**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-K/A**
 **Amendment
            No. 2**
 ý
              
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE **SECURITIES
                  EXCHANGE ACT OF 1934******For
                  the fiscal year ended December 31, 2006****or****o**
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE **SECURITIES
                  EXCHANGE ACT OF 1934****For
                the transition period from ____________ to
                ____________
 
 
 Commission
        file number: 11-2037182
 **COLONIAL
        COMMERCIAL CORP.**
 (Exact
        name of registrant as specified in its charter)
 
 **New
                  York**
              
              **11-2037182**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**275
                  Wagaraw Road, Hawthorne, New Jersey**
              
              **07506**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 Registrant’s
        telephone
        number, including area code**973-427-8224**
  **Securities
        registered pursuant to Section 12(b) of the Act:**
  Title
                  of each class
              
              Name
                  of each exchange on which registeredNone
              
              OTC
                  Bulletin Board
 
 **Securities
        registered pursuant to Section 12(g) of the Act:**
 Common
        Stock, Par Value $.05 Per Share
 Convertible
        Preferred Stock, Par Value $.05 Per Share
 (Title
        of
        Class)
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 Yes
o                                           No  ý
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Exchange Act.
 Yes
o                                           No  ý
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.  Yes oNo  ý
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K.  x
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
  Large
                    accelerated filer o
                
                Accelerated
                    filer  o
                
                Non-accelerated
                    filer  ý
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes
o                                           No  ý
 
 The
        aggregate market value of the registrant’s common stock held by non-affiliates
        of the registrant, computed by reference to the last reported price at which
        the
        stock was sold on June 30, 2006 (the last business day of the registrant’s most
        recently completed second quarter) was $3,906,145.
 
 Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        stock, as of the latest practicable date.
 
 Class
              
              Outstanding
                  at March 1, 2007Common
                  Stock, $.05 par value per share
              
              4,645,680
                  sharesConvertible
                  Preferred Stock, $.05 par value per share
              
              467,500
                  shares
  
 
  **TABLE
        OF CONTENTS**
  PART
                  IPageItem
                  1.
              Business
              4Item
                  1A.
              Risk
                  Factors
              6Item
                  2.
              Properties
              8Item
                  3.
              Legal
                  Proceedings
              9Item
                  4.
              Submission
                  of Matter to a Vote of Security
                  Holders
              11PART
                  IIItem
                  5.
              Market
                  for the Registrant’s Common Stock, Convertible Preferred
                  Stock and Related Stockholder Matters
              12Item
                  6.
              Selected
                  Financial Data
              14Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              15Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              22Item
                  8.
              Financial
                  Statements and Supplementary Data
              22Item
                  9.
              Changes
                  In and Disagreements With Accountants on Accounting and
                  Financial Disclosure
              22Item
                  9A.
              Controls
                  and Procedures
              22PART
                  IIIItem
                  10.
              Directors,
                  Executive Officers and Corporate
                  Governance
              24Item
                  11.
              Executive
                  Compensation
              26Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management
              36Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              38Item
                  14.
              Principal
                  Accountant Fees and Services
              41PART
                  IVItem
                  15.
              Exhibits
                  and Financial Statements Schedules
              42
  *Table
            of Contents*
  **Explanatory
          Note**
  This
                Form
                10-K/A (Amendment Number 2) is being filed to revise certain sections
                of the
                Form 10-K/A for the year ended December 31, 2006, which the Company
                previously
                filed with the Securities and Exchange Commission May 21, 2007.  The
                Company filed this restatement on Form 10-K/A using the cumulative
                effect
                transition method pursuant to the guidance contained in SAB 108.
  Subsequent
                communications with the
                Securities and Exchange Commission (“SEC”) found that the Company had improperly
                applied the guidance in SAB 108, specifically, the effect on materiality
                of the
                incorrect treatment of vendor rebates on net income for 2004.  The Audit
                Committee and management of the Company concurred with the SEC and
                determined
                that it is necessary to restate the Company’s financial statements for the years
                ended December 31, 2004 and 2005, as they relate to the treatment
                of vendor
                rebates. ****No changes have been made to the Company’s
                consolidated balance sheet, statement of operations and cash flows
                for the year
                ended December 31, 2006, related to this change, as previously reported
                in the
                Form 10-K/A.  The Company’s consolidated statement of stockholders’
equity for the year ended December 31, 2006 has been restated to
                remove the
                cumulative effect of the adoption of SAB 108.
  The
                Audit Committee and management of
                the Company has concluded that certain vendor rebates should be an
                adjustment to
                the cost of the vendors’ product and included as a reduction of cost of sales
                when recognized in the income statement.  Previously, some vendor
                rebates were recognized as a reduction of cost of sales when earned,
                not as a
                reduction of costs when sold.  When adjusting vendor rebates to be
                recognized as a reduction of cost of sales, a decrease of gross profit
                of
                $137,736 was recognized for the year ended December 31, 2004 and
                a decrease of
                gross profit of $52,779 was recognized for the year ended December
                31,
                2005.  Retained earnings at the beginning of 2004 has been adjusted by
                $129,006 to correct an error made in 2003 for the treatment of vendor
                rebates.  The Company had a net operating loss carryforward for
                federal tax purposes greater than any amount of federal taxes which
                would have
                been due for each of the years ended December 31, 2004 and 2005,
                therefore, the
                Company determined that the tax effect of these adjustments was immaterial
                and, accordingly, the Company has made no adjustment.
  Additionally,
                the Audit Committee and
                management of the Company concluded that per SFAS 128 convertible
                note interest,
                net of taxes, should be added back to net income when calculating
                diluted
                earnings per share to determine if the effect would be
                antidilutive.  Previously, the Company did not add back interest, net
                of taxes, on convertible notes when making this calculation.  The
                Company has corrected this procedure.  The only changes resulting from
                this correction are to the number of diluted weighted average shares
                outstanding
                and the diluted earnings per share.  This correction resulted in an
                increase of $0.01 to diluted earnings per share for the year ended
                December 31,
                2006, no change to diluted earnings per share for the year ended
                December 31,
                2005 and a reduction of $0.02 to diluted earnings per share for the
                year ended
                December 31, 2004.
  The
                following sections are restated in
                this Form 10-K/A (Amendment Number 2):
  Item
                6. Selected Financial Data is
                restated to revise the statement of operations and balance sheet
                data for the
                years ended December 31, 2003, 2004 and 2005 and the statement of
                operations for
                the year ended December 31, 2006.  No changes have been made to the
                balance sheet for December 31, 2006 as previously reported in the
                Form
                10-K/A.
  Item
                7. Management’s Discussion and
                Analysis of Financial Condition and Results of Operations is restated
                under the
                captions Comparison of Year Ended December 31, 2006 with Year Ended December
                31, 2005 and Comparison of Year Ended December 31, 2005 with Year Ended
                December 31, 2004.
  2
 *Table
                  of Contents*
 Item
              8.
              Financial Statements and Supplementary Data is revised to restate the
              Company’s
              consolidated statements of operations, stockholders’ equity and cash flows for
              the years ended December 31, 2004 and 2005, consolidated balance sheet
              for the
              year ended December 31, 2005 and consolidated statement of operations
              and
              stockholder’s equity for the year ended December 31, 2006  Also
              restated are the following Notes to the Consolidated Financial Statements:
              1.
Summary of Significant Accounting Policies and Practices, under the
              paragraphs (j) Stock Options and (p) Restatement; 10. Net Income Per Common
              Share; 11. Income Taxes; and 18. Quarterly Results
              (Unaudited).  No changes have been made to the Company’s
              consolidated balance sheets and cash flows for the year ended December
              31, 2006
              as previously reported in the Form 10-K/A.
  Item
              9A.
              Controls and Procedures is restated to state that the Audit Committee
              and
              management of the Company has concluded that the Company improperly
              applied the
              guidance in SAB 108, specifically, the effect on materiality of the
              incorrect
              treatment of vendor rebates on net income for 2004 and that per SFAS
              128
              convertible note interest, net of taxes, should be added back to net
              income when
              calculating diluted earnings per share to determine if the effect would
              be
              antidilutive, as set forth in this Form 10-K/A (Amendment Number
              2).  The need for this restatement of our financial statements is a
              result of material weaknesses in our internal controls over financial
              reporting.  The Company continues to develop controls and procedures
              and plans to implement additional controls and procedures sufficient
              to
              accurately report our financial performance in the foreseeable
              future.  The Company has also augmented its finance and accounting
              staff by retaining an experienced independent consultant to enhance
              the
              Company’s financial accounting and reporting capabilities.
  As
              required by Rule 12b-15 under the
              Securities and Exchange Act of 1934, as amended (the Exchange Act),
              new
              certifications by the Company’s principal executive officer and principal
              financial officer are being filed as exhibits to this Form 10-K/A (Amendment
              Number 2) under Part IV, Item 15. Exhibits and Financial Statement
              Schedules.
  For
              purposes of this Form 10-K/A
              (Amendment Number 2), and in accordance with Rule 12b-15 under the
              Exchange Act,
              each item of the Company’s Form 10-K/A for the year ended December 31, 2006, as
              originally filed on May 21, 2007, that was affected by this restatement,
              has
              been amended and restated in its entirety.  No attempt has been made
              in this Form 10-K/A (Amendment Number 2) to modify or update other
              disclosures
              as presented in the original Form 10-K/A, except as required to reflect
              such
              restatements.
 Because
                this Form 10-K/A (Amendment Number 2) restates all of the pertinent
                financial
                data for the affected periods, we do not intend to restate our previously
                filed
                Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for
                periods ending
                prior to December 31, 2006.  As a result, the reader should not rely
                on the prior filings, but should rely upon the restated financial
                statements,
                reports of our independent registered public accounting firm and
                related
                financial information for affected periods contained in this Form
                10-K/A
                (Amendment Number 2).  Additionally, 2007 10-Q filings will be
                compared to 2006 figures with the described vendor rebate adjustment
                and
                adjustment to diluted net income per common share and therefore will
                not be
                consistent with the 2006 quarterly information previously presented
                in the
                Company’s 10-Q filings for the fiscal year ended 2006.
  3
 *Table
                  of Contents*
  **PART
          I.**
  **Item
          1.Business**
  General
  Colonial
          Commercial Corp. (“Colonial”)
          is a New York corporation which was incorporated on October 28,
          1964.  Unless otherwise indicated, the term “Company” refers to
          Colonial Commercial Corp. and its consolidated subsidiaries.  The
          Company’s operations are conducted through its wholly owned subsidiaries,
          Universal Supply Group, Inc. (“Universal”), The RAL Supply Group, Inc. (“RAL”),
          and American/Universal Supply, Inc. (“American”).  We distribute
          heating, ventilating and air conditioning equipment (HVAC), parts and
          accessories, climate control systems, appliances, and plumbing fixtures
          and
          supplies, primarily, in New Jersey, New York and portions of eastern
          Pennsylvania.
  We
          supply the Amana air conditioning
          and heating equipment line in New Jersey (exclusive of Cape May and Cumberland
          counties) and lower portions of New York State.  We are also the
          non-exclusive supplier of the Goodman line of heating and air conditioning
          equipment in substantially the same trading area.  We distribute these
          products through eight locations in New Jersey, seven locations in lower
          New
          York State and one location in Willow Grove, Pennsylvania.  Of these
          locations, two are used for warehousing purposes only.  In addition,
          we distribute American Standard heating and air conditioning equipment,
          as well
          as other heating and air conditioning accessories, in Elmsford and Hicksville,
          New York.  We utilize showrooms for the display and sale of kitchen
          and bathroom fixtures and accessories at our locations in Fishkill, Middletown,
          New Windsor and Suffern, New York.
  We
          have developed a specialty in the
          design and sale of energy conservation control systems and the fabrication
          of
          customized UL listed control panels, and we also supply indoor air quality
          components and systems.
  Our
          in-house staff provides technical
          assistance and training to customers.  In some cases, we also use
          vendors’ representatives and outside services. We do not install any equipment
          or systems.
  In
          September 2006 we began to
          distribute appliances, such as washers and dryers, to appliance dealers
          primarily in New York, New Jersey, and portions of Connecticut, Delaware
          and
          Pennsylvania.
  Our
          business is affected by significant
          outdoor temperature swings. Our sales typically increase during peak heating
          and
          cooling demand periods.  Demand related to the residential central air
          conditioning replacement market is highest in the second and third quarters,
          while demand for heating equipment is usually highest in the fourth
          quarter.
  In
          2006, 2005 and 2004, approximately
          85% of our sales were for replacement and/or renovation and the remaining
          15% of
          sales were for new construction projects.  In the same years,
          respectively, sales consisted of approximately 40%, 40% and 42% HVAC equipment;
          39%, 38% and 38% parts and accessories; and 16%, 16% and 15% climate control
          systems.
  We
          own no patents and have no
          intellectual property rights or proprietary technology.
  We
          carry general liability,
          comprehensive property damage, workers compensation and product liability
          insurance in amounts that we consider adequate for our business.  We
          maintain $2,000,000 in the aggregate and $1,000,000 per occurrence general
          liability coverage, plus a $15,000,000 umbrella policy.
  No
          material regulatory requirements
          apply specifically to our business.
  4
 *Table
              of Contents*
  As
          of December 31, 2006, we had 154
          non-union full-time employees.  We believe that our employee relations
          are satisfactory.
  We
          have no foreign operations and
          operate only in one business segment.
  Distribution,
          Customers and Suppliers
  We
          stock inventory in all of our 17
          locations.  We deliver products to customers with our fleet of 16
          leased and 12 owned trucks and vans.  We also make products available
          for pick-up at our facilities.
  We
          sell primarily to contractors who
          purchase and install equipment and systems for residential, commercial
          and
          industrial users.  We had approximately 6,000 customers in
          2006.  No customer accounted for more than 2% of consolidated net
          sales in 2006.  We believe that the loss of any one customer would not
          have a material adverse effect on our business.  We have no long term
          agreement with any customer.
  We
          deal with our customers on a
          purchase order by purchase order basis.  We have no assured stability
          in our customer base.
  We
          purchase inventory from our vendors
          and maintain this inventory in our warehouses to meet purchasing requirements
          and ensure continuous availability of merchandise to satisfy our customers’
needs.  We occasionally accept the return of merchandise from the
          customer when returned in unopened cartons, subject to a restocking
          fee.  We do not normally provide extended payment terms to
          customers.  We have no material long term agreements with any
          supplier.
  Certain
          of our supplier agreements limit the sale of competitive products in designated
          markets that we serve.
  In
          2006,
          two suppliers accounted for 34% of our purchases.  The loss of one or
          both of these suppliers could have a material adverse effect on our business
          for
          at least a short-term period.  We believe that the loss of any one of
          our other suppliers would not have a material adverse effect on our
          business.
  Competition
  We
          compete with a number of
          distributors, national chains and national home centers, and also with
          several
          air conditioning and heating equipment manufacturers that distribute a
          significant portion of their products through their own distribution
          organizations.  There is no single manufacturer, distributor or
          national chain or home center that dominates our market.  Competition
          is based on product availability, customer service, price and quality.
          We work
          to maintain a competitive edge by providing in-house training, technical
          sales
          support to our customers and by employing experienced personnel at our
          point-of-sale locations.
  5
 *Table
              of Contents*
  **Item
          1A.Risk Factors**
  The
          following important factors could adversely impact our business.
  ***Our
          business is significantly impacted by changes in general and local economic
          conditions.***
  Our
          business is substantially affected
          by changes in general economic factors outside of our control, such
          as:
  a.
                employment
                    levels and job growth;
  b.
                population
                    growth;
  c.
                housing
                    demand or modernization of existing
                    homes;
  d.
                consumer
                    confidence (which can be substantially affected by external conditions,
                    including international hostilities involving the United States);
                    and
  e.
                the
                    availability of financing for homeowners and
                    homebuyers.
  ***We
          may lose business to competitors and may otherwise be unable to favorably
          compete.***
  See
“Business-Competition”
section
          above. Several of the companies that compete with the Company have substantially
          greater financial and other resources.  No assurance can be given that
          the Company will continue to be able to respond effectively to competitive
          pressures.  Increased competition by existing and future competitors
          could result in reductions in sales, prices, volumes and gross margins
          that
          could materially adversely affect the Company’s business, financial condition
          and results of operations.  Furthermore, the Company’s success
          depends, in part, on its ability to gain market share from
          competitors.
  ***We
          are dependent on third party suppliers to deliver equipment parts and
          accessories to us for resale to contractors.***
  We
          have no long term contracts with our
          suppliers. We are at risk that our suppliers may cease making their products
          available to us on acceptable terms or at all.  The loss of one or
          both of our two major suppliers could have a material adverse effect on
          our
          business.
  ***We
          are dependent upon uninterrupted delivery of
          products.***
  Our
          Company depends upon transportation
          of products from our suppliers and to our customers.  Any interruption
          or cessation of the transportation of these products by national or regional
          stoppages, fuel shortages, or other, will significantly impair the Company’s
          ability to do business.
  ***Our
          business may be negatively impacted by inventory losses or
          obsolescence.***
  Our
          businesses depend on providing
          current products in good condition from our inventory to the
          customer.  Although we believe that we carry adequate insurance to
          protect ourselves from significant product losses, any uninsured loss of
          inventory, damages to inventory, or theft of inventory could have a significant
          impact on our profitability.  Alternatively, in the event that we are
          unable to sell our inventory in a timely manner, the unsold product may
          become
          obsolete and unsaleable and cause us to incur significant financial
          losses.
  6
 *Table
              of Contents*
  ***We
          could incur substantial losses in the event there are sudden changes in
          demand
          for our products.***
  A
          significant sudden increase in the
          demand for the Company’s products could result in a short-term increase in the
          cost of inventory purchases, while a significant decrease in demand could
          result
          in an increase in the amount of excess inventory quantities on-hand.
          Additionally, the Company’s estimates of future product demand may prove to be
          inaccurate.  In any of these cases, the Company may have understated
          or overstated the write-down required for excess and obsolete inventory
          or
          otherwise incur additional financial losses.
  ***Our
          business is largely dependent upon seasonal weather
          variability.***
  A
          major portion of our business is the
          distribution of heating, ventilating and air conditioning
          products.  The sale of these products is heavily influenced by
          temperature extremes and any major shift in the variation of the climate
          may
          have a significant adverse impact on our business.
  ***The
          Company’s financial leverage may result in a negative impact upon our ability to
          do business.***
  Our
          Company is financially
          leveraged.  Our leverage may place burdens on our ability to comply
          with the terms of our indebtedness, may restrict our ability to pay certain
          term
          loans, and further restrict our ability to operate and fulfill our financial
          obligations.  The amount of our debt could have significant
          consequences.  As an example, it could limit our ability to obtain
          future financing for working capital, capital expenditures, debt service
          requirements, acquisitions, or other needs.  It requires us to
          dedicate a substantial portion of our cash flow from operations to the
          payment
          of our debt and reduces our ability to use cash for other
          purposes.  It has a negative impact on our flexibility in planning or
          reacting to business changes.  It increases our vulnerability to any
          downturn in our business or to a significant rise in interest rates and
          may
          place us at a competitive disadvantage with our competitors who are not
          in such
          a leveraged position.
  Our
          ability to meet our debt service
          and other obligations depends upon our future performance.  Our
          earnings vary based upon all the conditions described herein and, hence,
          our
          ability to pay our obligations is affected accordingly.
  We
          may be unable to renew our credit
          line at the expiration of its term or obtain a reasonable alternate form
          of
          financing which would have a significant impact on the continuation of
          the
          operation of our business.
  Since
          our debt accrues interest at a
          floating rate, extended periods of high interest rates could affect the
          viability of our business.
  ***Our
          Company’s business is dependent upon the creditworthiness of our contractor
          customers.***
  Our
          Company would be significantly
          negatively impacted in the event our contractor customers are unable to
          pay
          their obligations to us.  This may occur if the economy or housing
          market slows, unemployment rises, interest rates increase dramatically,
          a
          natural disaster occurs within our region, or an act of terror substantially
          stops our economy from operating for a significant period of time.  If
          these contractors are unable to pay their accounts with us, the result
          would be
          that we would be unable to pay our lending institutions and vendors,
          substantially impacting our ability to operate.
  7
 *Table
              of Contents*
  ***We
          could incur substantial losses for asbestos-based
          claims.***
  See
          Item 3, Legal Proceedings for a
          potential material and adverse effect to us if we are held liable for
          substantial asbestos claims against a predecessor of one of our subsidiaries,
          indemnitors fail to honor their indemnification agreements and insurance
          policies are held not to cover these liabilities.
  ***Our
          ability to operate our Company effectively could be impaired if we fail
          to
          attract and retain key personnel.***
  Although
          William Pagano, a Director and
          Chief Executive Officer, William Salek, Chief Financial Officer and Secretary
          and Bernard Korn, a current non-executive employee, former Director and
          former
          Chief Executive Officer, have entered into employment agreements with us
          that
          expire in 2010, 2007 and 2010, respectively, our ability to operate our
          businesses and implement our strategies will depend upon our ability to
          attract
          and retain other qualified personnel.
  ***Our
          ability to operate our business effectively could be impaired if we are
          unable
          to extend the leases for our locations.***
  We
          lease 17 locations with
          approximately 323,000 square feet for showrooms, counter sales and
          warehousing.  We own no real estate.  Our leases expire at
          various times between August 31, 2007 and November 30, 2016.  Our
          business will be negatively impacted if we are unable to extend our existing
          leases at reasonable rates and we are unable to lease alternative space
          on
          acceptable terms.
  **Item
          2.Properties**
  Our
          principal executive offices are
          located at 275 Wagaraw Road, Hawthorne, New Jersey 07506 and are consolidated
          with the administrative offices of our subsidiary, Universal Supply Group,
          Inc.
  The
          Company maintains 16 combination
          sales and warehouse locations in Hawthorne, Bogota, Augusta, North Brunswick,
          Cedar Knolls, Wharton and Westville, New Jersey; Willow Grove, Pennsylvania;
          Elmsford, Hicksville, Middletown, Fishkill, New Windsor, Peekskill, Poughkeepsie
          and Suffern, New York.  Additionally, the Company maintains two
          separate warehouse locations in Cedar Knolls, New Jersey and New Hampton,
          New
          York.  These locations consist of approximately 323,000 square feet
          under leases expiring between 2007 and 2016 with current aggregate annual
          rents
          of approximately $2,744,513.  In addition, the Company has a
          month-to-month lease for a portion of the New Windsor, New York location,
          consisting of 11,000 square feet, for $2,500 per month.
  The
          premises located at Middletown,
          Fishkill, New Windsor and Suffern, New York also include showrooms of kitchen
          and bathroom fixtures and accessories.
  Our
          premises are suitable and adequate
          for their intended use and are adequately covered by insurance.  As of
          December 31, 2006, we leased all our facilities.
  8
 *Table
              of Contents*
  **Item
          3.Legal Proceedings**
  Universal
          Supply Group, Inc. is a New
          York corporation (“Universal”).  On June 25, 1999, Universal acquired
          substantially all of the assets of Universal Supply Group, Inc., a New
          Jersey
          corporation, including its name, pursuant to the terms of a purchase
          agreement.  The Company filed a copy of the purchase agreement with
          the Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g)
          on
          Form 10KSB, and the Company filed a copy of an amendment to the purchase
          agreement on July 9, 1999 as Exhibit 10(a)(ii) on Form
          8-K.  Subsequent to the sale, Universal Supply Group, Inc. (the
          selling corporation) formerly known as Universal Engineering Co., Inc.,
          changed
          its name to Hilco, Inc.  Hilco, Inc. acquired the assets of Amber
          Supply Co., Inc., formerly known as Amber Oil Burner Supply Co., Inc.,
          in 1998,
          prior to Hilco’s sale of assets to Universal.  Hilco, Inc. is
          hereinafter referred to as the “Predecessor.”  The majority
          shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
          Hildebrandt.
  The
          Company understands that
          Predecessor and many other companies have been sued in the Superior Court
          of New
          Jersey (Middlesex County) by plaintiffs filing lawsuits alleging injury
          due to
          asbestos. Currently, there exist 93 plaintiffs in these lawsuits relating
          to
          alleged sales of asbestos products, or products containing asbestos, by
          the
          Predecessor. The Company never sold any asbestos related products.
  Of
          the existing plaintiffs, seven filed
          actions in 2006, 15 filed actions in 2005, 44 filed actions in 2004, 24
          filed
          actions in 2003, and three filed actions in 2002. There are 108 other plaintiffs
          that have had their actions dismissed and eight other plaintiffs that have
          settled as of December 31, 2006 for a total of $3,313,000. There has been
          no
          judgment against the Predecessor.
  Our
          Universal subsidiary was named by
          24 plaintiffs; of these, two filed actions in 1999, one filed an action
          in 2000,
          five filed actions in 2001, eleven filed actions in 2005 and five filed
          actions
          in 2006. Six plaintiffs naming Universal have had their actions dismissed
          and,
          of the total $3,313,000 of settled actions, two plaintiffs naming Universal
          have
          settled for $26,500.  No money was paid by Universal in connection
          with any settlement.  Following these dismissed and settled actions,
          there currently exist 16 plaintiffs that name Universal.
  As
          set forth in more detail below, the
          Company has been indemnified against asbestos-based claims, and insurance
          companies are defending the interests of the Predecessor and the Company
          in
          these cases.
  Based
          on advice of counsel, the Company
          believes that none of the litigation that was brought against the Company’s
          Universal subsidiary through December 31, 2006 is material, and that the
          only
          material litigation that was brought against Predecessor through that date
          was
          Rhodes v. A.O. Smith Corporation, filed on April 26, 2004 in the Superior
          Court
          of New Jersey, Law Division, Middlesex County, Docket Number MID-L-2979-04AS.
          The Company was advised that the Rhodes case was settled for $3,250,000
          (“Settlement”) under an agreement reached in connection with a $10,000,000 jury
          verdict that was rendered on August 5, 2005. The Company was not a defendant
          in
          the Rhodes case.
  On
          April
          29, 2005, prior to the Rhodes case trial, the Predecessor filed a third
          party
          complaint against Sid Harvey Industries (“Third Party Complaint”) in an action
          demanding contributor payment in connection with the Settlement. Sid Harvey
          Industries moved successfully for summary judgment.  The Predecessor
          filed an appeal as to the dismissal of Predecessor’s Third Party
          Complaint.  In a decision dated December 29, 2006, the Superior Court
          of New Jersey, Appellate Division, reversed the dismissal of Predecessor’s Third
          Party Complaint and remanded the matter for further proceedings as to
          Predecessor’s claim for contribution.
  9
 *Table
              of Contents*
  The
          Company believes that Rhodes
          differed from the other lawsuits in that plaintiff established that he
          contracted mesothelioma as a result of his occupational exposure to asbestos
          dust and fibers and that a predecessor of the Company was a major supplier
          of
          the asbestos containing products that allegedly caused his disease.
  Indemnification
  John
          A. Hildebrandt, Paul Hildebrandt
          and the Predecessor have jointly and severally agreed to indemnify our
          Universal
          subsidiary from and against any and all damages, liabilities and claims
          due to
          exposure to asbestos at any time prior to the June 25, 1999 closing of
          the
          purchase agreement referred to earlier.  These agreements are set
          forth in the purchase agreement. Paul Hildebrandt, one of the indemnitors,
          was a
          Director of the Company from September 29, 2004 to January 28,
          2005.
  The
          indemnitors may use their own
          counsel to defend these claims. The indemnitors are not liable for any
          settlement effected without their consent. The indemnitors may settle and
          pay
          money claims without the consent of the Company. There is no indemnification
          unless claims aggregate $50,000; once this trigger point is reached,
          indemnification is required for all claims, including the first $50,000,
          but
          excluding claims of less than $10,000. The indemnification requirement
          survives
          at least until 30 days after the running of any relevant statutes of
          limitation.
  The
          obligation of the indemnitors is
          joint and several, so that the Company can have recourse against any one
          or more
          of these indemnitors, whether or not any other indemnitor has previously
          defaulted on its obligation to us. There are no other limitations to our
          rights
          to indemnification.
  Insurance
  The
          assets that the Predecessor sold to
          us included its insurance policies and other agreements and contracts.
          The
          policies provide coverage for liability accruing during the periods for
          which
          premiums were paid.  The Predecessor was formed in 1940. Copies of
          policies are available for each year beginning in 1970 and ending with
          the
          closing under the purchase agreement in 1999. Copies of policies for the
          period
          from 1940 to 1969 are not available.
  Insurance
          companies acknowledge
          coverage for potential asbestos claims under certain of these
          policies.  Insurance companies under additional policies have reserved
          their right to deny coverage but have continued to defend and indemnify
          the
          Predecessor and the Company under the contested policies.
  There
          are periods during the years from
          1940 to 1999 in which our Predecessor did not have coverage for potential
          asbestos claims.  Subject to litigation, insurance companies may
          maintain that the existence of these periods’ results in coverage for only a
          portion of a particular injury that varies with the period during which
          there
          was asbestos coverage relating to the injury, and that the balance of any
          settlement or judgment is to be paid by the insured.  To date, no
          insurance company has claimed any contribution for a gap in coverage except
          for
          a claim for $159.64 made by one insurance company to the Predecessor in
          1995.  The Predecessor asserted that it had no obligation to pay this
          amount and did not make any payment.
  Insurance
          companies have to date
          defended us and the Predecessor, and have paid all settlement amounts and
          defense costs.  Except for $159.64 referred to above, the insurance
          companies have not requested any payments from us or from the
          Predecessor.
  Our
          Universal subsidiary has not
          engaged in the sale of asbestos products since its formation in 1997. Its
          product liability policies for all years since 1998 exclude asbestos
          claims.
  10
 *Table
              of Contents*
  General
  Regardless
          of indemnification and
          insurance coverage, we do not in any event consider our Company to be liable
          for
          the asbestos-based lawsuits that name us or for any other claim that arises
          as a
          result of actions or omissions by Predecessor companies. We expressly disclaimed
          the assumption of any liabilities when we purchased the assets of the
          Predecessor. It is our opinion that the existing asbestos litigation will
          not
          have a material adverse effect on the Company.  Nevertheless, we could
          be materially and adversely affected if we are held liable for substantial
          asbestos claims or if the Company incurs substantial legal or settlement
          costs.
          This material and adverse effect would occur if indemnitors fail to honor
          their
          indemnification agreements and insurance is not available either because
          policy
          limits are exceeded, or because insurance companies successfully claim
          limitations on their liabilities by reason of gaps in coverage or
          otherwise.
  Since
          we do not regard as likely the
          potential payment of any asbestos-based claim, we have not accrued any
          balance
          for any period relating to asbestos claims, and we have not recorded any
          amount
          for asbestos claims for any period in any of our financial
          statements.
  Other
          Litigation
  The
          Company is involved in other
          litigation incidental to the operation of its business.  The Company
          vigorously defends all matters in which the Company or its subsidiaries
          are
          named defendants and, for insurable losses, maintains significant levels
          of
          insurance to protect against adverse judgments, claims or
          assessments.  Although the adequacy of existing insurance coverage or
          the outcome of any legal proceedings cannot be predicted with certainty,
          the
          Company does not believe the ultimate liability associated with any claims
          or
          litigation will have a material impact to its financial condition or results
          of
          operations.
  **Item
          4.Submission of Matters to a Vote of Security
          Holders**
  None.
  11
 *Table
              of Contents*
  **PART
          II**
  **Item
          5.Market for the Registrant’s Common Stock,
          Convertible PreferredStock and Related Stockholder
          Matters**
  (a)  Price
          Range of Common Stock and Convertible Preferred Stock
  From
          July 11, 2002 through March 30,
          2004, the Company’s common stock was traded on the Over the Counter (OTC) – Pink
          Sheets market. Commencing March 31, 2004, the Company’s common stock and
          convertible preferred stock were traded on the Over the Counter (OTC)-Bulletin
          Board market.  The following table sets forth the quarterly high and
          low bid prices during 2006 and 2005.  The quotations set forth below
          represent inter-dealer quotations, which exclude retail markups, markdowns
          and
          commissions and do not necessarily reflect actual transactions.
 Common
                    Stock
                
