Liquidity and Capital Resources

As of December 31, 1998, the Company had $5,001,881 in cash and cash equivalents
compared to $1,240,986 in cash at December 31, 1997.

Cash flows used in operations during the 1998 year were principally attributable
to an increase in accounts receivable and inventory required to support a
$2,591,126 increase in sales, a $2,994,000 increase in sales backlog and a
reduction in accounts payable.

Cash flows provided by investing activities of $4,630,199 during 1998 were
principally due to proceeds received from the sale of land, sale of Monroc, Inc.
stock and payments on a note receivable, offset by capital expenditures and
purchase of treasury stock.

Cash flows used in financing activities of $329,668 during 1998 were due to
payments made on notes offset by increased credit borrowing.

At December 31, 1996, the Company had a $1,000,000 note receivable which was the
subject of litigation. In April 1997, the Company was granted a summary
judgment. On December 8, 1997, the judgment, interest and costs in the amount of
$1,207,139 were paid to the Company, $575,000 in cash and $632,139 in a note


                                      -34-


<PAGE>

receivable. The note receivable, with interest at the rate of 9% per annum is
payable in eight semi-annual installments of $79,017 and is secured by a real
estate mortgage and other collateral. During 1998, payments on the note have
been received in accordance with its terms.

The Company believes that its cash and cash equivalents are adequate for its
present operations and that credit is available should it be required. The
Company's $3,500,000 line of credit is reviewed annually each May. The Company
believes the credit facility will continue under the same terms and conditions.
The Company's resources consist primarily of cash and cash equivalents,
investment in Atlantic and notes receivable.

Year 2000 Date Conversion
-------------------------

The year 2000 issue affects computer systems, equipment and other systems that
have time-sensitive programs that may not properly recognize the year 2000.

The Company's computer systems are currently being upgraded and, upon completion
in mid 1999, they are expected to be year 2000 compliant. At this time,
management believes that the Company does not have any internal critical year
2000 issues that it cannot remedy.

Management is in the process of surveying third parties with whom it has a
material relationship primarily through written correspondence. Management is
relying upon the response of these third parties in its assessment of Year 2000
readiness. Although the Company does not have significant data communications
with its customers, suppliers, financial institutions and others, management
cannot be certain as to the Year 2000 readiness of these third parties or the
impact that any non-compliance on their part may have on the Company's business,
results of operations, financial condition or liquidity.

The Company expects to incur internal staff cost in preparing for the Year 2000.
Because the Company has replaced a significant portion of its computer hardware
in recent years and is currently updating its software, which updating is
independent of the Year 2000 compliance, the costs to be incurred in addressing
the Year 2000 issue are not expected to have a material impact on the Company's
business, results of operations, financial condition or liquidity. The Company
has established a contingency plan to address potential non-compliance of the
third parties with whom it does business or the possible failure or
non-completion of the internal systems upgrade. The contingency plan includes
the training of employees on the use of alternative procedures and a possible
increase in inventory levels in the later half of 1999.

The above comments on the Year 2000 issue contain forward-looking statements
relating to the Company's plans, strategies, objectives, expectations,
intentions and resources that should be read in conjunction with the disclosure
on forward-looking statements.

Recent Accounting Pronouncements
--------------------------------

The Financial Accounting Standards Board issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement 133"). Statement
133 established accounting and reporting standards for derivative instruments
embedded in other contracts, and for hedging activities. Statement 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Early application of all the provisions of this Statement is encouraged
but is permitted only as of the beginning of any fiscal quarter that begins
after issuance of this Statement. Management of the Company does not believe
that the implementation of Statement 133 will have a significant impact on its
financial position or results of operations.

The American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP98-1"). SOP98-1 provides guidance on accounting
for the costs of computer software developed or obtained for internal use.
SOP98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Management is in the process of assessing the impact that the
adoption of SOP98-1 will have on its financial position and results of
operations.


                                      -35-



<PAGE>





                            COLONIAL COMMERCIAL CORP.
                                AND SUBSIDIARIES

                        Consolidated Financial Statements

                           December 31, 1998 and 1997

                   (With Independent Auditors' Report Thereon)



                                      -36-



<PAGE>








                          Independent Auditors' Report
                          ----------------------------


The Board of Directors and Stockholders
Colonial Commercial Corp.:


We have audited the accompanying consolidated balance sheets of Colonial
Commercial Corp. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Colonial Commercial
Corp. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.




                                                        /S/ KPMG LLP
                                                        -------------

March 5, 1999
Melville, New York


                                      -37-


<PAGE>




                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997

<TABLE>
<CAPTION>


                                     ASSETS                                       1998           1997
                                     ------                                       ----           ----



Current assets:
<S>                                                                           <C>             <C>      
  Cash and cash equivalents                                                   $ 5,001,881     1,240,986
  Accounts receivable, net of allowance for doubtful accounts of
     $667,500 in 1998 and $625,000 in 1997                                      8,571,701     7,904,353
  Inventory                                                                     1,177,907       823,267
  Notes receivable - current portion                                              158,035       278,035
  Prepaid expenses and other assets                                                97,408       114,245
  Investment in Monroc, Inc.                                                        --        3,321,790
  Land held for sale                                                                --          174,226
  Deferred taxes                                                                  165,000       306,000
                                                                              ------------  -----------
                       Total current assets                                    15,171,932    14,162,902

Notes receivable, excluding current portion                                       316,069       652,854
Deferred taxes                                                                    335,000         --
Property and equipment, net                                                       502,312       344,701
                                                                              -----------   -----------
                                                                              $16,325,313    15,160,457
                                                                              ===========   ===========
                                                                                            
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

Current liabilities:
  Accounts payable                                                            $ 1,090,135     1,748,551
  Accrued liabilities                                                           1,392,034     1,075,218
  Income taxes payable                                                            203,640       112,606
  Borrowings under line of credit                                               2,049,268     1,990,108
  Notes payable - current portion                                                  18,677       447,363
                                                                              -----------   -----------
                       Total current liabilities                                4,753,754     5,373,846

Note payable, excluding current portion                                            39,858         --
Excess of acquired net assets over cost, net                                      724,611       837,543
                                                                              -----------   -----------
                       Total liabilities                                        5,518,223     6,211,389
                                                                              -----------   -----------