                
                Convertible
                    Preferred Stock2006
                
                High
                
                
                Low
                
                
                High
                
                
                LowFirst
                    Quarter
                
                $
                2.38
                
                
                $
                1.95
                
                
                $
                2.40
                
                
                $
                1.79Second
                    Quarter
                
                
                3.00
                
                
                
                2.10
                
                
                
                2.85
                
                
                
                2.10Third
                    Quarter
                
                
                2.50
                
                
                
                1.85
                
                
                
                2.30
                
                
                
                2.00Fourth
                    Quarter
                
                
                2.35
                
                
                
                1.70
                
                
                
                2.40
                
                
                
                1.80
 
 Common
                    Stock
                
                
                Convertible
                    Preferred Stock2005
                
                High
                
                
                Low
                
                
                High
                
                
                LowFirst
                    Quarter
                
                $
                1.65
                
                
                $
                1.40
                
                
                $
                1.68
                
                
                $
                1.48Second
                    Quarter
                
                
                1.66
                
                
                
                1.35
                
                
                
                1.60
                
                
                
                1.32Third
                    Quarter
                
                
                2.70
                
                
                
                1.50
                
                
                
                2.75
                
                
                
                1.46Fourth
                    Quarter
                
                
                2.75
                
                
                
                2.00
                
                
                
                2.55
                
                
                
                1.85
  (b)  Approximate
          number of common and convertible preferred stockholders:
  Title
                    of Class
                
                Approximate
                    Number of Record Holders
                  (As
                    of March 1, 2007)Common
                    stock par value $.05 per share
                
                293Convertible
                    preferred stock par value $.05 per share
                
                851
  12
 *Table
              of Contents*
  (c)  Dividends
  The
          Company does not contemplate common
          stock dividend payments in the near future and is restricted from paying
          any
          dividends under its credit facility.
  (d)  Securities
          Authorized for Issuance Under Equity Compensation Plans
  The
          following table sets forth as of
          December 31, 2006 certain information regarding the securities authorized
          for
          issuance under the 1996 Stock Incentive Plan and the Colonial Commercial
          Corp.
          2006 Stock Plan, as of December 31, 2006.
 Equity
                    Compensation Plan InformationNumber
                    of securities to be issued upon exercise of outstanding options,
                    warrants
                    and rights
                
                
                Weighted-average
                    exercise price of outstanding options, warrants and rights
                
                
                Number
                    of securities remaining available for future issuance under equity
                    compensation plans1996
                    Stock Incentive Plan:Equity
                    compensation plans approved by security holders
                
                
                74,000
                
                
                $
                0.25
                
                
                
                0Equity
                    compensation plans not approved by security holders
                
                
                0
                
                
                $
                0.00
                
                
                
                0Colonial
                    Commercial Corp. 2006 Stock Plan:Equity
                    compensation plans approved by security holders
                
                
                100,000
                
                
                $
                1.85
                
                
                
                900,000Equity
                    compensation plans not approved by security holders
                
                
                0
                
                
                $
                0.00
                
                
                
                0Total
                
                
                174,000
                
                
                $
                1.17
                
                
                
                900,000
  In
          June
          1996, the Company adopted the 1996 Stock Option Plan (the “1996 Plan”) to grant
          options to key employees and other persons who render service (non-employee)
          to
          the Company.  The plan expired on December 31, 2005.
  At
          December 31, 2006, a total of 74,000
          options were outstanding under the Company’s 1996 Stock Option Plan, which have
          expiration dates ranging from 2009 to 2013.
  On
          September 29, 2006, the Company
          adopted the Colonial Commercial Corp. 2006 Stock Plan, (the “2006
          Plan”).  The 2006 Plan enables the Company to grant equity and
          equity-linked awards to our Directors, officers, employees and other persons
          who
          provide services to the Company.  The 2006 Plan is intended to allow
          us to provide incentives that will (1) strengthen the desire of highly
          competent
          persons to provide services to us and (2) further stimulate their efforts
          on our
          behalf.
  On
          December 6, 2006, (the “Grant
          Date”), 100,000 options, having an expiration date in 2016, were granted under
          the Company’s 2006 Plan, of which 40,000 options vested and became exercisable
          immediately and 20,000 options vest and become exercisable on each of the
          first
          three anniversaries of the Grant Date.  As of December 31, 2006 all
          100,000 options were outstanding.  On January 22, 2007, Phillip Siegel
          resigned as a Director and his 15,000 options that would have vested on
          each of
          the first three anniversaries of the Grant Date were forfeited and he has
          sixty
          days from the date of his resignation to exercise his 10,000 vested
          options.
  13
 *Table
              of Contents*
  **Item
          6.Selected
          Financial
          Data**
  Years
                        Ended December 31,Restated
                    
                    
                    As
                      Previously
                      Reported
                    
                    
                    Restated
                    
                    
                    As
                      Previously
                      Reported
                    
                    
                    Restated
                    
                    
                    As
                      Previously
                      Reported
                    
                    
                    Restated
                    
                    
                    As
                      Previously
                      Reported2006
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2005
                    
                    
                    2004
                    
                    
                    2004
                    
                    
                    2003
                    
                    
                    2003
                    
                    
                    2002Sales
                    
                    $
                    71,494,652
                    
                    
                    $
                    71,494,652
                    
                    
                    $
                    66,690,945
                    
                    
                    $
                    66,690,945
                    
                    
                    $
                    61,454,128
                    
                    
                    $
                    61,454,128
                    
                    
                    $
                    44,671,136
                    
                    
                    $
                    44,671,136
                    
                    
                    $
                    36,998,800Operating
                        income
                    
                    
                    2,017,082
                    
                    
                    
                    2,017,082
                    
                    
                    
                    2,347,645
                    
                    
                    
                    2,400,424
                    
                    
                    
                    1,580,076
                    
                    
                    
                    1,717,812
                    
                    
                    
                    1,167,591
                    
                    
                    
                    1,296,597
                    
                    
                    
                    226,567Income
                        (loss) from continuing operations
                    
                    
                    815,772
                    
                    
                    
                    815,772
                    
                    
                    
                    2,062,852
                    
                    
                    
                    2,115,631
                    
                    
                    
                    1,523,420
                    
                    
                    
                    1,661,156
                    
                    
                    
                    1,191,257
                    
                    
                    
                    1,320,263
                    
                    
                    
                    (106,310
                    )Income
                        from operations of discontinued segment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,300,695
                    (1)Net
                        income
                    
                    $
                    815,772
                    
                    
                    $
                    815,772
                    
                    
                    $
                    2,062,852
                    
                    
                    $
                    2,115,631
                    
                    
                    $
                    1,523,420
                    
                    
                    $
                    1,661,156
                    
                    
                    $
                    1,191,257
                    
                    
                    $
                    1,320,263
                    
                    
                    $
                    3,194,385Income
                        (loss) per common  share:Basic:Continuing
                        operations
                    
                    $
                    .18
                    
                    
                    $
                    .18
                    
                    
                    $
                    .48
                    
                    
                    $
                    .49
                    
                    
                    $
                    .45
                    
                    
                    $
                    .49
                    
                    
                    $
                    .60
                    
                    
                    $
                    .67
                    
                    
                    $
                    (0.07
                    )Income
                        on discontinued operation
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2.06Net
                        income per common share
                    
                    $
                    .18
                    
                    
                    $
                    .18
                    
                    
                    $
                    .48
                    
                    
                    $
                    .49
                    
                    
                    $
                    .45
                    
                    
                    $
                    .49
                    
                    
                    $
                    .60
                    
                    
                    $
                    .67
                    
                    
                    $
                    1.99Diluted:Continuing
                        operations
                    
                    $
                    .16
                    
                    
                    $
                    .15
                    
                    
                    $
                    .40
                    
                    
                    $
                    .40
                    
                    
                    $
                    .34
                    
                    
                    $
                    .36
                    
                    
                    $
                    .34
                    
                    
                    $
                    .38
                    
                    
                    $
                    (0.07
                    )Income
                        on discontinued  operation
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2.06Net
                        income per common share
                    
                    $
                    .16
                    
                    
                    $
                    .15
                    
                    
                    $
                    .40
                    
                    
                    $
                    .40
                    
                    
                    $
                    .34
                    
                    
                    $
                    .36
                    
                    
                    $
                    .34
                    
                    
                    $
                    .38
                    
                    
                    $
                    1.99
  14
 *Table
              of Contents*
  December
                        31,Restated
                    
                    
                    As
                      Previously
                      Reported
                    
                    
                    Restated
                    
                    
                    As
                      Previously
                      Reported
                    
                    
                    Restated
                    
                    
                    As
                      Previously
                      Reported2006
                    
                    
                    2005
                    
                    
                    2005
                    
                    
                    2004
                    
                    
                    2004
                    
                    
                    2003
                    
                    
                    2003
                    
                    
                    2002Total
                        assets
                    
                    $
                    28,517,944
                    
                    
                    $
                    27,217,854
                    
                    
                    $
                    27,537,375
                    
                    
                    $
                    24,248,516
                    
                    
                    $
                    24,515,258
                    
                    
                    $
                    20,489,981
                    
                    
                    $
                    20,618,987
                    
                    
                    $
                    13,686,842Current
                        liabilitiesBorrowings
                        under credit facility
                    
                    
                    13,615,696
                    
                    
                    
                    11,745,985
                    
                    
                    
                    11,745,985
                    
                    
                    
                    12,325,209
                    
                    
                    
                    12,325,209
                    
                    
                    
                    12,232,030
                    (1)
                    
                    
                    12,232,030
                    (1)
                    
                    
                    10,350,889
                    (1)Other
                    
                    
                    6,832,504
                    
                    
                    
                    8,216,989
                    
                    
                    
                    8,216,989
                    
                    
                    
                    6,617,377
                    
                    
                    
                    6,617,377
                    
                    
                    
                    7,089,276
                    (2)
                    
                    
                    7,089,276
                    (2)
                    
                    
                    3,953,063
                    (2)Long-term
                        liabilities, less current obligations
                    
                    
                    1,317,394
                    
                    
                    
                    1,400,834
                    
                    
                    
                    1,400,834
                    
                    
                    
                    1,398,774
                    
                    
                    
                    1,398,774
                    
                    
                    
                    326,700
                    
                    
                    
                    326,700
                    
                    
                    