Stockholders' equity:
  Convertible preferred stock, $.05 par value, liquidation preference of
     $7,964,970 and $8,337,710 at December 31, 1998 and 1997, respectively,
     2,468,860 shares authorized, 1,592,994 and 1,667,542 shares
     issued and outstanding at December 31, 1998 and 1997, respectively            79,650        83,377
  Common stock, $.05 par value,  20,000,000 shares authorized,
     1,463,052   and  1,429,735 shares issued and outstanding
     at December 31, 1998 and December 31, 1997, respectively                      73,153        71,487
  Additional paid-in capital                                                    8,921,989     9,023,669
  Accumulated other comprehensive income                                           --         1,889,990
  Retained earnings (deficit)                                                   1,732,298    (2,119,455)
                                                                              -----------   -----------

                       Total stockholders' equity                              10,807,090     8,949,068
                                                                              -----------   -----------

Commitments
                                                                              $16,325,313    15,160,457
                                                                              ===========    ==========

</TABLE>


See accompanying notes to consolidated financial statements.


                                      -38-





<PAGE>



                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

                        Consolidated Statements of Income

                  Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>



                                                               1998              1997             1996
                                                               ----              ----             ----


<S>                                                        <C>               <C>             <C>       
Sales                                                      $ 25,233,909      22,642,783      25,059,492
Cost of sales                                                18,557,769      16,804,980      18,568,269
                                                           ------------    ------------    ------------

                          Gross profit                        6,676,140       5,837,803       6,491,223

Selling, general and administrative expenses, net             5,769,507       5,451,864       5,886,881
Write-off of deferred expenses for abandoned acquisition           --           385,705            --
                                                           ------------    ------------    ------------

                          Operating  income                     906,633             234         604,342

Gain on sale of Monroc, Inc. stock                            2,101,853         238,033
Gain on land sale                                               826,797         196,066         258,651
Interest income                                                 181,206         191,473         121,781
Other income                                                    114,899         178,231          13,064
Interest expense                                               (200,283)       (287,381)       (263,790)
                                                           ------------    ------------    ------------

                           Income before income taxes         3,931,105         516,656         734,048

Income taxes (benefit)                                           79,352        (155,700)        186,373
                                                           ------------    ------------    ------------

                           Net income                      $  3,851,753         672,356         547,675
                                                           ============    ============    ============


Net income per common share:
 Basic                                                     $       2.66             .47             .40
                                                           ============    ============    ============
 Diluted                                                   $       1.23             .21             .17
                                                           ============    ============    ============

Weighted average shares outstanding:
    Basic                                                     1,446,354       1,418,719       1,362,939
                                                           ============    ============    ============
    Diluted                                                   3,134,617       3,164,840       3,137,181
                                                           ============    ============    ============

</TABLE>


See accompanying notes to consolidated financial statements.


                                      -39-




<PAGE>


                            COLONIAL COMMERCIAL CORP.
                                AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity
                  Years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                             Accum-
                                                                                             ulated
                                 Con-                          Addi-                         Other        Total
                               vertible                       tional       Retained         Compre-       Stock-
                               Preferred         Common       Paid-in      Earnings         hensive       holders'
                                 Stock           Stock        Capital      (Deficit)        Income         Equity
                                 -----           -----        -------      ---------        ------         ------
Balances at
<S>      <C>                 <C>                 <C>         <C>           <C>               <C>          <C>      
December 31,1995             $    87,192         67,672      9,023,669     (3,339,486)       382,132      6,221,179

Comprehensive income:
Net income                          --             --             --          547,675           --             --
Unrealized gain on
investment security                 --             --             --             --          378,071           --      
Comprehensive income                --             --             --             --             --          925,746
Conversion of 23,895
shares of preferred stock
to common stock                   (1,195)         1,195           --             --             --             --
                                --------       --------    -----------    -----------      ---------    -----------
Balances at
December 31, 1996                 85,997         68,867      9,023,669     (2,791,811)       760,203      7,146,925

Comprehensive income:
Net income                          --             --             --          672,356           --             --
Unrealized gain on
investment security                 --             --             --             --        1,367,825           --
Reclassification adjust-
ment for gains realized in
net income                          --             --             --             --         (238,038)          --
Comprehensive income                --             --             --             --             --        1,802,143
Conversion of 52,397
shares of preferred stock
to common stock                   (2,620)         2,620           --             --             --             --      

Balances at                         --             --             --             --             --             --      
                                --------       --------    -----------    -----------      ---------    -----------    
December 31, 1997                 83,377         71,487      9,023,669     (2,119,455)     1,889,990      8,949,068

Comprehensive income:
Net income                          --             --             --        3,851,753           --             --
Unrealized gain on
investment security                 --             --             --             --          211,863           --      
Reclassification adjust-
ment for gains realized in
net income                          --             --             --             --       (2,101,853)          --
Comprehensive income                --             --             --             --             --        1,961,763
Conversion of
shares of preferred stock
to common stock                   (2,819)         2,819           --             --             --             --
Acquisition and retire-
ment of treasury stock              (908)        (1,153)      (101,680)          --             --         (103,741)
                             -----------    -----------    -----------    -----------    -----------    -----------    

Balances at
December 31, 1998            $    79,650         73,153      8,921,989      1,732,298           --       10,807,090
                             ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>


                                      -40-






See accompanying notes to consolidated financial statements.