                    64,775
  (1)
                The
                    amounts shown in the table as “Borrowings under Credit Facility,” as of
                    December 31, 2003 and December 31, 2002, includes $2,500,000
                    which
                    Colonial Commercial Corp. and Universal agreed to pay to their
                    lending
                    bank in consideration of the bank releasing Colonial Commercial
                    Corp. and
                    Universal from their guarantees to the bank of an additional
                    $3,300,695 of
                    Atlantic Hardware & Supply Corporation’s (“Atlantic”) line of
                    credit.  Atlantic, a wholly owned subsidiary of the Company, is
                    a discontinued operation with no assets.  The release from the
                    $3,300,695 of the guarantee resulted in the recognition of income
                    from
                    discontinued operations in 2002.
  (2)
                Amount
                    includes $219,007 of contingent liabilities of Atlantic.  This
                    liability was settled in June 2004.
  **Item
          7.Management’s Discussion and Analysis of Financial
          Condition and Results of Operations**
  Forward-Looking
          Statements
  The
          following material contains
          forward-looking statements relating to such matters as anticipated financial
          performance and business prospects. When used in this Report, the words
          “anticipates,” “expects,” “believes,” “may,” “intends” and similar expressions
          are intended to be among the statements that identify forward-looking
          statements.  From time to time, the Company may also publish
          forward-looking statements.  The Private Securities Litigation Reform
          Act of 1995 provides a safe harbor for forward-looking
          statements.  Forward-looking statements involve risks and
          uncertainties, including, but not limited to, the consummation of certain
          events
          referred to in this report, the availability of financing, technological
          changes, competitive factors, maintaining customer and vendor relationships,
          inventory obsolescence and availability, and other risks detailed in the
          Company’s periodic filings with the Securities and Exchange Commission, which
          could cause the Company’s actual results and experience to differ materially
          from the anticipated results or other expectations expressed in the Company’s
          forward-looking statements.
  15
 *Table
              of Contents*
  Critical
          Accounting Policies
  The
          accounting policies below are
          critical to the Company’s business operations and the understanding of results
          of operations. The Company’s discussion and analysis of its financial condition
          and results of operations are based upon the Company’s consolidated financial
          statements, which have been prepared in accordance with accounting principles
          generally accepted in the United States. The preparation of these financial
          statements requires the Company to make estimates and assumptions that
          affect
          the reported amounts of assets and liabilities, disclosure of contingent
          assets
          and liabilities as the date of the consolidated financial statements and
          the
          reported amount of revenue and expenses during the reporting period. The
          Company
          bases its estimates on historical experience and on various other factors
          that
          are believed to be reasonable under the circumstances, the results of which
          form
          the basis for making judgments about the carrying values of asset and
          liabilities that are not readily apparent from other sources. Actual results
          may
          differ from these estimates under different assumptions or
          conditions.
  Revenue
          for the Company primarily
          consists of sales of heating, ventilation and air conditioning equipment,
          climate control systems and plumbing fixtures and supplies. The Company
          recognizes revenue after it receives a purchase order with a fixed determinable
          price from the customer and shipment of products has occurred in accordance
          with
          the shipping terms.  There are no further obligations on the part of
          the Company subsequent to revenue recognition, except for returns of defective
          products from the Company’s customers, which are covered under the
          manufacturer’s warranty.  The Company will receive a vendor credit
          from the manufacturer related to the warranted product in question, at
          which
          time credits are issued to the customer.  The Company does not provide
          a warranty on products sold; rather the warranty is provided by the
          manufacturer.
  The
          Company maintains an allowance for
          doubtful accounts for estimated losses resulting from the inability of
          its
          customers to make required payments. The Company establishes and monitors
          the
          allowance for doubtful accounts based on the credit risk of specific customers,
          customer concentrations, historical trends and other information. The Company
          had accounts receivable of $9,281,344 and an allowance for doubtful accounts
          of
          $212,043 as of December 31, 2006.  Although the Company believes its
          allowance is sufficient, if the financial condition of the Company’s customers
          were to deteriorate, resulting in an impairment of their ability to make
          payments, additional allowances would be required.
  The
          Company writes down its inventories
          for estimated slow moving and obsolete goods in accordance with the lower
          of
          cost or market value, based upon assumptions about future demand and market
          conditions. A significant sudden increase in the demand for the Company’s
          products could result in a short-term increase in the cost of inventory
          purchases, while a significant decrease in demand could result in an increase
          in
          the amount of excess inventory quantities on-hand. Additionally, the Company’s
          estimates of future product demand may prove to be inaccurate, in which
          case the
          Company may have understated or overstated the write-down required for
          excess
          and obsolete inventory.
  16
 *Table
              of Contents*
  Under
          Statement of Financial Accounting
          Standards No. 142, goodwill is reviewed at least annually for
          impairment.  In assessing the recoverability of the Company’s
          goodwill, the Company must make assumptions regarding estimated future
          cash
          flows and other factors to determine the fair value of the respective assets
          and
          liabilities of the reporting unit.  Upon adoption and again as a
          result of the Company’s annual impairment test, there was no indication of
          impairment for goodwill acquired in prior business combinations.  If
          the Company’s estimates or its related assumptions change in the future, the
          Company may be required to record impairment charges related to its
          goodwill.  Goodwill and other intangible assets amounting to
          $1,628,133 and $3,500 at December 31, 2006, respectively, consist of assets
          arising from acquisitions.
  The
          Company has accounted for, and
          currently accounts for, income taxes in accordance with Statement 109
“Accounting for Income Taxes.”  This statement establishes financial
          accounting and reporting standards for the effects of income taxes that
          result
          from an enterprise’s activities during the current and preceding
          years.  It requires an asset and liability approach for financial
          accounting and reporting of income taxes.  The realization of future
          tax benefits of deductible temporary differences and operating loss or
          tax
          credit carryforwards will depend on whether the Company will have sufficient
          taxable income of an appropriate character within the carryback and carryforward
          period permitted by the tax law to allow for utilization of the deductible
          amounts and carryforwards. Without sufficient taxable income to offset
          the
          deductible amounts and carryforwards, the related tax benefits will expire
          unused. The Company evaluates both positive and negative evidence in making
          a
          determination as to whether it is more likely than not that all or some
          portion
          of the deferred tax asset will not be realized.  As of December 31,
          2006, the Company had a deferred tax valuation allowance of approximately
          $9,000,000.
  Comparison
          of Year Ended December 31, 2006 with Year Ended December 31,
          2005
  Sales
          increased by 7.2%, or $4,803,707,
          to $71,494,652 for the year ended December 31, 2006 from $66,690,945 for
          the
          same period in 2005.  The increase in sales is primarily a result of
          increased market penetration at two of the Company’s subsidiaries, an increase
          in general industry pricing, and increased sales of additional hydronic
          heating
          product lines.  The increases in these areas were offset by weaknesses
          in sales of heating equipment, parts and accessories related to an unusually
          warm November and December, as well as weaknesses in sales of commercial
          control
          systems.
  Gross
              profit increased by 6.5%, or
              $1,306,809, to $21,437,206 for the year ended December 31, 2006 from
              $20,130,397
              for the same period in 2005.  Gross profit expressed as a percentage
              of sales decreased by 0.2% to 30.0% in 2006 compared to 30.2% for the
              comparable
              period in 2005.  The lower gross profit expressed as a percentage of
              sales was caused by a decrease in sales of parts for heating systems
              due to a
              warmer November and December.  The sale of parts usually commands
              higher margins than equipment sales.  Cost of sales excludes the
              distribution costs of incoming freight, purchasing, receiving, inspection,
              warehousing and handling costs, as these costs are included in our
              selling,
              general and administrative expenses.  Our gross margins may not be
              comparable to those of other entities since some entities include these
              distribution costs in the cost of sales.  These distribution costs
              were $431,780 and $421,248 for the years ended December 31, 2006 and
              2005,
              respectively.
  17
 *Table
                of Contents*
  Operating
                income decreased by 14.1%, or $330,563, to $2,017,082 for the year
                ended
                December 31, 2006 from $2,347,645 for the same period in 2005.  This
                percentage decrease in operating income reflects the effect of the
                difference
                between the increase in gross profit of 6.5% compared to the increase
                in
                selling, general and administrative expenses of 9.2%.  The increase in
                selling, general and administrative expenses was $1,637,372 to $19,420,124
                for
                the year ended December 31, 2006 from $17,782,752 for the same period
                in
                2005.  This was caused by increased expenses for additional personnel
                to improve customer service, and added cost for increased health
                insurance,
                gasoline, utility expenses and decreasing sales in our heating replacement
                parts
                and commercial control systems business.  Staffing costs increased by
                $802,077, while costs for trucking, fuel, and facilities increased
                by
                $197,670.
  Other
                income increased by 1.9%, or
                $5,269, to $277,866 for the year ended December 31, 2006 from $272,597
                for the
                same period in 2005.  This increase is primarily the result of an
                increase in service charges collected from customers’ past due invoices in the
                year ended December 31, 2006.  Interest expense, net increased by
                29.7%, or $310,331, to $1,354,785 for the year ended December 31,
                2006 from
                $1,044,454 for the same period in 2005.  The interest expense increase
                is the result of increasing interest rates and increased borrowings
                under the
                credit line to support higher inventory levels and accounts receivable
                related
                to increased sales and higher inventory levels.  The revolving credit
                line bears interest at .25% below prime rate, which was 8.0% at December
                31,
                2006 compared to 7.25% at December 31, 2005.  As a result, pre tax
                income decreased by 40.3%, or $635,625, to $940,163 for the year
                ended December
                31, 2006 from $1,575,788 for the same period in 2005.
  The
                Company’s net income decreased by
                60.5%, or $1,247,080, to $815,772 for the year ended December 31,
                2006, compared
                to net income of $2,062,852 for the same period in 2005.  This
                decrease in net income was caused by the decrease in pre-tax income
                of $635,625,
                as stated above, in addition to the effect of the inclusion of a
                deferred tax
                benefit in the year ended December 31, 2005 in the amount of $641,500
                with no
                benefit recognized in the year ended December 31, 2006.  In 2005, the
                tax benefit resulted from extending the tax benefit calculation from
                a two year
                earnings projection to a three year earnings projection, due to improved
                earnings predictability.
 Comparison
          of Year Ended December 31, 2005 with Year Ended December 31,
          2004
 The
                Company’s net income increased 35.4% to $2,062,852 for the year ended December
                31, 2005, compared to net income of $1,523,420 for the same period
                in
                2004.
  Sales
              increased 8.5% to $66,690,945 for
              the year ended December 31, 2005 from $61,454,128 for the same period
              in
              2004.  The increase in sales is primarily a result of increased market
              penetration at two of the Company’s subsidiaries, an increase in general
              industry pricing, above average temperatures during the summer cooling
              season,
              and a continuing strong demand for residential and light commercial
              HVAC
              products and plumbing fixtures and supplies.
  Gross
                profit increased 10.3% to
                $20,130,397 for the year ended December 31, 2005 from $18,246,411
                for the same
                period in 2004.  The increase in gross profit is primarily the result
                of the mentioned increases in sales, and the Company’s improved ability to
                purchase products at more favorable pricing. Gross profit expressed
                as a
                percentage of sales increased to 30.2% in 2005 compared to 29.7%
                for the
                comparable period in 2004.  Cost of sales excludes the distribution
                costs of incoming freight, purchasing, receiving, inspection, warehousing
                and
                handling costs, as these costs are included in our selling, general
                and
                administrative expenses.  Our gross margins may not be comparable to
                those of other entities since some entities include these distribution
                costs in
                the cost of sales.  These distribution costs were $421,248 and
                $325,109 for the years ended December 31, 2005 and 2004,
                respectively.
  18
 *Table
                  of Contents*
  Selling,
          general and administrative
          expenses and cost of operations increased 6.7% to $17,782,752 for the year
          ended
          December 31, 2005 from $16,666,335 for the same period in 2004.  This
          increase is primarily a result of costs associated with the increased sales
          growth, increased utility and fuel costs, general cost increases, increased
          accounting fees, and an increase of certain variable expense items based
          on
          sales, such as salaries, commissions, marketing expenses and vehicle
          costs.
  Other
          income decreased by $47,762 to
          $272,597 for the year ended December 31, 2005 from $320,359 for the same
          period
          in 2004.  This decrease is primarily the result of a $58,000 gain from
          the settlement of a contingent liability of a discontinued operation recognized
          in 2004 with no such gain in 2005, partially offset by a $15,994 increase
          in
          service charges collected for the year ended December 31, 2005.
  Interest
          expense, net increased 19.3%
          to $1,044,454 for the year ended December 31, 2005 from $875,683 for the
          same
          period in 2004.  This increase is primarily the result of eight
          increases in prime rate, raising the rate from 5.25% on December 31, 2004
          to
          7.25% on December 31, 2005.
  Income
          tax benefit decreased by $11,604 to a net tax benefit of $487,064 for the
          year
          ended December 31, 2005 from a $498,668 net tax benefit for the same period
          in
          2004.  In accordance with FASB Statement Number 109, the Company
          recorded a deferred tax benefit of $641,500 for the year ended December
          31, 2005
          in order to recognize the expected utilization of available operating loss
          carryforwards, compared to $645,600 in the year ended December 31,
          2004.  In addition, the Company recorded a state tax provision of
          $170,675 for the year ended December 31, 2005 compared to $137,932 for
          the year
          ended December 31, 2004.
  Liquidity
          and Capital Resources
  Credit
          Facility
  The
          Company has a total secured loan facility of $15,000,000 pursuant to a
          credit
          and security agreement (“Agreement”) with Wells Fargo Business Credit, Inc.
          (“Wells”) consisting of a revolving line of credit including a $2,000,000
          two-year term loan.  Final payment of the term loan was made in July
          of 2006.  The revolving credit line bears interest at .25% below
          prime, and the term loan bore interest at .50% above prime.  On May
          11, 2006 the Company received a $500,000 overadvance, payable in equal
          installments of $12,500 each business day commencing July 11,
          2006.  The overadvance was paid in full on September 5,
          2006.  Effective June 23, 2006, the Agreement was amended to extend
          the maturity date from August 1, 2009 to August 1, 2010.  The facility
          consists of a $15,000,000 revolving line of credit which expires on August
          1,
          2010.  The Company has standby letters of credit, which expire on July
          31, 2007 and September 1, 2007, that reduce the credit facility by $300,000
          and
          $100,000, respectively, and additional reserves determined by the bank
          that
          reduce the credit facility by $100,000.  Availability under the
          revolving credit line is determined by a percentage of available assets
          as
          defined in the Agreement, less letters of credit and reserves, and was
          $142,216
          as of December 31, 2006.  The balance outstanding under the revolving
          line of credit was $13,615,696 as of December 31, 2006.  The interest
          rate on the revolving credit facility, as of December 31, 2006 was
          8.0%.
  19
 *Table
              of Contents*
  Substantially
          all of the assets of the Company, as well as a pledge of the stock of Colonial
          Commercial Corp.’s operating subsidiaries, collateralize the
          loans.  The facility contains covenants relating to the financial
          condition of the Company, its business operations, and restricts the payment
          of
          dividends, subordinated debt, purchase of securities, and capital
          expenditures.  The Company must maintain a tangible net worth of
          approximately $3.8 million for the fiscal year ending December 31,
          2006.  In addition, the Company is required to maintain certain levels
          of net income and cash flows, as defined in the agreement.  All loans
          are due on demand by the bank, and accordingly, have been classified as
          current
          liabilities.  In the event that Mr. Pagano no longer performs the
          duties of the President of Universal or the Vice President of RAL or American
          for any reason other than death or disability, the Company will be considered
          in
          default of its credit agreement with Wells Fargo Business Credit, Inc.
          unless a
          waiver is obtained.
  The
          Company believes that the credit facility is sufficient to finance its
          current
          operating needs.  However, the business of the Company would be
          materially and adversely affected if the bank demands payment of the loan
          and
          the Company is unable to refinance the loan.
  As
          of
          December 31, 2006, the Company had $482,251 in cash compared with $613,456
          at
          December 31, 2005.
  Net
          cash
          used in operating activities was $1,409,274 for the year ended December
          31,
          2006.  The net cash used in operating activities for the 2006 period is
          primarily a result of net income of $815,772 and non-cash charges of $768,545,
          offset by cash used in operating assets and liabilities of $2,993,591.
 The
          increase in accounts receivable of $701,615 was a direct correlation to
          the
          increase in sales compared to the prior year.  Accounts payable
          decreased by $1,272,786 as a reflection of the reduced purchase requirements
          for
          the warmer months of November and December and $400,000 additional cash
          that
          became available as a result of the final payment of the term loan in July
          of
          2006.
  Cash
          flows used in investing activities were $450,129 during the year ended
          December
          31, 2006 due to $300,504 in purchases of equipment and $149,625 in the
          purchase
          of Speed Queen assets from Goldman Associates of NY, Inc.
  Cash
          flows provided by financing activities of $1,728,198 consisted of $2,432,688
          in
          borrowings under the credit facility-revolving credit, $500,000 in borrowings
          under the credit facility-overadvance, $8,000 received from the exercise
          of
          stock options and $13,073 from the issuance of notes payable.  Cash
          flows used in financing activities consisted of $562,977 for repayments
          under
          the credit facility-term loan, $500,000 repayments under the credit
          facility-overadvance and $162,586 for repayments on notes payable.
  Equity
          Transactions
  During
          the year ended December 31,
          2006, the Company issued 32,000 shares of common stock pursuant to the
          exercise
          of stock options.  On April 3, 2006, Ronald H. Miller obtained 12,000
          shares of common stock, by exercising 12,000 outstanding stock
          options.  Mr. Miller is a Director of the Company. On April 17, 2006,
          Jack Rose obtained 12,000 shares of common stock, by exercising 12,000
          outstanding stock options.  Mr. Rose was a Director of the Company at
          the time of the transaction. On May 16, 2006, a non-executive employee of
          the Company obtained 4,000 shares of common stock by exercising 4,000
          outstanding stock options. On May 31, 2006, a non-executive employee of the
          Company obtained 4,000 shares of common stock by exercising 4,000 outstanding
          stock options.
  20
 *Table
              of Contents*
  The
          Company’s reports on Form 8-K and
          Form 8-K/A filed on April 21, 2006 and April 25, 2006, respectively, refer
          to
          sales of common stock by former Directors of the Company to two current
          Directors and other investors.  Concurrently with these transactions,
          Messrs. Bernard Korn, William Koon, Jack Rose and
          Carl Sussman resigned as Directors of the Company, and Mr. Korn also
          resigned as Chief Executive Officer and Chairman of the Board.
  During
          the year ended December 31,
          2006, holders of a total of 17,221 shares of redeemable convertible preferred
          stock converted these shares into 17,221 shares of Common Stock.  As
          of December 31, 2006, the number of convertible preferred shares outstanding
          was
          467,500.  As a result of this reduction in the number of outstanding
          shares of convertible preferred stock, commencing at the 2006 annual meeting
          of
          stockholders, the holders of common and convertible preferred stock vote
          together as one class to elect one class of Directors.
  Contractual
          Obligations:
  The
          following table represents certain
          contractual commitments associated with operating agreements, obligations
          to
          financial institutions and other long-term debt obligations as of December
          31,
          2006:
  Payment
                    Due by Period (in thousands)Total
                
                
                Less
                    than
                  1
                    Year
                
                
                2-3
                    Years
                
                
                4-5
                    Years
                
                
                Over
                  5
                    YearsOperating
                    leases
                
                $
                13,438
                
                
                $
                3,288
                
                
                $
                4,524
                
                
                $
                2,679
                
                
                $
                2,947Compensation
                    agreements
                
                
                2,460
                
                
                
                770
                
                
                
                1,090
                
                
                
                600
                
                
                
                -Notes
                    payable
                
                
                1,454
                
                
                
                137
                
                
                
                1,311
                
                
                
                6
                
                
                
                -Notes
                    payable interest
                
                
                214
                
                
                
                127
                
                
                
                87
                
                
                
                -
                
                
                
                -Line
                    of credit
                
                
                13,616
                
                
                
                13,616
                
                
                
                -
                
                
                
                -
                
                
                
                -Line
                    of credit interest
                
                
                1,089
                
                
                
                1,089
                
                
                
                -
                
                
                
                -
                
                
                
                -Totals
                
                $
                32,271
                
                
                $
                19,027
                
                
                $
                7,012
                
                
                $
                3,285
                
                
                $
                2,947
  Notes
          payable carry a fixed interest percentage rate per annum, with the exception
          of
          a $750,000 note that accrues interest at the prime rate.  “Notes
          payable interest” in the table assumes an average annual prime rate of
          8.25%.  The prime rate as of December 31, 2006 was
          8.25%.  See Note 6, Notes Payable, of the Financial Statements for the
          terms of these notes.
  “Line
          of credit” in the table is shown
          as a less than one year obligation because the lending bank may demand
          payment
          at any time.  The line of credit consists of a revolving credit line
          that bears interest at .25% below prime.  “Line of credit interest” in
          the table assumes that the principal amount outstanding on the line is
          paid in
          full on December 31, 2007, that the principal amount to be repaid on that
          date
          will be $13,616,000 (which is the principal amount that was outstanding
          on
          December 31, 2006), and assumes that the average prime rate will be 8.25%
          in
          2007.  The prime rate was 8.25% as of December 31,
          2006.  See Note 5, Financing Arrangements, of the Financial Statements
          for the terms of the line of credit.
  21
 *Table
              of Contents*
  Impact
          of Inflation and Seasonality
  To
          date, inflation has had a minor
          impact on the Company’s operations causing limited price increases in certain
          product lines. The Company’s business is affected by significant outdoor
          temperature swings.  Demand related to the residential central air
          conditioning replacement market is highest in the second and third quarters
          with
          demand for heating equipment usually highest in the fourth quarter.
  **Item
          7A.Quantitative and Qualitative Disclosures
          About Market Risk**
  Market
          risk represents the risk of changes in value of a financial instrument,
          derivative or non-derivative, caused by fluctuations in interest rates,
          foreign
          exchange rates and equity prices.  The Company has no financial
          instruments that give it exposure to foreign exchange rate or equity price
          risk.
  The
          Company’s pre-tax earnings and
          cash flows are exposed to changes in interest rates as all borrowings under
          its
          credit facility bear interest based on the prime rate less .25%, and the
          $750,000 note to Goldman Associates of NY, Inc. bears interest at the prime
          rate.  A hypothetical 10% adverse change in such rates would reduce
          the pre-tax earnings and cash flow for the year ended December 31, 2006
          by
          approximately $115,113 over a one-year period, assuming the borrowing level
          remains consistent with the outstanding borrowings as of December 31,
          2006.  The fair value of the borrowings under the credit facility is
          not affected by changes in market interest rates.
  The
          Company’s remaining
          interest-bearing obligations are at fixed rates of interest and as such
          do not
          expose pre-tax earnings and cash flows to changes in market interest rates.
          The
          change in fair value of the Company’s fixed rate obligations resulting from a
          hypothetical 10% adverse change in interest rates would not be
          material.
  **Item
          8.Financial Statements and Supplementary Data**
  The
          consolidated financial statements
          of the Company, together with the Report of Independent Registered Public
          Accounting Firm thereon of Weiser LLP, appear herein. See Index to Consolidated
          Financial Statements, appearing on page F-1.
  **Item
          9.Changes In and Disagreements With Accountants
          on Accounting and Financial Disclosure**
  None
  **Item
          9A.Controls and Procedures**
  Evaluation
          of Disclosure Controls and Procedures
  As
              of the end of the period covered by
              this report, the Company carried out an evaluation under the supervision
              and
              with the participation of our management, including our Chief Executive
              Officer
              and Chief Financial Officer, of the effectiveness of the design and
              the
              operation of our “disclosure controls and procedures” (as such term is defined
              in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of
              December 31,
              2006 (“Evaluation Date”). Based on this evaluation, our Chief Executive Officer
              and Chief Financial Officer concluded that, as of the Evaluation Date,
              the
              disclosure controls and procedures were not reasonably designed and
              effective to
              ensure that (i) information required to be disclosed by us in the reports
              we
              file or submit under the Securities Exchange Act of 1934 was recorded,
              processed, summarized and reported within the time periods specified
              in the
              SEC’s rules and forms, and (ii) such information was accumulated and
              communicated to our management, including our Chief Executive Officer
              and Chief
              Financial Officer, as appropriate to allow timely decisions regarding
              required
              disclosure.
  22
 *Table
                of Contents*
  On
                May
                21, 2007, following consultation with, and upon recommendation of
                the Company’s
                management and Audit Committee, the Board of Directors of the Company
                determined
                that certain vendor rebates should be recorded as an adjustment to
                the cost of
                the vendors’ product and included as a reduction of cost of sales when
                recognized in the income statement.  Previously, some vendor rebates
                were recognized as income, not as a reduction of costs when sold.  The
                Company adjusted certain vendor rebates using the cumulative effect
                transition
                method pursuant to the guidance contained in SAB 108.  Based upon this
                evaluation, the Company concluded that as of December 31, 2006, its
                disclosure
                controls and procedures in connection with the interpretation of
                accounting
                pronouncements were not effective.
  On
                July 23, 2007, the Audit Committee
                and management of the Company concluded that the Company had improperly
                applied
                the guidance in SAB 108, specifically, the effect on materiality
                of the
                incorrect treatment of vendor rebates on net income for 2004.
  Additionally,
                the Audit Committee and
                management of the Company concluded that per SFAS 128 convertible
                note interest,
                net of taxes, should be added back to net income when calculating
                diluted
                earnings per share to determine if the effect would be
                antidilutive.  Previously, the Company did not add back interest, net
                of taxes, on convertible notes when making this calculation.  The
                Company has corrected this procedure.  The only changes resulting from
                this correction are to the number of diluted weighted average shares
                outstanding
                and the diluted earnings per share.
  Accordingly,
                the Company has again
                concluded that the above is a result of material weaknesses in our
                internal
                controls over financial reporting and the Company’s controls and procedures in
                connection with the interpretation of accounting pronouncements were
                not
                effective as of December 31, 2006.  In connection with the review of
                its accounting for vendor rebates, the Company’s management believed that it
                obtained the necessary understanding of the accounting and reporting
                for such
                transactions.  The Company continues to develop controls and
                procedures and plans to implement additional controls and procedures
                sufficient
                to accurately report our financial performance in the foreseeable
                future.  The Company has also augmented its finance and accounting
                staff by retaining an experienced independent consultant to enhance
                the
                Company’s financial accounting and reporting capabilities.
 Other
          than described above, there have
          been no significant changes in the Company’s internal controls or in other
          factors that could significantly affect internal controls subsequent to
          December
          31, 2006.
  23
 ***Table
              of Contents***
  **PART
          III**
  **Item
          10.Directors, Executive Officers and Corporate
          Governance**
  The
          names, ages and positions of the
          Registrant’s Directors and executive officers are listed below, along with a
          brief account of their business experience during the last five
          years.  Officers are appointed annually by the Board of Directors at
          its first meeting following the Annual Meeting of Stockholders and from
          time to
          time at the pleasure of the Board.  There are no family relationships
          among these Directors and officers, except for Melissa Goldman-Williams,
          who is
          the daughter of Michael Goldman, nor any arrangements or understandings
          between
          any Directors or officers and any other person pursuant to which any of
          such
          officers were selected as executive officers.
  Name
                