<PAGE>





                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>



                                                             1998            1997          1996
                                                             ----            ----          ----
Reconciliation of net income to net cash provided by
   (used in) operating activities:
<S>                                                      <C>                <C>            <C>    
   Net income                                            $ 3,851,753        672,356        547,675
   Adjustments to reconcile net income to cash
     provided by (used in) operating activities:
        Deferred tax benefit                                (194,000)      (306,000)          --
        Gain on disposal of fixed assets                        --           (6,784)          --
        Gain on sale of land                                (826,797)      (196,066)      (258,651)
        Gain on sale of Monroc, Inc. stock                (2,101,853)      (238,033)          --
        Provision for allowance for doubtful accounts        223,000        270,000        232,600
        Depreciation                                          99,910         70,326         68,930
        Amortization of excess of acquired net assets
            over cost                                       (112,932)      (112,932)      (115,774)
        Write-off of deferred expenses for abandoned
            acquisition                                         --          385,705           --   
        Changes in assets and liabilities:
           Accounts receivable                              (890,348)       130,871     (1,722,423)
           Inventory                                        (354,640)       882,480       (404,292)
           Prepaid expenses and other assets                  16,837        (31,953)        74,068
           Accounts payable                                 (658,416)    (1,428,999)       612,534
           Accrued liabilities                               316,816        (19,117)       164,322
           Income taxes payable                               91,034        (24,394)       (69,356)
           Other                                                --             --            5,801
                                                         -----------    -----------    -----------
              Net cash provided by (used in) operating
                    activities                              (539,636)        47,460       (864,566)
                                                         -----------    -----------    -----------
Cash flows from investing activities:
   Proceeds from sale of land                              1,001,023        345,979        336,088
   Proceeds from sale of Monroc, Inc. stock                3,533,653        456,233           --
   Payments received on notes receivable                     456,785        487,861        512,500
   Proceeds from disposal of fixed assets                       --           19,457           --
   Additions to property and equipment                      (197,491)      (300,728)       (86,602)
   Purchase of treasury stock                               (103,741)          --             --
   Costs incurred with respect to planned acquisition           --         (385,705)          --
                                                         -----------    -----------    -----------
             Net cash provided by
                  investing activities                     4,690,229        623,097        761,986
                                                         -----------    -----------    -----------
Cash flows from financing activities:
   Payments on notes payable                                (448,858)      (469,082)      (494,210)
   Net borrowings (repayments) under line of credit           59,160       (283,022)        63,315
                                                         -----------    -----------    -----------
            Net cash used in
                financing activities                        (389,698)      (752,104)      (430,895)
                                                         -----------    -----------    -----------

Increase (decrease) in cash and cash equivalents           3,760,895        (81,547)      (533,475)

Cash and cash equivalents - beginning of period            1,240,986      1,322,533      1,856,008
                                                         -----------    -----------    -----------

Cash and cash equivalents - end of period                $ 5,001,881      1,240,986      1,322,533
                                                         ===========    ===========    ===========

</TABLE>


See accompanying notes to consolidated financial statements.


                                      -41-


<PAGE>




                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996



(1)   Summary Of Significant Accounting Policies And Practices
      --------------------------------------------------------

     (a)  Description Of Business
          -----------------------

      Colonial Commercial Corp. and subsidiaries (the Company) currently holds
          certain assets for investment purposes and is a distributor of door
          hardware, doors and door frames used in new building construction,
          buildings being rehabilitated, interior tenant buildouts and building
          maintenance. The Company services the contract hardware market,
          usually as a material supplier only, on a wide range of commercial,
          residential and institutional construction projects. The Company's
          customers are located in the United States, primarily in New York, New
          Jersey, Georgia, Illinois and Pennsylvania.

     (b)  Principles Of Consolidation
          ----------------------------

      The consolidated financial statements include the financial statements of
          the Company and its wholly-owned subsidiaries. All significant
          intercompany balances and transactions have been eliminated in
          consolidation.

     (c)  Cash Equivalents
          ----------------

      For purposes of the statements of cash flows, the Company considers all
          highly liquid investment instruments with an original maturity of
          three months or less to be cash equivalents. Included in cash and cash
          equivalents, at December 31, 1998, is approximately $3,706,000 of
          certificates of deposit. There were no cash equivalents at December
          31, 1997.

     (d)  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. During the fourth quarter of 1997, the Company reversed
          approximately $217,000 of inventory reserves that were established
          during the first three quarters of 1997 upon determination that such
          reserves were no longer required.

     (e)  Notes Receivable
          ----------------

      Notes receivable are recorded at cost, less an allowance for impaired
          notes receivable, if any.

     (f)  Investment In Monroc, Inc.
          --------------------------

      The Company classified its investment in Monroc, Inc., (Monroc) (note 3),
          as an available-for-sale security. Unrealized holding gains and
          losses, net of the related tax effect, on available-for-sale
          securities are excluded from earnings and are reported as a separate
          component of accumulated other comprehensive income until realized.
          Dividend income is recognized when earned. Realized gains and losses
          from the sale of available-for-sale securities are determined on a
          specific identification basis.



                                                                     (Continued)

                                      -42-


<PAGE>
                                       2

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

     (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. The useful lives of the assets are estimated to range between
          three and five years for all asset categories.

     (h)  Land Held For Sale
          ------------------

      The land held for sale is stated at cost. Impairment, if any, is
          recognized if the estimated fair value less costs to sell are lower
          than the carrying value.

      (i)  Stock Option Plan
           -----------------

      The Company applies the intrinsic value-based method of accounting
          prescribed by Accounting Principles Board (APB) Opinion No. 25,
          Accounting for Stock Issued to Employees, and related interpretations,
          in accounting for its fixed plan stock options. As such, compensation
          expense would be recorded on the date of grant only if the current
          market price of the underlying stock exceeded the exercise price.

     (j)  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.

     (k)  Reverse Stock Split
          -------------------

         On January 30, 1998, the Company made effective a five-to-one reverse
          stock split, which shareholders approved on January 13, 1998. All
          references in the consolidated financial statements referring to
          shares, share prices, per share amounts and stock plans have been
          adjusted retroactively for the five-to-one reverse stock split and the
          increase in authorized common stock (note 7).

      (l) Net Earnings Per Common Share
          -----------------------------

         In February 1997, the Financial Accounting Standards Board issued
          Statement No. 128, "Earnings per Share" (Statement 128). Statement 128
          replaces the calculation of primary and fully diluted earnings per
          share with basic and diluted earnings per share. Basic earnings per
          share excludes any dilution. It is based upon the weighted average
          number of common shares outstanding during the period. Dilutive
          earnings per share reflects the potential dilution that would occur if
          securities or other contracts to issue common stock were exercised or
          converted


                                                                     (Continued)


                                      -43-


<PAGE>







                                        3
                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

          into common stock. Earnings per share amounts for all periods
          presented have been restated to conform to the new presentation.

      (m)   Impairment Of Long-lived Assets And Long-lived Assets To Be Disposed
            Of
            --------------------------------------------------------------------

      The Company accounts for its long-lived assets in accordance with the
          provisions of Statement of Financial Accounting Standards No. 121,
          "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
          Assets to Be Disposed Of" (Statement 121). This Statement requires
          that long-lived assets and certain identifiable intangibles be
          reviewed for impairment whenever events or changes in circumstances
          indicate that the carrying amount of an asset may not be recoverable.
          Recoverability of assets to be held and used is measured by a
          comparison of the carrying amount of an asset to future net cash flows
          expected to be generated by the asset. If such assets are considered
          to be impaired, the impairment to be recognized is measured by the
          amount by which the carrying amount of the assets exceeds the fair
          value of the assets. Assets to be disposed of are reported at the
          lower of the carrying amount or fair value less costs to sell.

      (n) Comprehensive Income
          --------------------

      Effective January 1, 1998, the Company adopted Statement of Financial
          Accounting Standards No. 130, "Reporting Comprehensive Income"
          (Statement 130). This Statement requires that all items recognized
          under accounting standards as components of comprehensive income be
          reported in an annual financial statement that is displayed with the
          same prominence as other annual financial statements. Other
          comprehensive income may include foreign currency translation
          adjustments, minimum pension liability adjustments, and unrealized
          gains and losses on marketable securities classified as
          available-for-sale. The Company's only item of other comprehensive
          income is the net change in unrealized gain on available-for-sale
          securities. Prior year financial statements have been reclassified to
          conform to the presentation required by Statement 130.

      (o) Use Of Estimates
          ----------------

      Management of the Company has made a number of estimates and assumptions
          relating to the reporting of assets and liabilities and the disclosure
          of contingent assets and liabilities to prepare these consolidated
          financial statements in conformity with generally accepted accounting
          principles. Actual results could differ from those estimates.

      (p) Reclassifications
          -----------------    

      Certain reclassifications have been made to the 1996 and 1997 consolidated
          financial statements in order to conform to the 1998 presentation.

 (2) Notes Receivable
     ----------------

      Notes receivable consist of the following at December 31:

                                                            1998          1997
                                                            ----          ----
Note receivable  (a)                                     $474,104        632,139
Subordinated note (b)                                        --          298,750
                                                         --------       --------
           Total notes receivable                         474,104        930,889

Less current portion                                      158,035        278,035
                                                         --------       --------
           Total notes receivable,
                 less current portion                    $316,069        652,854
                                                         ========       ========

                                                                     (Continued)


                                      -44-


<PAGE>


                                        4

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

      (a)  At December 31, 1996 the $1,000,000 note receivable was past due.
           Extended legal actions pursued since the due date of the note
           resulted in the Company receiving payment in December 1997 of
           $575,000, of which $367,861 was applied against the note. The balance
           of the payment received in December 1997 of $207,139 was partially
           for the reimbursement of legal costs of $64,500, which is reflected
           as a reduction to selling, general and administrative expenses on the
           accompanying consolidated statement of income for the year ended
           December 31, 1997. The remainder of the payment received in December
           1997 of $142,639 was for past due interest, which is reflected in
           interest income in the accompanying consolidated statement of income
           for the year ended December 31, 1997. The outstanding balance of the
           note at December 31, 1997 of $632,139 was replaced with a new note,
           secured by a real estate mortgage and other collateral, bearing
           interest at 9% and payable in eight equal semi-annual installments of
           $79,017 beginning in June 1998. During 1998, payments on the note
           have been received in accordance with its terms.

      (b)  The Company had a subordinated note due from Monroc (note 3) bearing
           interest at the prime rate, which was 8.5% at December 31, 1997.
           Under the terms of the subordination agreement, Monroc made principal
           payments of $120,000 during 1997 and paid the note in full during
           1998.

(3)   Investment In Monroc, Inc.
      --------------------------

      At December 31, 1997, the Company owned 328,071 shares of Monroc common
         stock, which were classified as an available-for-sale security. The
         fair value of the investment security was $3,321,790, consisting of a
         cost basis of $1,431,800 and a gross unrealized holding gain of
         $1,889,990 at December 31, 1997, which was recorded as accumulated
         other comprehensive income.

      In June 1998, the Company sold all of its shares of Monroc common stock
         for $3,533,653 resulting in a realized gain of $2,101,853. In June
         1997, the Company sold 50,000 shares of Monroc common stock for
         proceeds of $456,233 and a gain of $238,033. There was no tax impact
         on the gains from the sale of Monroc common stock as the Company
         utilized its federal net operating loss carryforwards and the gains
         were not subject to state taxes.

(4)  Property And Equipment
     ----------------------   

     Property and equipment consist of the following at December 31:

                                                            1998           1997
                                                            ----           ----
        Computer hardware and software                   $551,807        417,261
        Office and warehouse equipment                     42,380         46,397
        Furniture and fixtures                             37,109         37,109
        Automobiles                                       114,805         30,483
                                                         --------       --------

                                                          746,101        531,250


        Less accumulated depreciation                     243,789        186,549
                                                         --------       --------
                                                         $502,312        344,701
                                                         ========       ========

        Computer software includes approximately $296,287 and $117,583 of costs
          as of December 31, 1998 and 1997, respectively, related to the
          acquisition and installation of management information systems for
          internal use. Amortization of computer software costs will commence
          when the new system is fully operational and will be amortized on a
          straight-line basis over three years.
                                                                     (Continued)


                                      -45-


<PAGE>


                                        5

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

(5)  Financing Arrangements
     ----------------------

      At  December 31, 1998 and 1997, the Company had available a line of credit
          with a financial institution for $3,500,000. Amounts outstanding under
          the line of credit were $2,049,268 and $1,990,108 at December 31, 1998
          and 1997, respectively. Borrowings under the line of credit subsequent
          to June 1998 bear interest at prime plus 1%, which was 9.00% at
          December 31, 1998. Prior to July 1998, the borrowing rate was prime
          plus 2%, and was 10.5% at December 31, 1997. The line of credit
          agreement is subject to review annually in May. The weighted average
          interest rates for 1998, 1997 and 1996 were 10.0%, 10.4% and 10.3%,
          respectively.