                Age
                
                Position
                    with the CompanyDirectors
                    and Executive Officers:E.
                    Bruce Fredrikson
                
                68
                
                Director,
                    Chairman of Audit CommitteeMelissa
                    Goldman-Williams
                
                38
                
                DirectorMichael
                    Goldman
                
                68
                
                Director,
                    Chairman of the BoardStuart
                    H. Lubow
                
                49
                
                Director,
                    Chairman of Nominating CommitteeRonald
                    H. Miller
                
                63
                
                DirectorWilliam
                    Pagano
                
                67
                
                Director
                    and Chief Executive Officer of the Company and President of
                    UniversalWilliam
                    Salek
                
                45
                
                Chief
                    Financial Officer and Secretary of the Company and Vice President
                    of
                    Universal
  24
 *Table
              of Contents*
  Dr.
          E.
          Bruce Fredrikson
  Dr.
              E. Bruce Fredrikson has been a
              Director of the Company since January 28, 2005. Dr. Fredrikson is currently
              an
              independent consultant in corporate finance and governance.  He is
              Professor of Finance, Emeritus, at Syracuse University’s Martin J. Whitman
              School of Management where he taught from 1966 until his retirement
              in May 2003.
              He is a director of Consumer Portfolio Services, Inc., a consumer finance
              company and of Track Data Corporation, a financial services
              company.  Dr. Fredrikson holds an A.B. in economics from Princeton
              University and a M.B.A. in accounting and a Ph.D. in finance from Columbia
              University.
 Melissa
          Goldman-Williams
  Melissa
          Goldman-Williams has been a
          Director of the Company since October 22, 2004.  Mrs. Goldman-Williams
          has been the Chief Operating Officer of Goldman Associates of NY, Inc.,
          an
          appliance distributor, since 1996, and is also a member of the Board of
          Directors of said company.  Mrs. Goldman-Williams holds a B.A. from
          Lehigh University and a Masters Degree in Environmental Management from
          Duke
          University.  Previously, she was employed as an Environmental
          Consultant for a private consulting firm.
  Michael
          Goldman
  Michael
          Goldman has been a Director of
          the Company since September 29, 2004 and was appointed Chairman of the
          Board on
          April 17, 2006.  Mr. Goldman has been the Chief Executive Officer and
          Chairman of the Board of Directors of Goldman Associates of NY, Inc., an
          appliance distributor, since 1987.  Mr. Goldman is a Certified Public
          Accountant and holds a B.S. in Accounting from Brooklyn College and an
          M.B.A. in
          Management from Syracuse University.
  Stuart
          H. Lubow
  Stuart
          H. Lubow became a Director of
          the Company on May 11, 2006.  Mr. Lubow is a founder, President and
          Chief Executive Officer of Community National Bank.  Mr. Lubow was
          founder, President and Chief Executive Officer of Community State Bank
          from 1997
          to 2003 and was the Executive Vice President and Chief Operating Officer
          of
          Garden State Bank until 1996.  Mr. Lubow has been a banking executive
          for over 25 years.  He is a past Chairman of the Community Bankers
          Association of New Jersey, as well as the former Chairman of the Teaneck
          Development Corporation.  Mr. Lubow holds a B.A. in Accounting from
          Moravian College and has served as an instructor at the New York University
          School of Continuing Education.
  Ronald
          H. Miller
  Ronald
          H. Miller has been a Director of
          the Company since 1983.  Mr. Miller holds a B.S. in Education from
          Ohio State University and a J.D. from Ohio State University.  Mr.
          Miller has been engaged in the practice of law since 1969 and as a sole
          practitioner since 1988.  Mr. Miller is an acting Judge of Auglaize
          County Municipal Court in the State of Ohio.
  William
          Pagano
  William
          Pagano has been the President
          of Universal since November 1998, and was appointed as a Director of the
          Company
          in February 2002, as President of the Company on October 27, 2005, and
          as Chief
          Executive Officer on April 17, 2006. Prior to November 1998 Mr. Pagano
          was
          engaged in the practice of law for 20 years.  Mr. Pagano holds a B.S.
          in Industrial Management, and an M.B.A., both from Fairleigh Dickinson
          University.  Mr. Pagano also holds a J.D. from Seton Hall University
          and is an attorney at law licensed in the State of New Jersey.
  25
 *Table
              of Contents*
  William
          Salek
  William
          Salek has been the Vice
          President of Universal since June 1999 and was appointed as the Chief Financial
          Officer of the Company in October 2004 and Secretary of the Company in
          February
          2005.  Mr. Salek has been employed by Universal since
          1983.  Mr. Salek holds a B.S. in Accounting from Clarion
          University.  Mr. Salek is a director of Educational Partnership for
          Instructing Children, Inc., a non-profit learning institute.
  Compliance
          with Section 16(a) of the Exchange Act
  The
          Company believes that during the
          period from January 1, 2006 through December 31, 2006, all executive officers,
          Directors and greater than 10% beneficial owners, complied with Section
          16(a)
          filing requirements.
  Code
          of Ethics
  The
          Company has adopted a Code of
          Ethics that applies to all employees, including all employees of  the
          Company’s subsidiaries, as well as each member of the Company’s Board of
          Directors.
  Audit
          Committee
  The
          Company has a separately designated
          standing audit committee established in accordance with Section 3(a)(58)(A)
          of
          the Exchange Act.  Serving on the Committee are E. Bruce Fredrikson
          and Ronald H. Miller.  Phillip Siegel served on the Committee prior to
          his resignation as a Director on January 22, 2007.  The Board of
          Directors had determined that it has two audit committee financial experts
          serving on the Audit Committee, Dr. Fredrikson and Ronald H.
          Miller.  Both Dr. Fredrikson and Mr. Miller are independent Directors
          as defined in Item 7(d)(3)(iv) of Schedule 14A.
  **Item
          11.Executive
          Compensation**
  Compensation
          Discussion and Analysis
  Overview
  This
          compensation discussion and analysis describes and analyzes the material
          elements of compensation awarded to, earned by, or paid to each of our
          executive
          officers who served as named executive officers during the last completed
          fiscal
          year.  This compensation discussion and analysis focuses on the information
          contained in the following tables and related footnotes and narrative for
          primarily the last completed fiscal year, but we also describe compensation
          actions taken before or after the last completed fiscal year to the extent
          it
          enhances the understanding of our executive compensation
          disclosure.
  Prior
          to
          June 13, 2006, our Board of Directors oversaw and administered our executive
          compensation program. The compensation committee currently oversees the
          design
          and administration of our executive compensation program.
  The
          principal elements of our executive compensation program are base salary,
          annual
          incentive compensation award, stock options and other benefits and perquisites.
           Our other benefits and perquisites consist of automobile payments, related
          automobile costs, prescription benefits and reimbursement for Medicare
          payments.  Our philosophy is to position the aggregate of these
          elements at a level that is commensurate with our size and sustained
          performance.
  26
 *Table
              of Contents*
  Compensation
          Program Objectives and Philosophy
  The
          objectives of our compensation program are to:
  a.
                Attract,
                    motivate and retain qualified and dedicated executive
                    officers.
  b.
                Retain
                    talented executives and motivate them to achieve business objectives
                    that
                    will enhance stockholder value.
  c.
                Provide
                    our executive officers with cash incentives to further the interests
                    of
                    the Company and our stockholders.
  Generally,
          the compensation of our executive officers is composed of a base salary,
          an
          annual incentive compensation award and equity awards in the form of stock
          options.  In setting base salaries, the Board generally reviewed (and going
          forward the compensation committee will review) the individual contributions
          of
          the particular executive.  The annual incentive compensation award for 2006
          is determined by terms set forth in each executive officer’s employment
          agreement.  In addition, stock options may be granted to provide the
          opportunity for long-term compensation based upon the performance of our
          stock
          over time.
  The
          following is the compensation
          committee’s policy for persons who do not have employment agreements with the
          Company:
  The
          compensation committee is
          responsible for determining the annual salary and incentive compensation
          awards,
          stock awards and other compensation of executive officers who do not have
          employment agreements as well as stock awards and other compensation of
          executive officers who have employment agreements.  In its
          deliberations regarding compensation of executive officers, the compensation
          committee considers the following factors:
  a.
                Company
                    performance, both separately and in relation to similar
                    companies;
  b.
                The
                    individual performance, experience and scope of responsibilities
                    of each
                    executive officer;
  c.
                Compensation
                    and stock award information disclosed in the proxy statements
                    of other
                    companies;
  d.
                Historical
                    compensation levels and stock awards at the
                    Company;
  e.
                The
                    overall competitive environment for executives and the level
                    of
                    compensation necessary to attract and retain executive talent;
                    and
  f.
                The
                    recommendations of management.
  Compensation
          Process
  Prior
          to June 13, 2006, our Board
          approved the compensation of our named executive officers, including the
          terms
          of their employment agreements.  Going forward, for each of our named
          executive officers, the compensation committee will, in accordance with
          the
          terms and conditions of any then effective employment agreements, review
          and
          approve all elements of compensation taking into consideration recommendations
          from our chief executive officer (for compensation other than his own),
          as well
          as competitive market guidance provided at the request of the compensation
          committee.
  The
          Company’s compensation program for executives consists of three
          elements:
  a.
                base
                    salaries
  b.
                performance-based
                    annual incentive compensation
                    awards
  c.
                periodic
                    grants of stock options
  27
 *Table
              of Contents*
  Base
          Salaries
  The
          salaries for the executive officers
          are designed to retain qualified and dedicated executive officers. The
          compensation committee reviews salary recommendations made by the Company’s
          Chief Executive Officer (other than for executive officers covered by employment
          agreements), and evaluates individual responsibility levels, performance
          and
          length of service.
  AnnualIncentive Compensation Awards
  Annual
          incentive compensation awards
          provide the Company with a means of rewarding performance based upon the
          attainment of corporate profitability during the year.  Mr. Pagano and
          Mr. Salek, pursuant to their employment contracts, receive annual incentive
          compensation awards based upon a percentage of earnings of the Company’s
          subsidiaries.  Mr. Pagano and Mr. Salek accrued an incentive
          compensation award of $260,109 and $30,958, respectively, for the year
          ended
          December 31, 2006.
  Stock
          Options
  Stock
          options may be granted to provide
          the opportunity for long-term compensation based upon the performance of
          our
          stock over time.  During 2006, no stock options were granted to the
          Company’s employees, or the executive officers.
  Employee
          Benefit and Health Plans
  The
          Company has a 401(k) plan, which covers substantially all
          employees.  Participants in the plan may contribute a percentage of
          compensation, but not in excess of the maximum allowed under the Internal
          Revenue Code. The plan provides for matching contributions up to a maximum
          of 3%
          of employees’ qualified wages.
  The
          Company makes available life and health insurance for full time
          employees.  Both the Company and the employees contribute to the
          payment of this plan in accordance with a published schedule as described
          in the
          Company’s employment manual.
  28
 *Table
              of Contents*
  Summary
          Compensation Table
  The
          following table sets forth
          information about compensation paid or accrued by the Company during the
          fiscal
          year ended December 31, 2006 to Bernard Korn, William Pagano and William
          Salek,
          the only named executive officers of the Company whose compensation exceeded
          $100,000.
  Name
                    and Principal Position
                
                Year
                
                Salary
                
                
                Non-Equity
                    Incentive Plan Compensation
                
                
                All
                    Other Compensation
                
                
                TotalBernard
                    Korn*
                
                2006
                
                $
                200,000
                
                
                
                -
                
                
                $
                30,699
                
                
                $
                230,699William
                    Pagano—Director and Chief Executive
                    Officer of the Company and President
                    of Universal
                
                2006
                
                $
                200,000
                
                
                $
                260,109
                
                
                
                -
                
                
                $
                460,109William
                    Salek—Chief Financial Officer and
                    Secretary of the Company and Vice President
                    of Universal
                
                2006
                
                $
                120,000
                
                
                $
                30,958
                
                
                
                -
                
                
                $
                150,958
  *Mr.
          Korn resigned as Director,
          Chairman of the Board, and Chief Executive Officer of the Company on April
          17,
          2006.  Currently, Mr. Korn is a non-executive employee of the
          Company.
  Mr.
          Korn’s all other compensation
          consists of $11,962 in automobile lease payments, $3,990 in automobile
          related
          costs, $7,289 in prescription coverage for Mr. Korn and his wife, and $7,458
          in
          Medicare reimbursements.
  During
          the fiscal years ended 2006,
          2005 and 2004, no stock awards, option awards, bonuses or nonqualified
          deferred
          compensation earnings were earned by the named executive officers.
  Narrative
          Disclosure to Summary Compensation Table
  Mr.
          Korn was the Chairman of the Board,
          Director and Chief Executive Officer of the Company until his resignation
          as
          such on April 17, 2006.  Mr. Pagano was the President and a Director
          of the Company for 2005 and was appointed Chief Executive Officer on April
          17,
          2006. Mr. Salek is the Chief Financial Officer and Secretary of the
          Company.
  Bernard
          Korn
  Concurrently
          with Mr. Korn’s sale of 426,743 shares of common stock and his resignation
          as Chief Executive Officer, Director and Chairman of the Board on April
          17,
          2006, the Company entered into an employment agreement with Bernard Korn
          that cancelled and superseded a prior employment agreement.
  29
 *Table
              of Contents*
  Mr.
          Korn’s employment under the new agreement is to end on December 31,
          2010.  Mr. Korn is required to perform duties that are reasonably
          assigned to him with his approval that he may not unreasonably withhold.
          Until
          December 31, 2008, he is required to devote his best efforts and significant
          time to his duties. During the balance of the term, Mr. Korn is required to
          devote reasonable efforts, consistent with his personal and business
          commitments, to the performance of his duties. The agreement provides for
          a
          salary of $200,000 per year, reduced by any amounts payable to Mr. Korn
          for loss
          of earnings or the like under any insurance plan or policy the premiums
          for
          which are paid for in their entirety by the Company, and designated fringe
          benefits. The agreement contains confidentiality and non-compete
          provisions.
  The
          agreement provides that until May 31, 2008, Mr. Korn may not without the
          prior
          written consent of the Company (i) knowingly sell any of the Company’s
          securities to a 5% shareholder (as defined), or to a person who as a result
          of
          such sale would become a 5% shareholder, unless such person first enters
          into a
          standstill agreement in favor of the Company, (ii) acquire, agree to
          acquire or make any proposal to acquire any voting securities or assets
          of the
          Company or any of its affiliates, (iii) propose to enter into any merger,
          consolidation, recapitalization, business combination or other similar
          transaction involving the Company or any of its affiliates, (iv) make,
          or in any
          way participate in any solicitation of proxies to vote or seek to advise
          or
          influence any person with respect to the voting of any voting securities
          of the
          Company or any of its affiliates, (v) form, join or in any way participate
          in a
          group (as defined) in connection with any of the foregoing or (vi) advise,
          assist or encourage any other persons in connection with the
          foregoing.
  See
“Potential
          Payments Upon
          Termination or Change in Control” below for a discussion relating to payments
          payable to Mr. Korn upon termination or upon a change in control.
  William
          Pagano
  Mr.
          Pagano was appointed the Chief
          Executive Officer of the Company after Mr.  Korn’s resignation on
          April 17, 2006.
  Universal
          Supply Group, Inc., a wholly owned subsidiary of the Company (“Universal”), and
          Mr. Pagano entered into an employment agreement dated as of June 25, 1999,
          as
          amended by Amendment No. 1 dated as of October 29, 2002, as further amended
          by
          Amendment No. 2 dated as of June 15, 2005, and as further amended by Amendment
          No. 3 dated as of March 12, 2007, pursuant to which the Company employed
          Mr.
          Pagano as President of Universal.  The amended employment agreement
          provides for (i) a salary of $200,000 per year, reduced by any amounts
          payable
          to Mr. Pagano for loss of earnings or the like under any insurance plan
          or
          policy the premiums for which are paid for in their entirety by the Company;
          (ii) fringe benefits commensurate with Mr. Pagano’s position as President, in
          such group life, health, accident, disability or hospitalization insurance
          plans, subject to underwriting requirements as Universal, or its parent,
          may
          make available to its other executive employees and (iii) additional incentive
          compensation based on a percentage of earnings, as defined below, of the
          subsidiaries, limited to two times his base compensation. The amended employment
          agreement contains confidentiality and non-compete provisions and expires
          on
          December 31, 2010.
  30
 *Table
              of Contents*
  For
          the calendar year 2005 and for each
          of the calendar years 2006 through 2010, Mr. Pagano shall receive, as incentive
          compensation, a percentage of the Incentive Compensation
          Base.  Incentive Compensation Base shall mean the Universal’s net
          earnings (as determined by the Company, Universal’s parent) which are included
          in the Company’s consolidated audited financial statements, plus the amount of
          any deductions from net earnings which are made in such statements for
          (i)
          interest paid or accrued in connection with the acquisition of the Universal,
          (ii) Federal income taxes, (iii) parent company management fees or allocation
          of
          overhead from the parent company either paid or accrued and (iv) incentive
          compensation under this Agreement.  Earnings of businesses acquired by
          Universal shall be included in determining incentive compensation
          base.  Incentive compensation will be paid within 30 days following
          receipt by Universal of the Independent Accountant’s report for the year
          involved and said report shall be binding and conclusive on the calculation
          of
          net earnings and incentive compensation.  Incentive compensation for
          any year beginning in 2005 shall in no event exceed two times Mr. Pagano’s base
          compensation for such year.
 Portion
                    of Incentive Compensation Base
                
                
                Additional
                    Compensation PercentagesUp
                    to
                
                
                
                $
                250,000
                
                
                
                8
                %$
                251,000
                
                to
                
                $
                500,000
                
                
                
                9
                %$
                501,000
                
                to
                
                $
                750,000
                
                
                
                10
                %$
                751,000
                
                to
                
                $
                1,000,000
                
                
                
                11
                %$
                1,001,000
                
                
                
                And
                    over
                
                
                
                12
                %
  For
          the fiscal year ending December 31, 2006 the incentive compensation base
          was
          $2,422,225 and the additional compensation was computed as follows:
  Incentive
                    Compensation Base
                
                Additional
                    Compensation Percentages
                
                Incentive
                    Compensation$
                250,000
                
                at
                    8%
                
                $
                20,000$
                250,000
                
                at
                    9%
                
                $
                22,500$
                250,000
                
                at
                    10%
                
                $
                25,000$
                250,000
                
                at
                    11%
                
                $
                27,500$
                1,375,908
                
                at
                    12%
                
                $
                165,109$
                2,375,908
                
                
                
                $
                260,109
  Total
          incentive compensation for the
          fiscal year ended December 31, 2006 was $260,109.
  In
          the event that Mr. Pagano no longer
          performs the duties of the President of Universal or the Vice President
          of RAL
          or American for any reason other than death or disability, the Company
          will be
          considered in default of its credit agreement with Wells Fargo Business
          Credit,
          Inc. unless a waiver is obtained.
  William
          Salek
  Effective
          January 1, 2005, Mr. Salek is
          employed pursuant to an employment agreement expiring on December 31, 2007
          at a
          compensation of $120,000 per annum.  The agreement also provides for
          additional incentive compensation based on a percentage of earnings, as
          defined
          below, of the subsidiaries.
  31
 *Table
              of Contents*
  For
          each of the calendar years 2005
          through 2007, Mr. Salek shall receive, as incentive compensation, a percentage
          of the Incentive Compensation Base.  Incentive Compensation Base shall
          mean the Universal’s net earnings (as determined by the Company, Universal’s
          parent) which are included in the Company’s consolidated audited financial
          statements, plus the amount of any deductions from net earnings which are
          made
          in such statements for (i) interest paid or accrued in connection with
          the
          acquisition of the Universal, (ii) Federal income taxes, (iii) parent company
          management fees or allocation of overhead from the parent company either
          paid or
          accrued and (iv) incentive compensation under this
          Agreement.  Earnings of businesses acquired by Universal shall be
          included in determining incentive compensation base.  Incentive
          compensation will be paid within 30 days following receipt by Universal
          of the
          Independent Accountant’s report for the year involved and said report shall be
          binding and conclusive on the calculation of net earnings and incentive
          compensation.
  Portion
                    of Incentive Compensation Base
                