      The credit facility allows the Company to borrow against eligible accounts
          receivable on a formula basis. Borrowings under the line of credit are
          secured by accounts receivable and inventory. Monthly interest and
          principal payments are based upon monthly accounts receivable
          collections, as defined.

(6)  Notes Payable
     -------------

      Notes payable at December 31, 1998 are payable in 36 equal monthly
           installments of $1,863, including interest at 7.36%, beginning in
           December 1998.

      Notes payable of $447,363 at December 31, 1997 were due to creditors,
          pursuant to a 1983 reorganization plan. In accordance with the plan
          the notes were established to include interest, at 6% per annum
          through maturity, and therefore interest expense is not reflected in
          the accompanying consolidated statements of income. The notes payable
          at December 31, 1997 were paid in full on January 16, 1998.

      Included in accrued liabilities at December 31, 1998 and 1997 is
          approximately $474,656 and $483,556, respectively, of unclaimed
          payments on the notes payable. In 1998 and 1997, $97,706 and $150,321,
          respectively, of the unclaimed payments were recorded as other income
          in the accompanying consolidated statements of income since in
          accordance with the opinion of counsel, it is more likely than not
          that the Company is entitled to these payments.


 (7) Capital Stock
     ------------- 

      On January 13, 1998, the stockholders approved a proposal to amend the
           Company's Certificate of Incorporation to effect a five-to-one
           reverse stock split by changing the number of authorized shares of
           common stock, par value $.01 from 40,000,000 shares to 8,000,000
           shares, par value $.05 and the number of authorized shares of
           convertible preferred stock, par value $.01, from 12,344,300 shares
           to 2,468,860 shares, par value $.05. The Company made the reverse
           stock split effective on January 30, 1998. In addition, stockholders
           approved a proposal to amend the Company's Certificate of
           Incorporation immediately following the amendment effecting the
           reverse stock split to increase the amount of authorized common stock
           to 20,000,000 with a par value of $.05 per share.

      Each share of the Company's preferred stock is convertible into one share
           of the Company's common stock. 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 preferred
           stock is redeemable, at the option of the Company, at $7.50 per
           share.

                                                                     (Continued)

                                      -46-


<PAGE>




                                        6

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

      The voting rights of the common stockholders and preferred stockholders
          are based upon the number of shares of convertible preferred stock
          outstanding. If 1,250,000 or more shares of preferred stock are
          outstanding five of the nine directors are elected by the common
          stockholders and the remainder by the preferred stockholders. If more
          than 600,000 but less than 1,250,000 preferred shares are outstanding,
          six of the nine directors are elected by common stockholders. A
          majority of the directors elected by preferred stockholders and a
          majority of the directors elected by the common stockholders are
          required to approve certain transactions, including, but not limited
          to, incurring certain indebtedness, merger, consolidation or
          liquidation of the Company, and the redemption of common stock.
          Preferred and common stockholders vote together on all other matters.

       At December 31, 1998 there were 2,792,994 shares of common stock reserved
          for conversion of preferred stock and for the exercise of stock
          options (note 8).

      In  November 1997, the Board of Directors approved the repurchase of up to
          1,000,000 shares, collectively, of the Company's common and
          convertible preferred stock in the open market. During 1998, the
          Company repurchased 23,070 shares of common stock and 18,162 shares of
          convertible preferred stock at an average price of approximately $2.52
          per share for an aggregate amount of $103,741. All such shares have
          been retired.

 (8) Stock Options
     -------------

      On January 13, 1998, stockholders approved a proposal to increase the
         number of shares of common stock for which options can be issued
         pursuant to the 1996 Stock Option Plan (the 1996 Plan) by 1,000,000
         shares from 200,000 to 1,200,000 shares on a post-reverse stock split
         basis. At December 31, 1998, a total of 20,000 options were
         outstanding under the 1996 Stock Option Plan and 136,500 options were
         outstanding under the Company's 1986 Stock Option Plan, which expired
         on December 31, 1995.

      In June 1996, the Company adopted the 1996 Plan pursuant to which the
         Company's Board of Directors may grant up to 1,200,000 options until
         December 31, 2005 to key employees and other persons who render
         service to the Company. Under the 1996 Plan, the options can be either
         incentive or nonqualified. The rate at which the options are
         exercisable is to be determined by the Board of Directors at the time
         of grant. The exercise price of the incentive stock options may not be
         less than the fair market value of the Company's common stock on the
         date of grant. The exercise price of the nonqualified stock options
         may not be less than 85% of the fair market value of the Company's
         common stock on the date of grant. In April 1998 and February 1997,
         options to purchase 2,000 shares and 20,000 shares of common stock
         were granted to certain employees, respectively, at $2.50 per share,
         which equaled the fair market value of the shares at the date of the
         grant under the 1996 Plan. Such options are immediately exercisable
         and expire in March 2008 and February 2007, respectively.

      Changes in options outstanding are as follows:

                                               Shares Subject   Weighted Average
                                                 To Option       Exercise Price
                                                 ---------       --------------

Balance at December 31, 1995                       145,500          $   1.45
Granted                                               --             --
                                                  --------          --------
Balance at December 31, 1996                       145,500              1.45
Granted                                             20,000              2.50
                                                  --------          --------
Balance at December 31, 1997                       165,500              1.57
Canceled                                           (11,000)            (1.68)
Granted                                              2,000              2.50
                                                   --------          --------   
Balance at December 31, 1998                       156,500              1.57
                                                   ========          ========

                                                                     (Continued)


                                      -47-


<PAGE>



                                        7

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

      At  December 31, 1998 and 1997, all shares subject to option were
          exercisable. At December 31, 1998 and 1997, the range of exercise
          prices of outstanding options was $1.25-$2.50 per share. At December
          31, 1998 and 1997, the weighted average remaining contractual lives of
          outstanding options were approximately five and six years,
          respectively.

      The per share fair value of the stock options granted during 1998 was
          $2.37 on the date of grant using the Black Scholes option pricing
          model with the following assumptions: expected dividend yield 0%,
          expected volatility 114%, risk-free interest rate of 5.7% and an
          expected life of 10 years.