                
                Additional
                    Compensation PercentagesUp
                    to
                
                
                
                $
                250,000
                
                
                
                .25
                %$
                251,000
                
                to
                
                $
                500,000
                
                
                
                .50
                %$
                501,000
                
                to
                
                $
                750,000
                
                
                
                .75
                %$
                751,000
                
                to
                
                $
                1,000,000
                
                
                
                1.00
                %$
                1,001,000
                
                to
                
                $
                1,250,000
                
                
                
                1.25
                %$
                1,251,000
                
                to
                
                $
                1,500,000
                
                
                
                1.50
                %$
                1,501,000
                
                to
                
                $
                1,750,000
                
                
                
                1.75
                %$
                1,751,000
                
                to
                
                $
                2,000,000
                
                
                
                2.00
                %$
                2,001,000
                
                
                
                And
                    over
                
                
                
                2.25
                %
  For
          the fiscal year ending December 31,
          2006 the incentive compensation base was $2,422,225 and the additional
          compensation was computed as follows:
  Incentive
                    Compensation Base
                
                
                Additional
                    Compensation Percentages
                
                
                Incentive
                    Compensation$
                250,000
                
                
                
                .25
                %
                
                $
                625$
                250,000
                
                
                
                .50
                %
                
                $
                1,250$
                250,000
                
                
                
                .75
                %
                
                $
                1,875$
                250,000
                
                
                
                1.00
                %
                
                $
                2,500$
                250,000
                
                
                
                1.25
                %
                
                $
                3,125$
                250,000
                
                
                
                1.50
                %
                
                $
                3,750$
                250,000
                
                
                
                1.75
                %
                
                $
                4,375$
                250,000
                
                
                
                2.00
                %
                
                $
                5,000$
                375,908
                
                
                
                2.25
                %
                
                $
                8,458$
                2,375,908
                
                
                
                
                
                
                $
                30,958
  Total
          incentive compensation for the
          fiscal year ended December 31, 2006 was $30,958.
  32
 *Table
              of Contents*
  Outstanding
          Equity Awards at Fiscal Year End
  The
          following table sets forth
          information about equity awards outstanding as of December 31,
          2006.
  Name
                
                Number
                    of Securities Underlying Unexercised Options Exercisable
                
                
                Option
                    Exercise Price
                
                Option
                    Expiration DateBernard
                    Korn
                
                
                52,000
                
                
                $
                0.25
                
                February
                    11, 2013
  On
          January 2, 2007 Bernard Korn
          obtained 52,000 shares of common stock by exercising 52,000 outstanding
          stock
          options.  Following said transaction, there are no equity awards
          outstanding for the named executive officers.
  Potential
          Payments Upon Termination or Change In Control
  Assuming
          the employment of each of our
          named executive officers were to be terminated on December 31, 2006 without
          cause, by death or by change in control, the following individuals would
          be
          entitled to payments in the amounts set forth opposite to their name in
          the
          table below:
  Severance
                    pay for termination without cause
                
                Termination
                    by death
                
                Change
                    of controlBernard
                    Korn
                
                $800,000
                    lump sum payment equal to the four total remaining $200,000 payments
                    payable to Mr. Korn under his employment agreement ; commencing
                    30 days
                    after demand therefore, interest accrues on such lump sum obligation
                    at
                    the annual rate of 10% per annum and is payable on demand.
                
                Mr.
                    Korn’s widow shall be entitled to the following two payments:
                  (1)
                    $5,000 lump sum tax-free death benefit and (2) $200,000 payable
                    not less
                    frequently than in bi-weekly installments.
                
                None.*William
                    Pagano
                
                None.
                
                None.
                
                None.William
                    Salek
                
                None.
                
                None.
                
                None.
  *
          If a change in control, as defined
          below, shall occur at any time from and after January 1, 2009, then the
          Company
          shall pay Mr. Korn in a lump sum, and without present value discount, the
          entire
          aggregate amount which would have been payable by the Company to Mr. Korn
          had
          Mr. Korn been employed for the entire term.  Commencing thirty days
          after demand therefore, interest shall accrue on such lump sum obligation
          at the
          annual rate if 10% per annum and shall be payable on demand.
  33
 *Table
              of Contents*
  A
“change
          of control” shall be deemed
          to have occurred if the stockholders of the Company approve a merger of
          the
          Company, or a plan of complete liquidation of the Company, or an agreement
          for
          the sale or disposition by the Company of all or substantially all of its
          assets, or any other business combination of the Company with any other
          corporation, other than any such merger or business combination which would
          result in the voting securities of the Company outstanding immediately
          prior
          thereto continuing to represent (either by remaining outstanding or by
          being
          converted into voting securities of the surviving entity) at least 50%
          of the
          total voting power represented by the voting securities of the Company
          or such
          surviving entity outstanding immediately after such merger or business
          combination.
  Director’s
          Compensation
  The
          following table sets forth
          compensation to members of the Board of Directors, other than those employed
          by
          the Company, during the fiscal year ended December 31, 2006.
  Name
                
                Fees
                    Earned or Paid in Cash
                
                
                Option
                    Awards
                
                
                All
                    Other Compensation
                
                
                TotalE.
                    Bruce Fredrikson
                
                $
                19,500
                
                
                $
                17,804
                
                
                
                -
                
                
                $
                37,304Melissa
                    Goldman-Williams
                
                $
                12,000
                
                
                
                -
                
                
                
                -
                
                
                $
                12,000Michael
                    Goldman
                
                $
                12,000
                
                
                
                -
                
                
                
                -
                
                
                $
                12,000William
                    Koon
                
                $
                6,000
                
                
                
                -
                
                
                $
                3,000
                
                
                $
                9,000Stuart
                    H. Lubow
                
                $
                7,681
                
                
                $
                17,804
                
                
                
                -
                
                
                $
                25,485Ronald
                    H. Miller
                
                $
                12,000
                
                
                $
                17,804
                
                
                
                -
                
                
                $
                29,804Jack
                    Rose
                
                $
                6,000
                
                
                
                -
                
                
                $
                3,000
                
                
                $
                9,000Phillip
                    Siegel
                
                $
                7,681
                
                
                
                -
                
                
                
                -
                
                
                $
                7,681Carl
                    Sussman
                
                $
                6,000
                
                
                
                -
                
                
                $
                3,000
                
                
                $
                9,000
  Members
          of the Board of Directors,
          other than those employed by the Company, received a fee of $12,000 annually
          consisting of an annual retainer of $8,000 and a fee of $1,000 for each
          meeting
          of the Board, limited to $4,000 per annum payable in advance in four equally
          quarterly installments.
  Additionally,
          effective April 1, 2006,
          E. Bruce Fredrikson’s annual retainer fee for serving as a Director and Chairman
          of the Audit Committee increased from $8,000 to $18,000.  The fee is
          payable in $4,500 installments in advance of each quarter.
  Members
          of the Board of Directors
          receive no fees if they are employed by the Company.
  34
 *Table
              of Contents*
  On
          December 6, 2006, the Company
          granted ten-year options to purchase 25,000 shares of common stock at an
          exercise price of $1.85 per share to each of the following Directors: E.
          Bruce
          Fredrikson, Stuart H. Lubow, Ronald H. Miller and Phillip Siegel. The option
          to
          each Director was immediately vested for 10,000 shares and will vest for
          5,000
          additional shares on each of the first three anniversaries of the Grant
          Date if
          the optionee then continues as a Director. The options were granted in
          reliance
          on the exemption from registration provided by Section 4(2) of the Securities
          Act of 1933, as amended.  On January 22, 2007, Phillip Siegel resigned
          as a Director and his 5,000 options that would have vested on each of the
          first
          three anniversaries of the Grant Date were forfeited and he has sixty days
          from
          the date of his resignation to exercise his 10,000 vested
          options.  Prior to his resignation as Director, Mr. Siegel served as
          Chairman of the Compensation Committee and as a member of the Audit and
          Nominating Committees.
  Messrs.
          Koon, Rose and Sussman resigned
          as Directors of the Company on April 17, 2006 and each received other
          compensation in the amount of $3,000 for and in consideration of their
          duties
          and service to the Company.
  Compensation
          Committee Interlocks and Insider Participation
  The
          Company did not have a Compensation
          Committee or any other committee of the Board of Directors performing equivalent
          functions until June 13, 2006. Prior to this date, decisions regarding
          compensation of named executive officers of the Company were made by the
          Board
          of Directors. Two of the company’s executive officers, Bernard Korn and William
          Pagano, were Directors of the Company.  Mr. Korn was the Chairman of
          the Board and Chief Executive Officer of the Company until his resignation
          as
          Chief Executive Officer, Director and Chairman of the Board on April 17,
          2006.  Until June 13, 2006, each of these individuals participated in
          deliberations of the Board during the fiscal year ended December 31, 2006
          concerning named executive officer compensation, except that they abstained
          from
          deliberations and voting regarding their own compensation.
  On
          June 13, 2006, the Board of
          Directors appointed Phillip Siegel as Chairman of the Compensation Committee
          and
          E. Bruce Fredrikson and Stuart H. Lubow to serve on the Compensation
          Committee.  On August 8, 2006 the Board of Directors adopted a
          Compensation Committee Charter.
  Compensation
          Committee Report
  The
          following report of the
          Compensation Committee does not constitute soliciting material and should
          not be
          deemed filed or incorporated by reference into any other Company filing
          under
          the Securities Act of 1933 or the Securities Exchange Act of 1934, except
          to the
          extent the Company specifically incorporates this Report by reference
          therein.
  The
          Compensation Committee has reviewed
          and discussed the Compensation Discussion and Analysis with management
          and
          recommended to the Board of Directors that the Compensation Discussion
          and
          Analysis be included in this Annual Report on Form 10-K for the fiscal
          year
          ended December 31, 2006, for filing with the Securities and Exchange
          Commission.  Phillip Siegel resigned as a Director on January 22,
          2007, has not served on the Compensation Committee since that date, and
          did not
          participate in these recommendations.
  Members
          of the Compensation Committee
  E.
          Bruce
          Fredrikson
  Stuart
          H.
          Lubow
  35
 *Table
              of Contents*
  **Item
          12.Security Ownership of Certain Beneficial
          Owners and Management**
  The
          following table sets forth, as of March 1, 2007, information with respect
          to
          beneficial ownership by named executive officers and Directors of the Company,
          holders of over 5% of a class of stock and of named executive officers
          and
          Directors of the Company as a group.
 Common
                    Stock
                
                
                Preferred
                    StockName
                    of Beneficial Owner
                
                Amount
                    and Nature of Beneficial Ownership*
                
                
                
                
                
                Percent
                    of Class
                
                
                Amount
                    and Nature of Beneficial Ownership*
                
                
                
                
                
                Percent
                    of ClassOfficers
                    and Directors***:E.
                    Bruce Fredrikson
                
                
                16,000
                
                
                
                (1)
                
                
                
                **
                
                
                
                500
                
                
                
                (1)
                
                
                
                **Melissa
                    Goldman-Williams
                
                
                5,400
                
                
                
                
                
                
                
                **
                
                
                
                0
                
                
                
                
                
                
                
                **Michael
                    Goldman
                
                
                1,282,255
                
                
                
                (2)
                
                
                
                26.74
                %
                
                
                0
                
                
                
                
                
                
                
                **Stuart
                    H. Lubow
                
                
                10,000
                
                
                
                (3)
                
                
                
                **
                
                
                
                0
                
                
                
                
                
                
                
                **Ronald
                    H. Miller
                
                
                11,054
                
                
                
                (4)
                
                
                
                **
                
                
                
                0
                
                
                
                
                
                
                
                **William
                    Pagano
                
                
                767,973
                
                
                
                (5)
                
                
                
                16.41
                %
                
                
                0
                
                
                
                
                
                
                
                **William
                    Salek
                
                
                61,667
                
                
                
                (6)
                
                
                
                1.32
                %
                
                
                0
                
                
                
                
                
                
                
                **All
                    Officers and Directors as a Group:
                
                
                2,154,349
                
                
                
                
                
                
                
                44.19
                %
                
                
                500
                
                
                
                
                
                
                
                **Holders
                    of over 5% of a class of stock who are not Officers or
                    Directors:Rita
                    C. Folger
                
                
                578,719
                
                
                
                (7)
                
                
                
                12.37
                %
                
                
                0
                
                
                
                
                
                
                
                **Goldman
                    Associates of NY, Inc.
                
                
                1,099,255
                
                
                
                (8)
                
                
                
                22.92
                %
                
                
                0
                
                
                
                
                
                
                
                **
  The
          beneficial owners listed above have
          all given a business address of 275 Wagaraw Road, Hawthorne, New Jersey
          07506.
  *
          For the purposes of this table,
“Beneficial Ownership” is defined as set forth in rule 13d-3 under the
          Securities Exchange Act of 1934, as amended.  Except as set forth in
          the following notes, each person listed in the table has sole voting and
          sole
          investment power with respect to the shares of Common Stock listed in the
          table.
  **
          Represents beneficial ownership of
          less than one percent of the Company’s outstanding securities.
  36
 *Table
              of Contents*
  ***
          William Koon, Bernard Korn, Jack
          Rose and Carl Sussman resigned as Directors of the Company on April 17,
          2006 and
          their beneficial ownership as of said date consisted of -0-, 202,512, 122,668
          and 49,607 shares of Common Stock, respectively.  On January 22, 2007,
          Phillip Siegel resigned as a Director and his 10,000 shares of Common Stock
          issuable upon exercise of his options expire sixty days after his
          resignation.  Each of Messrs. Koon, Sussman and Siegel’s beneficial
          ownership represent less than one percent of the Company’s outstanding
          securities. Each of Messrs. Korn and Rose’s beneficial ownership represented
          4.37% and 2.68%, respectively, of the Company’s outstanding
          securities.
  (1)  E.
          Bruce Fredrikson’s beneficial ownership consists of 6,000 shares of Common
          Stock, 10,000 shares of Common Stock issuable upon exercise of his options,
          and
          500 shares of Common Stock issuable at any time upon conversion of 500
          shares of
          Convertible Preferred Stock.
  (2)  Michael
            Goldman is the President and majority shareholder of Goldman Associates
            of NY,
            Inc. (“Goldman Associates”). Goldman Associates is the owner of 949,255 shares
            of Common Stock (“Goldman Shares”) and warrants (“Warrants”) to purchase 150,000
            shares of Common Stock at an exercise price of $3.00 per share. The Warrants
            are
            exercisable at any time prior to their expiration on December 31,
            2008.  Mr. Goldman is the owner of 183,000 shares of Common Stock and
            the beneficial owner of the Warrants and the Goldman Shares.  Mr.
            Goldman’s beneficial ownership excludes 20,000 shares of Common Stock owned by
            his wife, of which Goldman Associates of New York, Inc. and Michael Goldman
            disclaim beneficial ownership.  Mr. Goldman’s wife disclaims
            beneficial ownership of Mr. Goldman’s shares.
 (3)  Stuart
          H. Lubow’s beneficial ownership consists of 10,000 shares of Common Stock
          issuable upon exercise of his options.
  (4)  Ronald
          H. Miller’s beneficial ownership consists of 1,054 shares of Common Stock and
          10,000 shares of Common Stock issuable upon exercise of his
          options.
  (5)  William
          Pagano’s beneficial ownership consists of 734,640 shares of Common Stock and
          33,333 shares of Common Stock issuable at any time upon conversion of a
          $100,000
          Convertible Note at a conversion price of $3 per share.
  (6)  William
          Salek’s beneficial ownership consists of 45,000 shares of Common Stock and
          16,667 shares of Common Stock issuable upon conversion of a $50,000 Convertible
          Note at a conversion price of $3 per share.
  (7)  Rita
          C. Folger’s beneficial ownership consists of 545,386 shares of Common Stock and
          33,333 shares of Common Stock issuable upon conversion of a $100,000 Convertible
          Note at a conversion price of $3 per share. Mrs. Folger is the wife of
          Oscar
          Folger and the mother of Jeffrey Folger.  Oscar and Jeffrey Folger
          acted as legal counsel for the Company through April 20, 2005.  Oscar
          and Jeffrey Folger acted as legal consultants for the Company from April
          21,
          2005 through December 31, 2005 and since January 1, 2006 have been employed
          by
          the Company as, respectively, Vice President-Chief Legal Counsel and Assistant
          Vice President-Legal.  Mr. Folger’s beneficial ownership consists of
          5,000 shares of Common Stock issuable at any time upon exercise of his
          options.  Mr. Folger disclaims beneficial ownership of his wife’s
          shares, and Mrs. Folger disclaims beneficial ownership of her husband’s
          shares.
  (8)  The
          beneficial ownership of Goldman Associates of NY, Inc. consists of 949,255
          shares of Common Stock and 150,000 warrants to purchase 150,000 shares
          of Common
          Stock, at an exercise price of $3.00 per share.  See Footnote 2,
          above, for information relating to beneficial ownership of these securities
          held
          by Michael Goldman.
  37
 *Table
              of Contents*
  **Item
          13.Certain Relationships and Related
          Transactions, and Director Independence**
  Related
          Party Transaction Policies and Procedures
  Policy
  It
              is the policy of the Board of
              Directors of Colonial Commercial Corp. (the “Company”) that all Interested
              Transactions with Related Parties, as those terms are defined in this
              policy,
              shall be subject to approval or ratification in accordance with the
              procedures
              set forth below.
 Procedures
  The
          Board
          of Directors of the Company, or, if directed by the Board of Directors,
          the
          Audit Committee or any other independent committee appointed by the Board
          of
          Directors, shall review the material facts of all Interested Transactions
          that
          require the Committee’s approval and either approve or disapprove of the entry
          into the Interested Transaction, subject to the exceptions described
          below.  If advance Board or committee approval of an Interested
          Transaction is not feasible, then the Interested Transaction shall be considered
          and, if the Board or committee determines it to be appropriate, ratified
          at the
          Board’s or committee’s next regularly scheduled meeting.  In
          determining whether to approve or ratify an Interested Transaction, the
          Board or
          committee will take into account, among other factors it deems appropriate,
          whether the Interested Transaction is on terms no less favorable than terms
          generally available to an unaffiliated third-party under the same or similar
          circumstances and the extent of the Related Person’s interest in the
          transaction.
  The
              Board
              of Directors and the Audit Committee have reviewed the Interested Transactions
              described below in “Standing Pre-Approval for Certain Interested Transactions”
and determined that each of the Interested Transactions described therein
              shall
              be deemed to be pre-approved or ratified (as applicable) by the Board
              and the
              Audit Committee under the terms of this policy.
 No
          Director shall participate in any discussion or approval of an Interested
          Transaction for which he or she is a Related Party, except that the Director
          shall provide all material information concerning the Interested Transaction
          to
          the Board or the committee.
  If
          an
          Interested Transaction will be ongoing, the Board may establish guidelines
          for
          the Company’s management to follow in its ongoing dealings with the Related
          Party.  Thereafter, the Board, on at least an annual basis, shall
          review and assess ongoing relationships with the Related Party to see that
          they
          are in compliance with these guidelines and that the Interested Transaction
          remains appropriate.
  Definitions
  An
          “Interested Transaction” is any transaction, arrangement or relationship or
          series of similar transactions, arrangements or relationships (including
          any
          indebtedness or guarantee of indebtedness) in which (1) the aggregate amount
          involved will or may be expected to exceed $120,000 in any calendar year,
          (2)
          the Company is a participant, and (3) any Related Party has or will have
          a
          direct or indirect material interest (other than solely as a result of
          being a
          director or a less than 10 percent beneficial owner of another
          entity).
  38
 *Table
              of Contents*
  A
          “Related Party” is any (a) person who is or was (since the beginning of the last
          fiscal year for which the Company has filed a Form 10-K and proxy statement,
          even if they do not presently serve in that role) an executive officer,
          Director
          or nominee for election as a Director, (b) greater than 5 percent beneficial
          owner of the Company’s common stock, or (c) immediate family member of any of
          the foregoing.  Immediate family member includes a person’s spouse,
          parents, stepparents, children, stepchildren, siblings, mothers- and
          fathers-in-law, sons- and daughters-in-law, and brothers- and sisters-in-law
          and
          anyone residing in such person’s home (other than a tenant or
          employee).
  Standing
          Pre-Approval for Certain Interested Transactions
  The
          Board and the Audit Committee have
          reviewed the types of Interested Transactions described below and determined
          that each of the following Interested Transactions shall be deemed to be
          pre-approved by the Committee, even if the aggregate amount involved will
          exceed
          $120,000.
  1.
                Employment
                    of executive officers.  Any employment by the Company of an
                    executive officer of the Company
                    if:
  a.
                  the
                        related compensation is required to be reported in the Company’s proxy
                        statement under Item 402 of the Securities and Exchange Commission’s
                        (“SEC’s”) compensation disclosure requirements (generally applicable
                        to
                        “named executive officers”);
                        or
  b.
                  the
                        executive officer is not an immediate family member of another
                        executive
                        officer or Director of the Company, the related compensation
                        would be
                        reported in the Company’s proxy statement under Item 402 of the SEC’s
                        compensation disclosure requirements if the executive officer
                        was a “named
                        executive officer”, and the Company’s Compensation Committee approved (or
                        recommended that the Board approve) such
                        compensation.
  2.
                Director
                    compensation.  Any compensation paid to a Director if the
                    compensation is required to be reported in the Company’s proxy statement
                    under Item 402 of the SEC’s compensation disclosure
                    requirements;
  3.
                Certain
                    transactions with other companies.  Any transaction with another
                    company at which a Related Person’s only relationship is as an employee
                    (other than an executive officer), Director or beneficial owner
                    of less
                    than 10% of that company’s shares;
  4.
                Transactions
                    where all shareholders receive proportional benefits.  Any
                    transaction where the Related Person’s interest arises solely from the
                    ownership of the Company’s common stock and all holders of the Company’s
                    common stock received the same benefit on a pro rata basis (e.g.
                    dividends);
  5.
                Transactions
                    involving competitive bids.  Any transaction involving a Related
                    Party where the rates or charges involved are determined by competitive
                    bids.
  39
 *Table
              of Contents*
  Certain
          Relationships and Related Transactions
  A
          subsidiary of the Company
          leases a warehouse and store in Wharton, New Jersey comprising of 27,000
          square
          feet from a company owned by Mr. Paul Hildebrandt under a lease that expires
          in
          June 2010.  The Company paid Mr. Hildebrandt’s company $224,885 during
          the year ended December 31, 2006.   The Company owes Mr.
          Hildebrandt $110,000 pursuant to two notes: (a) a subordinated note in
          the
          amount of $150,000, paid $30,000 annually commencing December 31, 2004
          and (b) a
          $50,000 convertible note due 50% on June 1, 2008 and 50% on June 1,
          2009.  William Salek, the Company’s Chief Financial Officer, is the
          son-in-law of Mr. Hildebrandt.  Mr. Hildebrandt served as a Director
          from July 2004 to January 2005.
  Goldman
          Associates of NY, Inc.
          (“Goldman Associates”) has agreed that it and its affiliates will not until May
          31, 2008 without the prior written consent of the Board of Directors of
          the
          Company (i) acquire, agree to acquire or make any proposal to acquire any
          voting
          securities or assets of the Company or any of its affiliates, (ii) propose
          to
          enter into any merger, consolidation, recapitalization, business combination,
          or
          other similar transaction involving the Company or any of its affiliates,
          (iii)
          make, or in any way participate in any “solicitation” of “proxies” (as such
          terms are used in the proxy rules of the Securities and Exchange Commission)
          to
          vote or seek to advise or influence any person with respect to the voting
          of any
          voting securities of the Company or any of its affiliates or (iv) form,
          join or
          in any way participate in a “group” as defined in Section 13(d)(3) of the
          Securities Exchange Act of 1934, as amended, in connection with any of
          the
          foregoing or (v) advise, assist or encourage any other persons in connection
          with the foregoing.  Michael Goldman is the beneficial owner of the
          shares held by Goldman Associates.
  Each
          of Messrs. Goldman, Korn, Pagano,
          Rozzi, and Mrs. Folger has agreed that until May 31, 2008 he or she will
          not
          purchase any stock of the Company without written consent from the Company
          and
          that he or she will not sell any stock to any person if the sale would
          create a
          new 5% shareholder within the meaning of Internal Revenue Code Section
          382
          unless the buyer first enters into a similar standstill agreement.
  In
          the event that Mr. Pagano no longer
          performs the duties of the President of Universal or the Vice President
          of RAL
          or American for any reason other than death or disability, the Company
          will be
          considered in default of its credit agreement with Wells Fargo Business
          Credit,
          Inc. unless a waiver is obtained.
  The
          Company owes Goldman Associates, a
          private Company controlled by Michael Goldman, $750,000 pursuant to a secured
          note which is subordinate to the Company’s senior secured lender. The note bears
          interest at the prime rate and is due on June 30, 2008.
  Mr.
          Pagano, Mr. Salek, Mrs. Folger and
          the wife of Michael Goldman are holders of convertible unsecured notes
          in the
          amounts of $100,000, $50,000, $100,000 and $25,000, respectively, issued
          pursuant to the terms of a private placement made on July 29, 2004.
  On
          September 5, 2006, the Company was
          appointed a non-exclusive distributor of Speed Queen home laundry equipment
          in
          the New York metropolitan area, and in portions of Connecticut, Delaware
          and
          Eastern Pennsylvania.  The Company succeeded Goldman Associates of New
          York, Inc. in this distributorship and, on August 31, 2006, purchased Goldman
          Associates’ Speed Queen accounts receivable, inventory and related assets at
          book value for $149,625.  Goldman Associates is a private Company
          controlled by Michael Goldman who is the Chairman of Colonial.  The
          Company also established a “Goldman Universal” division to distribute the Speed
          Queen home laundry system line and other appliances.
  40
 *Table
              of Contents*
  Pioneer
          Realty Holdings, LLC, a New
          York limited liability company (“Pioneer”), is the owner of the premises located
          at 836 Route 9, Fishkill, New York, formerly known as 2213 Route 9, Fishkill,
          New York that is leased to a subsidiary of the Company under a lease that
          expired September 2008, subject to renewal options, and provided for a
          current
          aggregate annual rent of $133,500.  Pioneer is the landlord under the
          Lease pursuant to an assignment and assumption agreement dated April 12,
          2005.
  On
          February 21, 2007, the Lease was
          further amended by a Third Modification of Lease Agreement to provide,
          among
          other things, for 25,947 square feet of the leased premises, a net increase
          of
          14,443 square feet, for $245,844 total annual fixed rent, an increase of
          $106,740 per annum.  The effectiveness of the Third Modification of
          Lease Agreement commences on the date of issuance of a certificate of occupancy
          for the Premises that are currently undergoing reconstruction.  The
          term of the lease expires on March 31, 2017, subject to two five-year renewal
          options.
  Additionally,
          on February 21, 2007,
          Pioneer granted the Company an option (“Option”) to purchase the Premises for
          (i) an exercise price equal to Pioneer’s total financial investment in the
          Premises through the date of exercise and (ii) the release of Mr. Pagano
          (and
          any other guarantors) from guaranties of mortgage loans secured by the
          Premises.  The Option expires on July 31, 2007.
  William
          Pagano has a 55% interest in Pioneer and each of Rita Folger and Jeffrey
          Folger
          has an 8% interest in Pioneer Realty Partners I, LLC, which has a 40% interest
          in Pioneer.  Oscar Folger and Jeffrey Folger are the Vice
          President-Chief Legal Counsel and Assistant Vice President-Legal,
          respectively.  The Company paid Pioneer Realty Holdings, LLC $137,239
          in rent during the year ended December 31, 2006.
  Oscar
          and Jeffrey Folger acted as legal
          counsel for the Company through April 20, 2005.  Oscar and Jeffrey
          Folger acted as legal consultants for the Company from April 21, 2005 through
          December 31, 2005 and each became an employee of the Company as Vice
          President-Chief Legal Counsel and Assistant Vice President-Legal, respectively,
          on January 1, 2006.  Mrs. Folger is the wife of Oscar Folger and the
          mother of Jeffrey Folger.  Professional fees paid to the Oscar
          Folger’s law firm for the years ended 2006, 2005 and 2004 were $89,826, $79,973
          and $71,115, respectively.  Jeffrey Folger is an associate of Oscar
          Folger’s law firm.  Additionally, in 2006, $12,000 was paid to each
          Oscar and Jeffrey Folger as part time employees of the Company.
  The
          positions with the Company and the
          relevant stock ownerships of the persons and entities referenced in this
          Item
          are set forth in Items 10 and 12.
  Director
          Independence
  The
          Board of Directors is comprised of
          six members, of which three are classified as “independent” as defined in the
          NASDAQ Stock Marketplace Rule 4200.  The three independent Directors
          are E. Bruce Fredrikson, Stuart H. Lubow and Ronald H. Miller.
  **Item
          14.Principal Accountant Fees And
          Services**
  Audit
          Fees
  Audit
          fees for 2006 and 2005 were
          $207,500 and $227,385, respectively.  All services provided by
          independent accountants were approved by the audit committee. Audit Fees
          consist
          of fees billed for professional services rendered for the audit of the
          Company’s
          annual statements, for review of interim consolidated financial statements
          included in quarterly reports and services that are normally provided by
          Weiser
          LLP in connection with statutory and regulatory filings or
          engagements.
  41
 *Table
              of Contents*
  Audit
          Related Fees
 The
              Company did not incur audit related
              fees from Weiser in 2006 and 2005.  Audit-Related Fees consist of fees
              billed for assurance and related services that are reasonably related
              to the
              performance of the audit or review of the Company’s consolidated financial
              statements and are not reported under “Audit Fees.”
 Tax
          Fees
  The
          Company did not incur tax fees from
          Weiser in 2006 and 2005.  Tax Fees consist of fees billed for
          professional services rendered for tax compliance.  These services
          include assistance regarding federal, state and local tax
          compliance.
  All
          Other Fees
  There
          were no other fees for
          professional services rendered to the Company during the fiscal years 2006
          and
          2005, other than the service reported above.
  The
          Audit Committee meets with the
          independent auditor prior to the audit and discusses the planning and staffing
          of the audit, approves in advance the engagement of the independent auditor
          for
          all audit services and non-audit services and approves the fees and other
          terms
          of any such engagement, and obtains periodically from the independent auditor
          a
          formal verbal communication of the matters required to be discussed by
          Statements of Auditing Standards No. 61 and SEC Rule 10(a).  In
          addition, the Company obtains a letter describing all relationships between
          the
          auditor and the Company and discusses with the auditor any disclosed
          relationships or services that may impact auditor objectivity and
          independence.
  **PART
          IV**
  **Item
          15.Exhibits and Financial Statement
          Schedules**
  (a)
                Exhibits
                    and Financial Statements
  (1)
                Financial
                    Statements.  See Item 8. Index to Financial
                    Statements
  (2)
                Financial
                    Statement Schedules.  See F-1 through F-,
                    attached
  (3)
                Exhibits
  INDEX
          TO
          EXHIBITS
  Exhibit
                  Exhibit
                      Name
                  Filed
                      Herewith
                  Form
                  Date
                      Filed With SEC
                  Incorporated
                      By Reference From Exhibit3.01
                  Restated
                      Certificate of Incorporation of Registrant dated January 6,
                      1983
                  
                  10-K
                  03-30-06
                  3.01(a)
                  Certificate
                      of Amendment of the Certificate of Incorporation dated October
                      31,
                      1986
                  
                  10-K
                  03-30-06
                  3.01(a)(b)
                  Certificate
                      of Amendment of the Certificate of Incorporation dated June
                      24,
                      1988
                  
                  10-K
                  03-30-06
                  3.01(b)(c)
                  Certificate
                      of Amendment of the Certificate of Incorporation dated January
                      13,
                      1998
                  
                  10-K
                  03-30-06
                  3.01(c)(d)
                  Certificate
                      of Amendment of the Certificate of Incorporation dated January
                      13,
                      1998
                  
                  10-K
                  03-30-06
                  3.01(d)(e)
                  Certificate
                      of Amendment of the Certificate of Incorporation dated September
                      29,
                      2006
                  
                  10-Q
                  11-13-06
                  3.013.02
                  By-Laws
                      of Registrant
                  
                  10-K
                  03-30-06
                  3.02(a)
                  Amended
                      and Restated By-Laws of Registrant, ratified and adopted June
                      13,
                      2006
                  
                  8-K
                  06-19-06
                  3.01
  42
 *Table
              of Contents*
 
 Exhibit
                Exhibit
                    Name
                Filed
                    Herewith
                Form
                Date
                    Filed With SEC
                Incorporated
                    By Reference From Exhibit4.01
                Specimen
                    of Common Stock Certificate
                
                10-K
                03-30-06
                4.014.02
                Specimen
                    of Convertible Preferred Stock Certificate
                
                10-K
                03-30-06
                4.0210.01
                Employment
                    Agreement dated as of January 1, 1998 between Registrant and
                    Bernard
                    Korn
                
                10-KSB
                03-31-98
                10(a)(a)
                Amendment
                    Number 1 dated April 1, 1999 to Employment Agreement dated as
                    of January
                    1, 1998 between Registrant and Bernard Korn
                
                10-K
                04-11-01
                10(a)(i)(b)
                Amendment
                    Number 2 dated April 1, 2000 to Employment Agreement dated as
                    of January
                    1, 1998 between Registrant and Bernard Korn
                
                10-K
                04-11-01
                10(a)(ii)(c)
                Amendment
                    Number 3 dated October 29, 2002 to Employment Agreement dated
                    as of
                    January 1, 1998 between Registrant and Bernard Korn
                
                10-K
                11-18-03
                10(a)(iii)(d)
                Amendment
                    Number 4 dated October 29, 2002 to Employment Agreement dated
                    as of
                    January 1, 1998 between Registrant and Bernard Korn
                
                10-K
                11-18-03
                10(a)(iv)(e)
                Amendment
                    Number 5 dated May 17, 2004 to Employment Agreement dated as
                    of January 1,
                    1998 between Registrant and Bernard Korn
                
                10-K
                03-30-06
                10.01(e)(f)
                Employment
                    Agreement dated April 17, 2006 between Registrant and Bernard
                    Korn
                
                8-K
                04-21-06
                10.0110.02
                Employment
                    Agreement dated as of June 25, 1999 between Universal Supply
                    Group, Inc.
                    and William Pagano
                
                8-K
                07-09-99
                10(a)(iii)(a)
                Amendment
                    Number 1 dated October 29, 2002 to Employment Agreement dated
                    as of June
                    25, 1999 between Universal Supply Group, Inc. and William
                    Pagano
                
                8-K
                11-02-05
                10.02(b)
                Amendment
                    Number 2 dated as of June 15, 2005 to Employment Agreement dated
                    as of
                    June 25, 1999 between Universal Supply Group, Inc. and William
                    Pagano
                
                8-K
                06-20-05
                99.1(c)
                Amendment
                    Number 3 dated as of March 12, 2007 to Employment Agreement dated
                    as of
                    June 25, 1999 between Universal Supply Group, Inc. and William
                    Pagano
                
                8-K
                03-12-07
                10.0410.03
                Employment
                    Agreement dated June 25, 1999 between Universal Supply Group,
                    Inc. and
                    William Salek
                
                10-K
                03-30-06
                10.03(a)
                Amended
                    and Restated Employment Agreement dated as of January 20, 2005
                    to
                    Employment Agreement dated as of June 25, 1999 between Universal
                    Supply
                    Group, Inc. and William Salek
                
                8-K
                01-20-05
                10.0110.04
                1996
                    Stock Option Plan
                
                S-8
                10-02-97
                28B10.05
                2006
                    Stock Plan
                
                10-Q
                11-13-06
                10.01(a)
                Form
                    of stock option grant letter
                
                8-K
                12-06-06
                10.01
  43
 *Table
              of Contents*
 
 Exhibit
                Exhibit
                    Name
                Filed
                    Herewith
                Form
                Date
                    Filed With SEC
                Incorporated
                    By Reference From Exhibit10.06
                Purchase
                    Agreement dated March 25, 1999 for business and assets subject
                    to certain
                    liabilities of Universal Supply Group, Inc.
                
                10-KSB
                03-30-99
                10(g)(a)
                Amendment
                    Number 1 dated June 25, 1999 to Purchase Agreement dated March
                    25,
                    1999
                
                8-K
                07-09-99
                10(a)(ii)(b)
                Loan
                    and Security Agreement dated June 24, 1999 between LaSalle Bank
                    National
                    Association and Universal Supply Group, Inc.
                
                8-K
                07-09-99
                10(a)(iv)(c)
                Demand
                    Note dated June 24, 1999 between LaSalle Bank National Association
                    and
                    Colonial Commercial Sub Corp.
                
                8-K
                07-09-99
                10(a)(v)(d)
                Guaranty
                    of All Liabilities and Security Agreement of Colonial Commercial
                    Sub Corp.
                    by Colonial Commercial Corp. to LaSalle Bank National Association
                    dated
                    June 24, 1999
                
                8-K
                07-09-99
                10(a)(vi)(e)
                Waiver
                    and Tenth Amendment dated November 21, 2002 to the Loan and Security
                    Agreement dated June 24, 1999 between LaSalle Bank National Association
                    and Universal Supply Group, Inc.
                
                10-K
                11-18-03
                10(e)(vi)(f)
                Securities
                    Pledge Agreement dated November 21, 2002 made by the Registrant
                    in favor
                    of LaSalle Bank National Association, re: Universal Supply Group,
                    Inc.
                
                10-K
                11-18-03
                (10)(e)(vii)10.07
                Certain
                    documents related to refinance with Wells Fargo Business Credit,
                    Inc. of
                    asset based loan and term loan dated July 28, 2004, previously
                    with
                    LaSalle Bank National Association:(a)
                Credit
                    Security Agreement dated July 28, 2004 between American/Universal
                    Supply,
                    Inc., The RAL Supply Group, Inc. and Universal Supply Group,
                    Inc. to Wells
                    Fargo Business Credit, Inc.
                
                10-Q
                08-16-04
                10.1(b)
                First
                    Amendment to the Credit Security Agreement dated May 11,
                    2006
                
                8-K
                06-27-06
                10.0210.08
                Certain
                    documents related to Well-Bilt Steel Products, Inc.:(a)
                Reaffirmation
                    Agreement, General Release Consent and Acknowledgement of Commercial
                    Reasonableness of Private Sale dated February 1, 2001between
                    Atlantic
                    Hardware & Supply Corporation, Universal Supply Group, Inc., Colonial
                    Commercial Corp., and the Secured Lender
                
                8-K
                02-16-01
                10(a)(i)(b)
                Reaffirmation
                    Agreement, General Release Consent and Acknowledgement of Commercial
                    Reasonableness of Private Sale dated February 1, 2001between
                    Well-Bilt
                    Steel Products, Inc. and the Secured Lender
                
                8-K
                02-16-01
                10(a)(ii)(c)
                Foreclosure
                    Agreement dated February 1, 2001 between Independent Steel Products,
                    LLC,
                    the Secured Lender, Atlantic Hardware & Supply Corporation, Universal
                    Supply group, Inc. and Well-Bilt Steel Products, Inc.
                
                8-K
                02-16-01
                10(a)(iii)(d)
                Bill
                    of Sale and Assignment dated February 1, 2001 made by the Secured
                    Lender
                    in favor of Independent Steel Products, LLC
                
                8-K
                02-16-01
                10(a)(iv)
  44
 *Table
              of Contents*
 
 Exhibit
                Exhibit
                    Name
                Filed
                    Herewith
                Form
                Date
                    Filed With SEC
                Incorporated
                    By Reference From Exhibit10.09
                Inventory
                    Control Agreement re: Universal Supply Group, Inc. taking in
                    inventory on
                    a consignment basis dated August 9, 2001 between Douglas-Guardian
                    Services
                    Corporation, Universal Supply Group, Inc. and GMC Sales
                    corp.
                
                10-K
                11-18-03
                10(g)10.10
                Agreement
                    of Purchase of Sale of Assets dated July 1, 2002 between Goldman
                    Associates of New York, Inc. and Universal Supply Group,
                    Inc.
                
                10-K
                11-18-03
                10(h)10.11
                Private
                    Placement Purchase Agreement dated June 30, 2003 by and among
                    Colonial
                    Commercial Corp. and the persons who are counterparts to the
                    Agreement as
                    “Investors”
                
                10-K
                03-30-06
                10.1010.12
                Private
                    Placement Purchase Agreement dated February 12, 2004 by and among
                    Colonial
                    Commercial Corp. and the persons who are counterparts to the
                    Agreement as
                    “Investors”
                
                10-K
                03-30-06
                10.1110.13
                Private
                    Placement Purchase Agreement dated July 29, 2004 by and among
                    Colonial
                    Commercial Corp, and the persons who are counterparts to the
                    Agreement as
                    “Investors” including:(a)
                Private
                    Placement Purchase Agreement
                
                10-Q
                08-16-04
                4.1(b)
                Convertible
                    Note Payable
                
                10-Q
                08-16-04
                4.210.14
                Private
                    Placement Purchase Agreement dated July 29, 2004 by and among
                    Michael
                    Goldman and Goldman Associates of New York, Inc.
                    including:
                
                10-Q
                08-16-04
                4.3(a)
                Private
                    Placement Agreement
                
                10-Q
                08-16-04
                4.4(b)
                Secured
                    Note
                
                10-Q
                08-16-04
                4.5(c)
                Warrant
                
                10-Q
                08-16-04
                4.610.15
                Asset
                    Purchase Agreement dated September 5, 2003 for the purchase of
                    certain
                    assets, subject to certain liabilities of The RAL Supply Group,
                    Inc., by
                    RAL Purchasing Corp., a wholly-owned subsidiary of Colonial Commercial
                    Corp.
                
                8-K
                10-15-03
                10(a)(i)10.16
                RAL
                    Closing Statement dated September 30, 2003
                
                8-K
                10-15-03
                10(a)(ii)10.17
                Lease
                    Agreement by and between Zanzi Realty, Inc. and The RAL Supply
                    Group,
                    Inc., dated September 1, 1998
                
                8-K
                11-02-05
                10.04(a)
                First
                    Modification of Lease Agreement dated September 30, 2003 to Lease
                    Agreement by and between Zanzi Realty, Inc. and The RAL Supply
                    Group,
                    Inc., dated September 1, 1998
                
                8-K
                11-02-05
                10.05
  45
 *Table
              of Contents*
  Exhibit
                  Exhibit
                      Name
                  Filed
                      Herewith
                  Form
                  Date
                      Filed With SEC
                  Incorporated
                      By Reference From Exhibit(b)
                  Second
                      Modification of Lease Agreement dated April 12, 2005 to Lease
                      Agreement by
                      and between Zanzi Realty, Inc. and The RAL Supply Group, Inc.,
                      dated
                      September 1, 1998
                  
                  8-K
                  11-02-05
                  10.06(c)
                  Third
                      Modification of Lease Agreement dated February 21, 2007 to
                      Lease Agreement
                      by and between Zanzi Realty, Inc. and The RAL Supply Group,
                      Inc., dated
                      September 1, 1998
                  
                  8-K
                  02-23-07
                  10.04(d)
                  Option
                      Agreement by and between Pioneer Realty Holdings, LLC and Colonial
                      Commercial Corp., dated as of February 21, 2007.
                  