      The per share fair value of the stock options granted during 1997 was
          $2.13 on the date of grant using the Black Scholes option-pricing
          model with the following assumptions: expected dividend yield 0%,
          expected volatility of 80%, risk-free interest rate of 6.3% and an
          expected life of 10 years.

      The Company applies APB Opinion No. 25 in accounting for options issued
          pursuant to its stock option plan, accordingly, no compensation cost
          has been recognized for its stock options in the financial statements.
          Had the Company determined compensation cost based on the fair value
          at the grant date for its stock options under Financial Accounting
          Standards No. 123, "Accounting for Stock-Based Compensation ," the
          Company's net income and net earnings per share would have been
          reduced to the pro forma amounts indicated below:

                                                1998          1997         1996
                                                ----          ----         ----
Net income:
  As reported                            $   3,851,753      672,356      547,675
  Pro forma                                  3,847,017      629,730      547,675

Net income per common share (basic):
   As reported                                    2.66          .47          .40
   Pro forma                                      2.66          .44          .40


Net income per common share (diluted):
  As reported                                     1.23          .21          .17
  Pro forma                                       1.23          .20          .17

(9)  Net Earnings Per Common Share
     -----------------------------

     As discussed in Note 1(l), the Company adopted Statement 128, which
        replaces the calculation of primary and fully diluted earnings per
        share, with basic and diluted earnings per share. A reconciliation
        between the numerators and denominators of the basic and diluted
        earnings per common share is as follows:



                                                                     (Continued)


                                      -48-


<PAGE>




                                        8

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>


                                              1998           1997        1996
                                              ----           ----        ----

<S>                                       <C>              <C>           <C>    
Net income (numerator)                    $3,851,753       672,356       547,675
                                          ==========    ==========    ==========

Weighted average common shares
   (denominator for basic income
   per share)                              1,446,354     1,418,719     1,362,939

Effect of dilutive securities:
  Convertible preferred stock              1,631,547     1,678,559     1,734,339
  Employee stock options                      56,716        67,562        39,903
                                          ----------    ----------    ----------

Weighted average common
  and potential common shares
  outstanding (denominator for
  diluted income per share)                3,134,617     3,164,840     3,137,181
                                          ==========    ==========    ==========

Basic income per share                    $     2.66           .47           .40
                                          ==========    ==========    ==========

Diluted income per share                  $     1.23           .21           .17
                                          ==========    ==========    ==========
</TABLE>


Employee stock options of 20,000 for the first, third and fourth quarters in
     1998 and for the fourth quarter in 1997 were not included in the net income
     per share calculation because their effect would have been anti-dilutive.

(10) Income Taxes
     ------------

The provision (benefit) for income taxes attributable to income is comprised of:
<TABLE>
<CAPTION>


                           1998                                  1997                               1996
                           ----                                  ----                               ----                            
                        State and                              State and                          State and 
            Federal       Local        Total       Federal       Local       Total      Federal     Local      Total
            -------       ------       -----       -------       -----       -----      -------     -----      -----

<S>        <C>            <C>         <C>            <C>        <C>          <C>            <C>       <C>         <C>    
Current    $  70,930      202,422     273,352        2,000      148,300      150,300        4,569     181,804     186,373
Deferred    (194,000)        --      (194,000)    (306,000)        --       (306,000)        --          --         --
           ---------    ---------   ---------    ---------    ---------    ---------   ---------   ---------    ---------
           $(123,070)     202,422      79,352     (304,000)     148,300     (155,700)       4,569     181,804     186,373
           =========    =========   =========    =========    =========    =========    =========   =========   =========
</TABLE>

  Income tax expense for 1998, 1997 and 1996 differed from amounts computed by
     applying the U.S. Federal income tax rate of 34% to pre-tax income due to
     various items including state and local taxes, net of Federal income tax
     benefit and a net reduction in the valuation allowance for deferred tax
     assets of $644,547, $1,288,667 and $1,296,069 for 1998, 1997 and 1996,
     respectively.

The components of deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>


                                                      1998         1997          1996
                                                      ----         ----          ----
Deferred tax expense,  exclusive of the effect
<S>                                              <C>              <C>           <C>    
    of the other components listed below         $  450,547       492,253       232,747
Adjustment to deferred tax assets for expired
    net operating loss carryforwards                   --         490,414     1,063,322
 Decrease in beginning-of-the-year balance
    of the valuation allowance for
    deferred tax assets                            (644,547)   (1,288,667)   (1,296,069)
                                                 ----------    ----------    ----------
                                                 $ (194,000)     (306,000)         --
                                                 ==========    ==========    ==========

</TABLE>


                                                                     (Continued)


                                      -49-

<PAGE>


                                        9

                   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 at December 31, 1998 and 1997 are
          presented below.

                                                        1998            1997
                                                        ----            ----

Deferred tax assets:
  Net operating loss carryforwards                 $ 10,884,818      12,253,826
  Accounts receivable due to allowance
     for doubtful accounts                              286,204         175,002
  Inventory due to valuation reserve                    216,047         124,315
  Alternative minimum tax credit carryforward           115,885          42,955
  Other                                                  11,286          11,286
                                                   ------------    ------------
     Total gross deferred tax assets                 11,514,240      12,607,384
     Less valuation allowance                       (11,014,240)    (11,658,787)
                                                   ------------    ------------
     Deferred tax assets, net                           500,000         948,597
                                                   ============    ============
  Deferred tax liabilities:
     Investment security due to unrealized gain            --          (642,597)
                                                   ------------    ------------
                 Net deferred tax asset            $    500,000         306,000
                                                   ============    ============


      At December 31, 1998, the valuation allowance was determined by estimating
        the recoverability of the deferred tax assets. In assessing the
        realizability of deferred tax assets, management considers whether it is
        more likely than not that some portion or all of the deferred tax assets
        will not be realized. The ultimate realization of deferred tax assets is
        dependent upon the generation of future taxable income and tax planning
        strategies in making this assessment. Based upon the level of historical
        income and projections for future taxable income over the periods which
        the deferred tax assets are deductible, management believes it is more
        likely than not that the Company will realize the benefits of these
        deductible differences, net of the existing valuation allowances at
        December 31, 1998. The amount of the deferred tax asset considered
        realizable, however, could be reduced in the near term if estimates of
        future taxable income during the carryforward period are not realized.
        In order to fully realize the net deferred tax asset, the Company will
        need to generate future taxable income of approximately $1,470,000.
        Taxable income for 1998, 1997 and 1996 was approximately $4,050,000,
        $491,000 and $832,000, respectively.

     During the fourth quarters of 1998 and 1997, the valuation allowance was
        reduced by $500,000 and $306,000, respectively, in order to recognize a
        net deferred tax asset based upon updated projections of future taxable
        income.

     At December 31, 1998, the Company has net operating loss carryforwards
        for federal income tax purposes of approximately $32,000,000. Varying
        amounts of the net operating loss carryforwards will expire each year
        from 2000 through 2008. Approximately $3,100,000 of the net operating
        loss carryforwards will expire if not utilized during 2000. During
        1998, the Company utilized approximately $4,050,000 of its net
        operating loss carryforwards and none expired. The net operating loss
        carryforwards have been substantially reduced as a result of certain
        annual limitations and they may be further limited to utilization
        against the future earnings of the subsidiary that sustained the
        loss. 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.



                                                                     (Continued)


                                      -50-


<PAGE>


                                       10

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

(11)  Fair Value Of Financial Instruments
      -----------------------------------

      Financial Accounting Standards Board Statement No.107, "Disclosure 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 receivable and notes payable, because of the
          short maturity of these instruments.

      The notes receivable and notes payable approximate fair value as the
          interest rates are comparable to rates currently offered by local
          lending institutions for loans of similar terms to companies with
          comparable credit risk.

(12) Supplemental Cash Flow Information
     ----------------------------------

      The following is supplemental information relating to the consolidated
          statements of cash flows:
                                                1998         1997        1996
                                                ----         ----        ----
       Cash paid during the years for:
            Interest                      $    208,824      286,340     260,628
                                               =======      =======     =======
            Income taxes                  $    186,386      181,428     250,878
                                               =======      =======     =======

      Non-cash transactions:

      During 1998, the Company retired 18,162 shares of convertible preferred
          stock, 23,070 shares of common stock and 56,387 shares which were
          converted to a similar number of common shares. During 1997, 52,297
          shares of convertible preferred stock, which were exchanged for a
          similar number of common shares, were retired.

      During 1998, the Company issued a $60,030 note payable to finance the
          purchase of equipment (note 6).

      In  1997, the Company received a note in the amount of $632,139 secured by
          a real estate mortgage and other collateral as partial consideration
          for an equivalent amount of a previously outstanding note (note 2(a)).

 (13) Employee Benefit Plans
      ----------------------

      The Company has a profit-sharing plan and a 401(k) plan, which cover
          substantially all employees of the Company's subsidiary, Atlantic
          Hardware and Supply Corporation. Participants in the 401(k) plan may
          contribute a percentage of compensation, but not in excess of the
          maximum allowed under the Internal Revenue Code. The 401(k) plan does
          not provide for matching contributions, however, the Board of
          Directors can authorize discretionary contributions to both the
          profit sharing and 401(k) plans. In 1998, 1997 and 1996, the Board of
          Directors authorized $90,000 , $70,000 and $75,000, respectively, of
          such discretionary contributions to the plans.




                                                                     (Continued)

                                      -51-


<PAGE>




                                       11

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

(14)  Industry Segments
      -----------------

      The Company has two reportable segments: (1) door hardware, doors and
          door frames and (2) investing activities. The door hardware, doors
          and door frames segment generates revenue from the distribution of
          products to the contract hardware market. The investing activities
          holds certain assets for investment purposes. A substantial portion
          of the investing activities segment revenues is generated from the
          sale of its assets. The accounting policies of the segments are the
          same as those described in the summary of significant accounting
          policies. The Company evaluates performance of the door hardware,
          doors and door frames segment based upon operating income and net
          income and the investing activities segment based upon income before
          income taxes. Interest on intersegment borrowings is recorded at the
          Company's incremental borrowing rate, which was 9.0% at December 31,
          1998. All of the Company's revenues are generated in the United
          States. All of the Company's assets are located in the United States.
          The investing activities segment does not include income from its
          investment in the door hardware, doors and door frames segment.

      Summarized financial information for each of the Company's two business
          segments for 1998, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>

                                         Door
                                       hardware,
                                        doors             Investing       Unallocated                        Consolidated
          1998                     And Door Frames       Activities         Amount         Eliminations         Total
          ----                     ----------------      ----------        -------         -------------        -----
<S>                                    <C>               <C>                 <C>               <C>            <C>       
  Revenues                             $25,233,909             --                --               --          25,233,909
  Operating income                       1,780,174(a)      (873,541)(a)          --               --             906,633
  Other income                               5,280        3,038,269              --               --           3,043,549
Interest income                               --            274,825              --            (93,619)(b)       181,206
Interest expense                           293,902             --                --            (93,619)(b)       200,283
Income before income taxes               1,491,552(a)     2,439,553(a)           --               --           3,931,105
Net income                               1,291,552        2,366,201           194,000(f)          --           3,851,753
Total assets                            10,938,951        8,539,264           500,000(c)    (3,652,902)(d)    16,325,313
Non-cash items:
   Provision for doubtful accounts         223,000             --                --               --             223,000
   Amortization of negative goodwill       112,932             --                --               --             112,932
   Depreciation expense                     97,965            1,945              --               --              99,910
Capital expenditures                       197,491             --                --               --             197,491
                                        ----------         --------           -------        ----------       ----------            
</TABLE>


                                      -52-




                                                                     (Continued)