                  8-K
                  02-23-07
                  10.0510.18
                  Offer
                      to Purchase Odd Lot Shares and Letter of Transmittal dated
                      August 16,
                      2005
                  
                  8-K
                  08-18-05
                  10.0111.01
                  Statement
                      re computation of per share earnings (loss)—Not filed since computations
                      are readily apparent from the Consolidated Financial
                      Statements14.01
                  Code
                      of Ethics
                  
                  10-K
                  04-15-05
                  1421.01
                  Subsidiaries
                      of Registrant
                  Yes23.01
                  Consent
                      of Registered Independent Public Accounting Firm—Weiser,
                      LLP
                  Yes31.01
                  Certification
                      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                      Act of 2002
                  Yes31.02
                  Certification
                      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                      Act of 2002
                  Yes32.01
                  Certification
                      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                      Act of 2002
                  Yes32.02
                  Certification
                      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
                      Act of 2002
                  Yes99.01
                  Affidavit
                      dated January 28, 2002 in support of Atlantic Hardware & Supply
                      Corporation’s Petition for Relief under Chapter 11 of the U.S. Bankruptcy
                      Code
                  
                  10-K
                  11-18-03
                  99.199.02
                  Dismissal
                      of Atlantic Hardware & Supply Corporation’s Petition for Relief by the
                      U.S. Bankruptcy Court for the Eastern District of New York
                      dated May 18,
                      2005
                  
                  10-K
                  03-30-06
                  99.02
  46
 *Table
              of Contents*
  **COLONIAL
          COMMERCIAL CORP.
          AND SUBSIDIARIES**
  Index
          to
          Consolidated Financial Statements
  CONTENTSPageReport
                      of Independent Registered Public Accounting Firm: Weiser
                      LLP
                  F-2Consolidated
                      Balance Sheets as of December 31, 2006 and 2005
                  F-3Consolidated
                      Statements of Operations for the Years Ended December 31, 2006,
                      2005 and
                      2004
                  F-4Consolidated
                      Statements of Stockholders’ Equity for the Years Ended December 31, 2006,
                      2005 and 2004
                  F-5Consolidated
                      Statements of Cash Flows for the Years Ended December 31, 2006,
                      2005 and
                      2004
                  F-6Notes
                      to the Consolidated Financial Statements
                  F-7Schedule
                      II – Valuation and Qualifying Accounts
                  F-32
 All
            other
            schedules are omitted because they are not required or the information
            required
            is given in the consolidated financial statements or notes thereto.
 F-1
 *Table
              of Contents*
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
   To
          the
          Board of Directors and Stockholders of Colonial Commercial Corp. and
          Subsidiaries:
  We
          have audited the accompanying
          consolidated balance sheets of Colonial Commercial Corp. and Subsidiaries
          (the
          "Company") as of December 31, 2006 and 2005 and the related consolidated
          statements of operations, stockholders’ equity and cash flows for the years
          ended December 31, 2006, 2005 and 2004.  These financial statements
          and financial statement schedule are the responsibility of the Company's
          management.  Our responsibility is to express an opinion on these
          financial statements and financial statement schedule based on our
          audits.
  We
          conducted our audits in accordance
          with the standards of the Public Company Accounting Oversight Board (United
          States).  Those standards require that we plan and perform the audit
          to obtain reasonable assurance about whether the financial statements are
          free
          of material misstatement.  An audit includes examining, on a test
          basis, evidence supporting the amounts and disclosures in the financial
          statements.  An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation.  We believe
          that our audits provide a reasonable basis for our opinion.
  In
          our opinion, the financial
          statements referred to above present fairly, in all material respects,
          the
          consolidated financial position of Colonial Commercial Corp. and Subsidiaries
          as
          of December 31, 2006 and 2005 and the consolidated results of their operations
          and their cash flows for the years ended December 31, 2006, 2005 and 2004,
          in
          conformity with U.S. generally accepted accounting principles.
 As
              discussed in Note 1(j) to the
              consolidated financial statements, in 2006, the Company changed its
              method of
              accounting for stock-based compensation.  Also, as discussed in Note
              1(p) the accompanying consolidated financial statements have been
              restated.
 We
          have also audited the financial
          statement Schedule II (Valuation and Qualifying Accounts) for the years
          ended
          December 31, 2006, 2005 and 2004. In our opinion, this schedule presents
          fairly,
          in all material respects, the information required to be set forth
          therein.
   /s/Weiser
          LLP
 New
          York,
          NY
 March
              22,
              2007, (August 13, 2007, as to the effects of the restatements discussed
              in Note
              1(p) to the consolidated financial statements)
  F-2
 *Table
                of Contents*
  **PART
                I.  FINANCIAL INFORMATION**
 **Item
                1.  Financial Statements**
 COLONIAL
                COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
                Balance Sheets
 December
                        31,
                      2006
                    
                    
                    December
                        31,
                      2005(Restated)AssetsCurrent
                        assets:Cash
                    
                    $
                    482,251
                    
                    
                    $
                    613,456Accounts
                        receivable, net of allowance for doubtful accounts of $212,043
                        in 2006 and
                        $185,971 in 2005
                    
                    
                    9,069,301
                    
                    
                    
                    8,489,717Inventory
                    
                    
                    12,854,317
                    
                    
                    
                    11,894,740Prepaid
                        expenses and other current assets
                    
                    
                    1,057,099
                    
                    
                    
                    1,066,658Deferred
                        tax asset - current portion
                    
                    
                    420,000
                    
                    
                    
                    637,500Total
                        current assets
                    
                    
                    23,882,968
                    
                    
                    
                    22,702,071Property
                        and equipment
                    
                    
                    1,512,666
                    
                    
                    
                    1,669,484Goodwill
                    
                    
                    1,628,133
                    
                    
                    
                    1,628,133Other
                        intangibles
                    
                    
                    3,500
                    
                    
                    
                    11,334Other
                        assets - noncurrent
                    
                    
                    202,177
                    
                    
                    
                    135,832Deferred
                        tax asset - noncurrent
                    
                    
                    1,288,500
                    
                    
                    
                    1,071,000$
                    28,517,944
                    
                    
                    $
                    27,217,854Liabilities
                        and Stockholders' EquityCurrent
                        liabilities:Trade
                        payables
                    
                    $
                    4,719,160
                    
                    
                    $
                    5,991,946Accrued
                        liabilities
                    
                    
                    1,975,175
                    
                    
                    
                    2,047,159Income
                        taxes payable
                    
                    
                    1,630
                    
                    
                    
                    12,772Borrowings
                        under credit facility - revolving credit
                    
                    
                    13,615,696
                    
                    
                    
                    11,183,008Borrowings
                        under credit facility - term loan/overadvance
                    
                    
                    -
                    
                    
                    
                    562,977Notes
                        payable - current portion; includes related party  notes of
                        $30,000 in 2006 and $60,389 in 2005
                    
                    
                    136,539
                    
                    
                    
                    165,112Total
                        current liabilities
                    
                    
                    20,448,200
                    
                    
                    
                    19,962,974Notes
                        payable, excluding current portion; includes related party
                        notes of
                        $1,008,125 in 2006and $1,000,625 in 2005
                    
                    
                    1,317,394
                    
                    
                    
                    1,400,834Total
                        liabilities
                    
                    
                    21,765,594
                    
                    
                    
                    21,363,808Commitments
                        and contingenciesStockholders'
                        equity:Redeemable
                        convertible preferred stock, $.05 par value, 2,500,000 shares
                        authorized,
                        467,500 in 2006 and 484,721 in 2005 shares issued and outstanding,
                        liquidation preference of  $2,337,500 in 2006 and $2,423,605 in
                        2005
                    
                    
                    23,375
                    
                    
                    
                    24,236Common
                        stock, $.05 par value, 20,000,000 shares authorized, 4,593,680
                        in 2006 and
                        4,544,459 in 2005 shares issued and outstanding
                    
                    
                    229,684
                    
                    
                    
                    227,223Additional
                        paid-in capital
                    
                    
                    10,707,791
                    
                    
                    
                    10,626,859Accumulated
                        deficit
                    
                    
                    (4,208,500
                    )
                    
                    
                    (5,024,272
                    )Total
                        stockholders' equity
                    
                    
                    6,752,350
                    
                    
                    
                    5,854,046$
                    28,517,944
                    
                    
                    $
                    27,217,854
 
 The
              accompanying notes are an integral part of these consolidated financial
              statements.
  F-3
 *Table
              of Contents*
  COLONIAL
                COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
                Statements of Operations
 For
                          the Years Ended December 31,2006
                      
                      
                      2005
                      
                      
                      2004(Restated)
                      
                      
                      (Restated)
                      
                      
                      (Restated)Sales
                      
                      $
                      71,494,652
                      
                      
                      $
                      66,690,945
                      
                      
                      $
                      61,454,128Cost
                          of sales
                      
                      
                      50,057,446
                      
                      
                      
                      46,560,548
                      
                      
                      
                      43,207,717Gross
                          profit
                      
                      
                      21,437,206
                      
                      
                      
                      20,130,397
                      
                      
                      
                      18,246,411Selling,
                          general and administrative expenses, net
                      
                      
                      19,420,124
                      
                      
                      
                      17,782,752
                      
                      
                      
                      16,666,335Operating
                          income
                      
                      
                      2,017,082
                      
                      
                      
                      2,347,645
                      
                      
                      
                      1,580,076Other
                          income
                      
                      
                      277,866
                      
                      
                      
                      272,597
                      
                      
                      
                      320,359Interest
                          expense, net; includes related party interest of $104,485
                          in 2006, $93,154
                          in 2005 and $45,007 in 2004
                      
                      
                      (1,354,785
                      )
                      
                      
                      (1,044,454
                      )
                      
                      
                      (875,683
                      )Income
                          from operations before income tax benefit
                      
                      
                      940,163
                      
                      
                      
                      1,575,788
                      
                      
                      
                      1,024,752Income
                          tax expense (benefit)
                      
                      
                      124,391
                      
                      
                      
                      (487,064
                      )
                      
                      
                      (498,668
                      )Net
                          income
                      
                      $
                      815,772
                      
                      
                      $
                      2,062,852
                      
                      
                      $
                      1,523,420Income
                          per common share:Basic
                      
                      $
                      0.18
                      
                      
                      $
                      0.48
                      
                      
                      $
                      0.45Diluted
                      
                      $
                      0.16
                      
                      
                      $
                      0.40
                      
                      
                      $
                      0.34Weighted
                          average shares outstanding:Basic
                      
                      
                      4,579,129
                      
                      
                      
                      4,295,697
                      
                      
                      
                      3,403,152Diluted
                      
                      
                      5,125,646
                      
                      
                      
                      5,293,114
                      
                      
                      
                      4,587,966
 
 The
              accompanying notes are an integral part of these consolidated financial
              statements.
 F-4
 *Table
                of Contents*
  COLONIAL
                COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
                Statements of Stockholders' Equity
 For  the
                Years Ended December 31, 2006, 2005, and 2004
 
 Number
                          of sharesRedeemable
                        Convertible
                        Preferred
                        Stock
                      
                      
                      Common
                        Stock
                      
                      
                      Redeemable
                        Convertible
                        Preferred
                        Stock
                      
                      
                      Common
                        Stock
                      
                      
                      Additional
                        Paid-In
                          Capital
                      
                      
                      Accumulated
                        Deficit
                      
                      
                      Total
                        Stockholders'
                        EquityBalance
                          at December 31, 2003
                      
                      
                      1,466,792
                      
                      
                      
                      2,403,318
                      
                      
                      $
                      73,340
                      
                      
                      $
                      120,166
                      
                      
                      $
                      9,259,013
                      
                      
                      $
                      (8,481,538
                      )
                      
                      $
                      970,981Prior
                          period adjustment (See Note 1(p))
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (129,006
                      )
                      
                      
                      (129,006
                      )Balance
                          at January 1, 2004, Restated
                      
                      
                      1,466,792
                      
                      
                      
                      2,403,318
                      
                      
                      $
                      73,340
                      
                      
                      $
                      120,166
                      
                      
                      $
                      9,259,013
                      
                      
                      $
                      (8,610,544
                      )
                      
                      $
                      841,975Net
                          income, Restated
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,523,420
                      
                      
                      
                      1,523,420Stock-based
                          compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      62,025
                      
                      
                      
                      
                      
                      
                      
                      62,025Conversion
                          of shares of preferred stock to common stock
                      
                      
                      (83,623
                      )
                      
                      
                      83,623
                      
                      
                      
                      (4,181
                      )
                      
                      
                      4,181
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Retirement
                          of preferred stock
                      
                      
                      (592,730
                      )
                      
                      
                      
                      
                      
                      
                      (29,637
                      )
                      
                      
                      
                      
                      
                      
                      (326,002
                      )
                      
                      
                      
                      
                      
                      
                      (355,639
                      )Issuance
                          of common stock
                      
                      
                      
                      
                      
                      
                      1,620,000
                      
                      
                      
                      
                      
                      
                      
                      81,000
                      
                      
                      
                      1,554,000
                      
                      
                      
                      
                      
                      
                      
                      1,635,000Options
                          exercised
                      
                      
                      
                      
                      
                      
                      51,500
                      
                      
                      
                      
                      
                      
                      
                      2,575
                      
                      
                      
                      10,300
                      
                      
                      
                      
                      
                      
                      
                      12,875Warrant
                          value
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      187,500
                      
                      
                      
                      
                      
                      
                      
                      187,500Balance
                          at December 31, 2004, Restated
                      
                      
                      790,439
                      
                      
                      
                      4,158,441
                      
                      
                      
                      39,522
                      
                      
                      
                      207,922
                      
                      
                      
                      10,746,836
                      
                      
                      
                      (7,087,124
                      )
                      
                      
                      3,907,156Net
                          income, Restated
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,062,852
                      
                      
                      
                      2,062,852Stock-based
                          compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (74,450
                      )
                      
                      
                      
                      
                      
                      
                      (74,450
                      )Conversion
                          of shares of preferred stock to common stock
                      
                      
                      (298,018
                      )
                      
                      
                      298,018
                      
                      
                      
                      (14,901
                      )
                      
                      
                      14,901
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Retirement
                          of preferred stock
                      
                      
                      (7,700
                      )
                      
                      
                      
                      
                      
                      
                      (385
                      )
                      
                      
                      
                      
                      
                      
                      (15,015
                      )
                      
                      
                      
                      
                      
                      
                      (15,400
                      )Options
                          exercised
                      
                      
                      
                      
                      
                      
                      88,000
                      
                      
                      
                      
                      
                      
                      
                      4,400
                      
                      
                      
                      17,600
                      
                      
                      
                      
                      
                      
                      
                      22,000Tax
                          effect of options exercised
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (48,112
                      )
                      
                      
                      
                      
                      
                      
                      (48,112
                      )Balance
                          at December 31, 2005, Restated
                      
                      
                      484,721
                      
                      
                      
                      4,544,459
                      
                      
                      
                      24,236
                      
                      
                      
                      227,223
                      
                      
                      
                      10,626,859
                      
                      
                      
                      (5,024,272
                      )
                      
                      
                      5,854,046Net
                          income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      815,772
                      
                      
                      
                      815,772Conversion
                          of shares of  preferred stock to common stock
                      
                      
                      (17,221
                      )
                      
                      
                      17,221
                      
                      
                      
                      (861
                      )
                      
                      
                      861
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Options
                          exercised
                      
                      
                      
                      
                      
                      
                      32,000
                      
                      
                      
                      
                      
                      
                      
                      1,600
                      
                      
                      
                      6,400
                      
                      
                      
                      
                      
                      
                      
                      8,000Options
                          issued
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      53,412
                      
                      
                      
                      
                      
                      
                      
                      53,412Tax
                          effect of options exercised
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      21,120
                      
                      
                      
                      
                      
                      
                      
                      21,120Balance
                          at December 31, 2006, Restated
                      
                      
                      467,500
                      
                      
                      
                      4,593,680
                      
                      
                      $
                      23,375
                      
                      
                      $
                      229,684
                      
                      
                      $
                      10,707,791
                      
                      
                      $
                      (4,208,500
                      )
                      
                      $
                      6,752,350
  The
                accompanying notes are an integral part of these consolidated financial
                statements.
 F-5
 *Table
                  of Contents*
  COLONIAL
                COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
                Statements of Cash Flows
 For
                        The Years Ended December 31,2006
                    
                    
                    2005
                    
                    
                    2004(Restated)
                    
                    
                    (Restated)Cash
                        flows from operating activities:Net
                        income
                    
                    $
                    815,772
                    
                    
                    $
                    2,062,852
                    
                    
                    $
                    1,523,420Adjustments
                        to reconcile net income to net cash (used in) provided by
                        operating
                        activities:Deferred
                        tax benefit
                    
                    
                    -
                    
                    
                    
                    (641,500
                    )
                    
                    
                    (645,600
                    )Stock-based
                        compensation
                    
                    
                    53,412
                    
                    
                    
                    (74,450
                    )
                    
                    
                    62,025Provision
                        for doubtful accounts
                    
                    
                    191,357
                    
                    
                    
                    101,724
                    
                    
                    
                    225,183Depreciation
                    
                    
                    457,322
                    
                    
                    
                    387,719
                    
                    
                    
                    366,223Amortization
                        of intangibles
                    
                    
                    7,834
                    
                    
                    
                    16,166
                    
                    
                    
                    26,667Accretion
                        of debt discount
                    
                    
                    37,500
                    
                    
                    
                    37,500
                    
                    
                    
                    15,625Tax
                        effect of options exercised
                    
                    
                    21,120
                    
                    
                    
                    (48,112
                    )
                    
                    
                    -Changes
                        in operating assets and liabilitiesAccounts
                        receivable
                    
                    
                    (701,615
                    )
                    
                    
                    (816,853
                    )
                    
                    
                    (1,745,871
                    )Inventory
                    
                    
                    (867,398
                    )
                    
                    
                    (1,159,168
                    )
                    
                    
                    (1,081,756
                    )Prepaid
                        expenses and other current assets
                    
                    
                    (2,321
                    )
                    
                    
                    (200,926
                    )
                    
                    
                    (245,054
                    )Other
                        assets - noncurrent
                    
                    
                    (66,345
                    )
                    
                    
                    47,351
                    
                    
                    
                    (183,183
                    )Trade
                        payables
                    
                    
                    (1,272,786
                    )
                    
                    
                    1,270,156
                    
                    
                    
                    (574,089
                    )Accrued
                        liabilities
                    
                    
                    (71,984
                    )
                    
                    
                    303,153
                    
                    
                    
                    230,428Income
                        taxes payable
                    
                    
                    (11,142
                    )
                    
                    
                    (23,544
                    )
                    
                    
                    (139,298
                    )Net
                        cash (used in) provided by operating activities
                    
                    
                    (1,409,274
                    )
                    
                    
                    1,262,068
                    
                    
                    
                    (2,165,280
                    )Cash
                        flows from investing activities:
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Additions
                        to property and equipment
                    
                    
                    (300,504
                    )
                    
                    
                    (401,054
                    )
                    
                    
                    (507,241
                    )Acquisition
                        of Speed Queen assets from Goldman Associates of NY, Inc.
                    
                    
                    (149,625
                    )Net
                        cash used in investing activities
                    
                    
                    (450,129
                    )
                    
                    
                    (401,054
                    )
                    
                    
                    (507,241
                    )Cash
                        flows from financing activities:Issuance
                        of common stock and exercise of stock options
                    
                    
                    8,000
                    
                    
                    
                    22,000
                    
                    
                    
                    1,647,875Retirement
                        of preferred stock
                    
                    
                    -
                    
                    
                    
                    (15,400
                    )
                    
                    
                    (355,639
                    )Repayments
                        of notes payable: includes related party repayments of $60,389
                        in 2006,
                        $48,091 in 2005 and $30,000 in 2004.
                    
                    
                    (162,586
                    )
                    
                    
                    (141,292
                    )
                    
                    
                    (105,883
                    )Issuance
                        of notes payable: includes related party notes of $0.00 in
                        2006, $48,480
                        in 2005 and $1,075,000 in 2004.
                    