                                     <PAGE>


                                       12

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>


                                         Door
                                       hardware,
                                        doors             Investing      Unallocated                      Consolidated
          1997                     And Door Frames       Activities        Amount        Eliminations         Total
          ----                     ----------------      ----------       -------        -------------        -----
<S>                                    <C>               <C>              <C>             <C>                <C>       
Revenues                               $22,642,783             --            --              --               22,642,783
Operating income                         1,154,004(a)    (1,153,770)(e)(a)   --              --                      234
Other income                                 5,825          606,505          --              --                  612,330
Interest income                               --            191,473          --              --                  191,473
Income before income taxes                 872,448(a)      (355,792)(e)      --              --                  516,656
Net income                                 727,448         (361,092)      306,000(f)         --                  672,356
Total assets                             9,232,245        8,161,496       306,000(c)    (2,539,284)(d)        15,160,457
Non-cash items:
   Provision for doubtful accounts         270,000             --            --              --                  270,000
   Amortization of negative goodwill       112,932             --            --              --                  112,932
   Depreciation expense                     68,380            1,946          --              --                   70,326
Capital
    expenditures                           300,728             --            --              --                  300,728
                                        ===========      ==========       ========       =========            ==========
</TABLE>

<TABLE>
<CAPTION>

                                         Door
                                       hardware,
                                         doors             Investing  Unallocated                    Consolidated
          1996                     And Door Frames        Activities    Amount     Eliminations         Total
          ----                     ----------------       ----------    -------    ------------         -----
<S>                                    <C>                 <C>            <C>        <C>             <C>       
Revenues                               $ 25,059,492             --         --           --           25,059,492
Operating income                          1,425,404(a)      (821,062)(a)   --           --              604,342
Other income                                 (8,210)         279,925                    --              271,715
Interest ncome                                 --            130,746       --         (8,965)(b)        121,781
Income before income taxes                1,144,439(a)      (410,391)(a)   --           --              734,048
Net income                                  964,439         (416,764)      --           --              547,675
Total assets                             10,218,917        7,641,227       --     (2,164,284)(d)     15,695,860
Non-cash items:
   Provision for doubtful accounts          232,600             --         --           --              232,600
   Amortization of negative goodwill        115,774             --                      --              115,774
   Depreciation expense                      63,298            5,632       --           --               68,930
Capital expenditures                         84,104            2,498       --           --               86,602
                                        ===========        ==========    =====     =========         ==========
<FN>

(a)  Includes an allocation from the investing segment to the door hardware,
     doors and door frames segment of $120,000, $90,000 and $90,000 in 1998,
     1997 and 1996, respectively, based upon management's estimate of costs
     incurred by the investing segment on behalf of the door hardware, doors and
     door frames segment.
(b)  Represents elimination of interest charged on intercompany borrowings.
(c   ) Represents deferred tax assets that are not allocated to either segment.
(d)  Represents elimination of intercompany receivable and the investing
     activities investment in the door hardware, doors and door frames segment.
(e)  Includes $385,705 of a write-off of deferred expenses for an abandoned
     acquisition.
(f)  Represents net deferred tax benefit that is not allocated to either
     segment. 
</FN>
</TABLE>

                                                                     (Continued)


                                      -53-


<PAGE>



                                       13

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued



(15)  Business And Credit Concentrations
      ----------------------------------

      During 1998, five customers accounted for approximately 37% of the
          Company's annual sales, during 1997, four customers accounted for
          approximately 27% of the Company's annual sales and during 1996, four
          customers accounted for approximately 23% of the Company's annual
          sales. At December 31, 1998 and 1997, seven customers had accounts
          receivable balance, which in the aggregate, represented 43 % and 34%,
          respectively, of the total net receivable balance. The Company
          estimates an allowance for doubtful accounts based on the
          creditworthiness of its customers as well as general economic
          conditions. Consequently, an adverse change in those factors could
          affect the Company's estimate of its bad debts. The Company as a
          policy does not require collateral from its customers.

(16)  Commitments
      -----------

      (a) Employment Contracts
          --------------------

      The Company has employment contracts with two officers and various
          employees with remaining terms ranging from one to four years at
          amounts approximating their current levels of compensation. The
          Company's remaining aggregate commitment at December 31, 1998 is
          approximately $274,574.

       (b) Leases
           ------

      The Company is obligated under operating leases for warehouse, office
          facilities and certain office equipment. Rental expense, including
          real estate taxes, amounted to approximately $275,000, $283,000 and
          $291,000 in 1998, 1997 and 1996, respectively. Rental expense in 1998
          and 1997 is before sublease income of $55,264 and $46,020,
          respectively. At December 31, 1998, future minimum lease payments in
          the aggregate and for each of the five succeeding years are as
          follows:

                        1999                                           $276,000
                        2000                                            138,000
                        2001                                             57,000
                        2002                                             47,000
                        2003                                             47,000
                        Thereafter                                        8,000
                                                                      ---------
                                                                       $573,000
                                                                      =========

     Future minimum rentals have not been reduced by minimum sublease rental 
          income of $ 7,772 due in the future under noncancelable subleases.

                                      -54-







<PAGE>




 OFFICERS

 Bernard Korn, Chairman of the Board/President
  James W. Stewart, Executive Vice President/Treasurer/Secretary

  SUBSIDIARY
  Atlantic Hardware and Supply Corporation
    Paul Selden, President

  DIRECTORS
  Gerald S. Deutsch
    Certified Public Accountant and Attorney

  William Koon
    President - Lord's Enterprises, grain merchants

  Bernard Korn
    Chairman of the Board/President

  Donald K. MacNeill
    Retired Corporate Executive

  Ronald Miller
    Miller and Hearn, attorneys

  Jack Rose
    Investor

  Paul Selden
    Atlantic Hardware and Supply Corporation/President

  James W. Stewart
    Executive Vice President/Treasurer/Secretary

  Carl L. Sussman
    Investor

  COUNSEL                               STOCK LISTINGS - NASDAQ
    Oscar D. Folger, Esq.                 Convertible Preferred Stock
    New York, New York                    Symbol  = CCOM-P

  AUDITORS                                Common Stock
    KPMG LLP                              Symbol = CCOM
    Melville, New York

  REGISTRAR AND TRANSFER AGENT          10-KSB AVAILABLE
    American Stock Transfer Co.         The Annual Report on Form 10-KSB
    New York, New York                  as filed with the Securities and
                                        Exchange Commission, is available
                                        to stockholders without charge
                                        upon written request to:

                                       Secy., Colonial Commercial Corp.
 ANNUAL STOCKHOLDERS MEETING           3601 Hempstead Turnpike
 Wednesday, June 9,1999,10:30 AM       Levittown, New York 11756-1315

                                      -55-