                    
                    13,073
                    
                    
                    
                    155,699
                    
                    
                    
                    1,173,392Issuance
                        of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    187,500Repayments
                        under credit facility - term loan/overadvance
                    
                    
                    (562,977
                    )
                    
                    
                    (1,103,690
                    )
                    
                    
                    (572,333
                    )Borrowings
                        under credit facility - revolving credit
                    
                    
                    2,432,688
                    
                    
                    
                    524,466
                    
                    
                    
                    665,512Net
                        cash provided by (used in) financing activities
                    
                    
                    1,728,198
                    
                    
                    
                    (558,217
                    )
                    
                    
                    2,640,424(Decrease)
                        increase in cash
                    
                    
                    (131,205
                    )
                    
                    
                    302,797
                    
                    
                    
                    (32,097
                    )Cash
                        - beginning of period
                    
                    
                    613,456
                    
                    
                    
                    310,659
                    
                    
                    
                    342,756Cash
                        - end of period
                    
                    $
                    482,251
                    
                    
                    $
                    613,456
                    
                    
                    $
                    310,659
 
 The
              accompanying notes are an integral part of these consolidated financial
              statements.
  F-6
 *Table
              of Contents*
 **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
  **Notes
            to Consolidated Financial Statements**
 **December
            31, 2006, 2005 and 2004**
 **1.
              Summary of Significant Accounting Policies and
              Practices**
  (a)
            Description of Business
  Colonial
            Commercial Corp. (“Colonial”),
            through its operating Subsidiaries, Universal Supply Group, Inc. (“Universal”),
            RAL Supply Group, Inc. (“RAL”) and American/Universal Supply Inc. (“American”)
            (together, the “Company”), is a distributor of heating, ventilation and air
            conditioning (HVAC), climate control products, plumbing fixtures and
            supplies
            and appliances to building contractors and other users, which the Company
            considers its only industry segment.  The Company’s products are
            marketed primarily to HVAC contractors, which, in turn, sell such products
            to
            residential and commercial/industrial customers.  The Company’s
            customers are located in the United States, primarily New Jersey, New
            York and
            portions of eastern Pennsylvania.  The Company has no long term
            agreement with any customer.  The Company deals with its customers on
            a purchase order by purchase order basis.  The Company has no assured
            stability in its customer base.  The Company has no material long term
            agreements with any supplier.  Certain supplier agreements limit the
            sale of competitive products in designated markets that the Company
            serves.
  (b)
            Principles of Consolidation
  The
            consolidated financial statements
            include the accounts of Colonial and its wholly-owned
            Subsidiaries.  All significant intercompany balances and transactions
            have been eliminated in consolidation.
  (c)  Revenue
            Recognition
  Revenue
            is recognized when the earnings
            process is complete, generally upon shipment of products in accordance
            with
            shipping terms.  There are no further obligations on the part of the
            Company subsequent to revenue recognition, except for returns of defective
            products from the Company’s customers, which are covered under the
            manufacturer’s warranty.  The Company will receive a vendor credit
            from the manufacturer related to the warranted product in question, at
            which
            time credits are issued to the customer.  The Company does not provide
            a warranty on products sold other than the warranty provided by the
            manufacturer.
  (d)
            Cash Equivalents
  The
            Company considers all highly liquid
            investment instruments with an original maturity of three months or less
            to be
            cash equivalents.  There were no cash equivalents at December 31, 2006
            and 2005.
  (e)
            Accounts Receivable
  Accounts
            receivable consist of trade
            receivables recorded at original invoice amount, less an estimated allowance
            for
            uncollectible accounts. Trade credit is generally extended on a short-term
            basis; thus trade receivables generally do not bear interest. However,
            a service
            charge may be applied to receivables that are past due. These charges,
            when
            collected, are included as other income.  Trade receivables are
            periodically evaluated for collectibility based on past credit history
            with
            customers and their current financial condition. Changes in the estimated
            collectibility of trade receivables are recorded in the results of operations
            for the period in which the estimate is revised. Trade receivables that
            are
            deemed uncollectible are offset against the allowance for uncollectible
            accounts. The Company generally does not require collateral for trade
            receivables.
  F-7
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  (f)
            Inventory
  Inventory
            is stated at the lower of
            cost or market and consists solely of finished goods.  Cost is
            determined using the first-in, first-out method.
  Distribution
            costs of incoming
            freight, purchasing, receiving, inspection, warehousing and handling
            costs are
            included in selling, general and administrative expenses.  Such costs
            were $431,780, $421,248 and $325,109 for the years ended December 31,
            2006, 2005
            and 2004, respectively.
  (g)
            Vendor Rebates
  The
            Company has arrangements with
            several vendors that provide rebates payable when the Company achieves any
            of a number of measures, generally related to volume level of
            purchases.  The Company accounts for such rebates as a reduction of
            inventory until sale of the product, at which time such rebates are reflected
            as
            a reduction of cost of sales in the consolidated statements of
            income.  Throughout the year, the Company estimates the amount of
            rebate based on estimates of purchases to date relative to the purchase
            levels that mark the progress toward earning the rebate.  The Company
            continually revises these estimates of earned vendor rebates based on
            actual
            purchase levels.
  (h)
            Property and Equipment
  Property
            and equipment are stated at
            cost.  Depreciation is calculated on the straight-line method over the
            estimated useful lives of the assets as follows:
  Computer
                      hardware and software
                  3-5
                      yearsFurniture
                      and fixtures
                  5
                      yearsAutomobiles
                  3-5
                      yearsShowroom
                      fixtures and displays
                  3
                      years
  Leasehold
            improvements are amortized
            over the shorter of the lease term or the estimated useful life of the
            asset.
  (i)
            Goodwill and Other Intangible Assets
  Statement
            of Financial Accounting
            Standards (SFAS) 142, "Goodwill and Other Intangible Assets," requires
            that
            goodwill be tested for impairment at least annually. Intangible assets
            determined to have finite lives are amortized over their remaining useful
            lives.  The Company has determined Universal and RAL are reporting
            units.
  F-8
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  (j)
            Stock Options
  Prior
            to January 1, 2006, the Company
            used the intrinsic-value method of accounting for stock-based awards
            granted to
            employees.  In accordance with SFAS No. 148, “Accounting for Stock
            Based Compensation – Transition and Disclosure,” the following table presents
            the effect on net income and net income per share, had compensation cost
            for the
            Company’s stock plans been determined consistent with SFAS No. 123, “Accounting
            for Stock-Based Compensation”.
  On
            January 1, 2006, the Company adopted
            the modified prospective application method of SFAS No. 123(R), “Share-Based
            Payment”, which establishes standards for transactions in which an entity
            exchanges its equity instruments for goods or services. This standard
            requires
            an entity to measure the cost of employee services received in exchange
            for an
            award of equity instruments based on the grant date fair value of the
            award.
            This eliminates the exception to account for such awards using the intrinsic
            method previously allowable under APB Opinion No. 25. SFAS No. 123 (R)
            will be
            effective for the first period after December 31, 2005.
  The
            following table illustrates the
            effect on net income if the fair-value-based method had been applied
            to all
            outstanding and unvested awards in each period.
 2005
                        Restated
                      
                      
                      2005
                        As
                          Previously
                        Reported
                      
                      
                      2004
                        Restated
                      
                      
                      2004
                        As
                          Previously
                        ReportedNet
                          income, as reported
                      
                      $
                      2,062,852
                      
                      
                      $
                      2,115,631
                      
                      
                      $
                      1,523,420
                      
                      
                      $
                      1,661,156Add:
                          Stock-based compensation related to option repricing
                      
                      
                      (74,450
                      )
                      
                      
                      (74,450
                      )
                      
                      
                      62,025
                      
                      
                      
                      62,025Pro
                          forma
                      
                      $
                      1,988,402
                      
                      
                      $
                      2,041,181
                      
                      
                      $
                      1,585,445
                      
                      
                      $
                      1,723,181Basic
                          net income per common shareAs
                          reported
                      
                      $
                      0.48
                      
                      
                      $
                      0.49
                      
                      
                      $
                      0.45
                      
                      
                      $
                      0.49Pro
                          forma
                      
                      $
                      0.46
                      
                      
                      $
                      0.48
                      
                      
                      $
                      0.47
                      
                      
                      $
                      0.51Diluted
                          net income per common shareAs
                          reported
                      
                      $
                      0.40
                      
                      
                      $
                      0.40
                      
                      
                      $
                      0.34
                      
                      
                      $
                      0.36Pro
                          forma
                      
                      $
                      0.38
                      
                      
                      $
                      0.39
                      
                      
                      $
                      0.35
                      
                      
                      $
                      0.38
  (k)  Net
            Income Per Common Share
  Basic
            income per share excludes any
            dilution.  It is based upon the weighted average number of common
            shares outstanding during the period.  Dilutive earnings per share
            reflect the potential dilution that would occur if securities or other
            contracts
            to issue common stock were exercised or converted into common
            stock.
  F-9
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  (l)  Income
            Taxes
  Income
            taxes are accounted for under
            the asset and liability method.  Deferred tax assets and liabilities
            are recognized for the future tax consequences attributable to differences
            between the financial statement carrying amounts of existing assets and
            liabilities and their respective tax bases, and operating loss and tax
            credit
            carryforwards.  Deferred tax assets and liabilities are measured using
            enacted tax rates expected to apply to taxable income in the years in
            which
            those temporary differences are expected to be recovered or
            settled.  The effect on deferred tax assets and liabilities of a
            change in tax rates is recognized in income in the period that includes
            the
            enactment date.
  The
            Company records a valuation
            allowance against any portion of the deferred income tax asset when it
            believes,
            based on the weight of available evidence, it is more likely than not
            that some
            portion of the deferred tax asset will not be realized.
  (m)
            Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
            Of
  Long-lived
            assets, such as intangible
            assets, furniture, equipment and leasehold improvements, are evaluated
            for
            impairment when events or changes in circumstances indicate that the
            carrying
            amount of the assets may not be recoverable through estimated undiscounted
            future cash flows from the use of these assets.  When any such
            impairment exists, the related assets will be written down to fair
            value.
  (n)
            Use of Estimates
  The
            preparation of the financial
            statements in accordance with accounting principles generally accepted
            in the
            United States of America requires management to make estimates and assumptions
            that affect the reported amounts of assets and liabilities and disclosure
            of
            contingent assets and liabilities at the date of the financial statements
            and
            the reported amounts of revenues and expenses during the reporting
            period.  Actual results could differ from those
            estimates.
  (o)  Recent
            Issued Accounting Pronouncements
  In
            June 2006, the FASB issued FASB
            Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*-an
            interpretation FASB No. 109 (“FIN 48”), which prescribes accounting for and
            disclosure of uncertainty in tax positions.  This interpretation
            defines the criteria that must be met for the benefits of a tax position
            to be
            recognized in the financial statements and the measurement of tax benefits
            recognized.  The provisions of FIN 48 are effective as of the
            beginning of the Company’s 2007 fiscal year, with the cumulative effect of the
            change in accounting principle recorded as an adjustment to opening retained
            earnings.  The Company is currently evaluating the impact of adopting
            FIN 48 on the Company’s consolidated financial statements.
  In
            September 2006, the FASB issued
            Statement of Financial Accounting Standards No. 157, *Fair Value
            Measurements*, (“SFAS 157”).  This Standard defines fair value,
            establishes a framework for measuring fair value in generally accepted
            accounting principles and expands disclosures about fair value
            measurements.  SFAS 157 is effective for financial statements issued
            for fiscal years beginning after November 15, 2007 and interim periods
            within
            those fiscal years.  The adoption of SFAS 157 is not expected to have
            a material impact on the Company’s financial position, results of operations or
            cash flows.
  F-10
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  (p)  Restatement
 This
                  Form
                  10-K/A (Amendment Number 2) is being filed to revise certain sections
                  of the
                  Form 10-K/A for the year ended December 31, 2006, which the Company
                  previously
                  filed with the Securities and Exchange Commission May 21, 2007.  The
                  Company filed this restatement on Form 10-K/A using the cumulative
                  effect
                  transition method pursuant to the guidance contained in SAB 108.
  Subsequent
                  communications with the
                  Securities and Exchange Commission (“SEC”) found that the Company had improperly
                  applied the guidance in SAB 108, specifically, the effect on materiality
                  of the
                  incorrect treatment of vendor rebates on net income for 2004.  The
                  Company has restated its consolidated statements of operations,
                  stockholders’
equity and cash flows for the years ended December 31, 2004 and
                  2005,
                  consolidated balance sheet for the year ended December 31, 2005
                  and
                  stockholder’s equity for the year ended December 31, 2006.  The
                  purpose of this restatement was to correct improper accounting
                  for vendor
                  rebates.  Previously, some vendor rebates were recognized as a
                  reduction of cost of sales when earned, not as a reduction of costs
                  when
                  sold.  When adjusting vendor rebates to be recognized as a reduction
                  of cost of sales, a decrease of gross profit of $137,736 was recognized
                  for the
                  year ended December 31, 2004 and a decrease of gross profit of
                  $52,779 was
                  recognized for the year ended December 31, 2005.  Retained earnings at
                  the beginning of 2004 has been adjusted by $129,006 to correct
                  an error made in
                  2003 for the treatment of vendor rebates.  The Company’s consolidated
                  statement of stockholders’ equity for the year ended December 31, 2006 has been
                  restated to remove the cumulative effect of the adoption of SAB
                  108.  The Company had a net operating loss carryforward for federal
                  tax purposes greater than any amount of federal taxes which would
                  have been due
                  for each of the years ended December 31, 2004 and 2005, therefore,
                  the Company
                  determined that the tax effect of these adjustments was immaterial
                  and,
                  accordingly, the Company has made no adjustment.
  Additionally,
                  the Audit Committee and
                  management of the Company concluded that per SFAS 128 convertible
                  note interest,
                  net of taxes, should be added back to net income when calculating
                  diluted
                  earnings per share to determine if the effect would be
                  antidilutive.  Previously, the Company did not add back interest, net
                  of taxes, on convertible notes when making this calculation.  The
                  Company has corrected this procedure.  The only changes resulting from
                  this correction are to the number of diluted weighted average shares
                  outstanding
                  and the diluted earnings per share.  This correction resulted in an
                  increase of $0.01 to diluted earnings per share for the year ended
                  December 31,
                  2006, no change to diluted earnings per share for the year ended
                  December 31,
                  2005 and a reduction of $0.02 to diluted earnings per share for
                  the year ended
                  December 31, 2004.
  No
                  changes have been made to the
                  Company’s consolidated balance sheet and cash flows for the year ended
                  December
                  31, 2006 as previously reported in the Form 10-K/A on May 21,
                  2007.
  F-11
 *Table
                    of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
 The
                following tables isolate each of
                the restated amounts in the Company’s consolidated balance sheet as of December
                31, 2005, consolidated statement of operations for the years ended
                December 31,
                2004, 2005 and 2006, consolidated statement of cash flows for the
                years ended
                December 31, 2004 and 2005 and stockholder’s equity for the years ended December
                31, 2004, 2005 and 2006.
  Consolidated
                            Balance SheetDecember
                            31,Restated
                        
                        
                        As
                            Previously
                          Reported2005
                        
                        
                        2005Inventory
                        
                        $
                        11,894,740
                        
                        
                        $
                        12,214,261Current
                            assets
                        
                        
                        22,702,071
                        
                        
                        
                        23,021,592Long
                            term assets
                        
                        
                        4,515,783
                        
                        
                        
                        4,515,783Total
                            assets
                        
                        $
                        27,217,854
                        
                        
                        $
                        27,537,375Current
                            liabilities
                        
                        $
                        19,962,974
                        
                        
                        $
                        19,962,974Long
                            term liabilities
                        
                        
                        1,400,834
                        
                        
                        
                        1,400,834Total
                            liabilities
                        
                        
                        21,363,808
                        
                        
                        
                        21,363,808Stockholders’
                            equity
                        
                        
                        5,854,046
                        
                        
                        
                        6,173,567Total
                            liabilities and stockholders equity
                        
                        $
                        27,217,854
                        
                        
                        $
                        27,537,375
  F-12
 *Table
                of Contents*
  **COLONIAL
                  COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
                  to Consolidated Financial Statements, Continued**
  Consolidated
                Statement of Operations
 
 Years
                          Ended December 31,Restated
                      
                      
                      As
                        Previously
                        Reported
                      
                      
                      Restated
                      
                      
                      As
                        Previously
                        Reported
                      
                      
                      Restated
                      
                      
                      As
                        Previously
                        Reported2006
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2005
                      
                      
                      2004
                      
                      
                      2004Sales
                      
                      $
                      71,494,652
                      
                      
                      $
                      71,494,652
                      
                      
                      $
                      66,690,945
                      
                      
                      $
                      66,690,945
                      
                      
                      $
                      61,454,128
                      
                      
                      $
                      61,454,128Cost
                          of Sales
                      
                      
                      50,057,446
                      
                      
                      
                      50,057,446
                      
                      
                      
                      46,560,548
                      
                      
                      
                      46,507,769
                      
                      
                      
                      43,207,717
                      
                      
                      
                      43,069,981Gross
                          Profit
                      
                      
                      21,437,206
                      
                      
                      
                      21,437,206
                      
                      
                      
                      20,130,397
                      
                      
                      
                      20,183,176
                      
                      
                      
                      18,246,411
                      
                      
                      
                      18,384,147Sales,
                          general and administrative expenses, net
                      
                      
                      19,420,124
                      
                      
                      
                      19,420,124
                      
                      
                      
                      17,782,752
                      
                      
                      
                      17,782,752
                      
                      
                      
                      16,666,335
                      
                      
                      
                      16,666,335Operating
                          income
                      
                      
                      2,017,082
                      
                      
                      
                      2,017,082
                      
                      
                      
                      2,347,645
                      
                      
                      
                      2,400,424
                      
                      
                      
                      1,580,076
                      
                      
                      
                      1,717,812Other
                          income
                      
                      
                      277,866
                      
                      
                      
                      277,866
                      
                      
                      
                      272,597
                      
                      
                      
                      272,597
                      
                      
                      
                      320,359
                      
                      
                      
                      320,359Interest
                          expense, net
                      
                      
                      (1,354,785
                      )
                      
                      
                      (1,354,785
                      )
                      
                      
                      (1,044,454
                      )
                      
                      
                      (1,044,454
                      )
                      
                      
                      (875,683
                      )
                      
                      
                      (875,683
                      )Income
                          from operations before income tax benefit
                      
                      
                      940,163
                      
                      
                      
                      940,163
                      
                      
                      
                      1,575,788
                      
                      
                      
                      1,628,567
                      
                      
                      
                      1,024,752
                      
                      
                      
                      1,162,488Income
                          tax expense (benefit)
                      
                      
                      124,391
                      
                      
                      
                      124,391
                      
                      
                      
                      (487,064
                      )
                      
                      
                      (487,064
                      )
                      
                      
                      (498,668
                      )
                      
                      
                      (498,668
                      )Net
                          income
                      
                      $
                      815,772
                      
                      
                      $
                      815,772
                      
                      
                      $
                      2,062,852
                      
                      
                      $
                      2,115,631
                      
                      
                      $
                      1,523,420
                      
                      
                      $
                      1,661,156Income
                          per common share:Basic:
                      
                      $
                      0.18
                      
                      
                      $
                      0.18
                      
                      
                      $
                      0.48
                      
                      
                      $
                      0.49
                      
                      
                      $
                      0.45
                      
                      
                      $
                      0.49Diluted:
                      
                      $
                      0.16
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.40
                      
                      
                      $
                      0.40
                      
                      
                      $
                      0.34
                      
                      
                      $
                      0.36Weighted
                          average shares outstanding:Basic:
                      
                      
                      4,579,129
                      
                      
                      
                      4,579,129
                      
                      
                      
                      4,295,697
                      
                      
                      
                      4,295,697
                      
                      
                      
                      3,403,152
                      
                      
                      
                      3,403,152Diluted:
                      
                      
                      5,125,646
                      
                      
                      
                      5,300,646
                      
                      
                      
                      5,293,114
                      
                      
                      
                      5,293,114
                      
                      
                      
                      4,587,966
                      
                      
                      
                      4,587,966
  F-13
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
 Consolidated
                          Statement of Cash FlowsYears
                          Ended December 31,Restated
                      
                      
                      As
                          Previously
                        Reported
                      
                      
                      Restated
                      
                      
                      As
                          Previously
                        Reported2005
                      
                      
                      2005
                      
                      
                      2004
                      
                      
                      2004Net
                          income
                      
                      $
                      2,062,852
                      
                      
                      $
                      2,115,631
                      
                      
                      $
                      1,523,420
                      
                      
                      $
                      1,661,156Inventory
                      
                      
                      (1,159,168
                      )
                      
                      
                      (1,211,947
                      )
                      
                      
                      (1,081,756
                      )
                      
                      
                      (1,219,492
                      )Net
                          cash (used in) provided by operating activities
                      
                      
                      1,262,068
                      
                      
                      
                      1,262,068
                      
                      
                      
                      (2,165,280
                      )
                      
                      
                      (2,165,280
                      )Net
                          cash used in investing activities
                      
                      
                      (401,054
                      )
                      
                      
                      (401,054
                      )
                      
                      
                      (507,241
                      )
                      
                      
                      (507,241
                      )Net
                          cash provided by (used in) financing activities
                      
                      
                      (558,217
                      )
                      
                      
                      (558,217
                      )
                      
                      
                      2,640,424
                      
                      
                      
                      2,640,424(Decrease)
                          increase in cash
                      
                      
                      302,797
                      
                      
                      
                      302,797
                      
                      
                      
                      (32,097
                      )
                      
                      
                      (32,097
                      )Cash
                          – beginning of period
                      
                      
                      310,659
                      
                      
                      
                      310,659
                      
                      
                      
                      342,756
                      
                      
                      
                      342,756Cash
                          – end of period
                      
                      $
                      613,456
                      
                      
                      $
                      613,456
                      
                      
                      $
                      310,659
                      
                      
                      $
                      310,659
  Consolidated
                            Statements of Stockholders' EquityFor the
                            Years Ended December 31, 2006, 2005, and 2004As
                            Previously Reported
                        
                        RestatedAccumulated
                          Deficit
                        
                        
                        Total
                          Stockholders'
                          Equity
                        
                        
                        
                        Accumulated
                          Deficit
                        
                        
                        Total
                          Stockholders'
                          EquityBalance
                            at December 31, 2003
                        
                        $
                        (8,481,538
                        )
                        
                        $
                        970,981
                        
                        Balance
                            at December 31, 2003
                        
                        $
                        (8,481,538
                        )
                        
                        $
                        970,981Prior
                            period adjustment
                        
                        
                        (129,006
                        )
                        
                        
                        (129,006
                        )Balance
                            at January 1, 2004
                        
                        $
                        (8,610,544
                        )
                        
                        $
                        841,975Net
                            income
                        
                        
                        1,661,156
                        
                        
                        
                        1,661,156
                        
                        Net
                            income
                        
                        
                        1,523,420
                        
                        
                        
                        1,523,420Balance
                            at December 31, 2004
                        
                        
                        (6,820,382
                        )
                        
                        
                        4,173,898
                        
                        Balance
                            at December 31, 2004
                        
                        
                        (7,087,124
                        )
                        
                        
                        3,907,156Net
                            income
                        
                        
                        2,115,631
                        
                        
                        
                        2,115,631
                        
                        Net
                            income
                        
                        
                        2,062,852
                        
                        
                        
                        2,062,852Balance
                            at December 31, 2005
                        
                        
                        (4,704,751
                        )
                        
                        
                        6,173,567
                        
                        Balance
                            at December 31, 2005
                        
                        
                        (5,024,272
                        )
                        
                        
                        5,854,046Cumulative
                            effect of adoption of SAB 108
                        
                        
                        (319,521
                        )
                        
                        
                        (319,521
                        )Net
                            income
                        
                        
                        815,772
                        
                        
                        
                        815,772
                        
                        Net
                            income
                        
                        
                        815,772
                        
                        
                        
                        815,772Balance
                            at December 31, 2006, Restated
                        
                        $
                        (4,208,500
                        )
                        
                        $
                        6,752,350
                        
                        Balance
                            at December 31, 2006
                        
                        $
                        (4,208,500
                        )
                        
                        $
                        6,752,350
  F-14
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  **2.
              Business Acquisitions and Discontinued Operations**
  On
              January 28, 2002, Atlantic, a
              wholly-owned Subsidiary of the Company, filed a voluntary petition
              with the U.
              S. Bankruptcy Court for the Eastern District of New York to reorganize
              under
              Chapter 11 of the U. S. Bankruptcy Code.  On May 18, 2005, the United
              States Bankruptcy Court for the Eastern District of New York dismissed
              the
              petition.  Atlantic is a discontinued operation and has no
              assets.  Neither Colonial Commercial Corp. nor any of its other
              subsidiaries were part of the Chapter 11 filing.
  The
              Company’s investment in Atlantic’s
              common stock was recognized at a cost value of $219,007 of guaranteed
              liabilities as of December 31, 2002.  Colonial recognized the $219,007
              of guaranteed liabilities of Atlantic until June 2004, at which time
              the Company
              settled the claim for $161,000 and recognized a gain of $58,007.
  **3.
              Property and Equipment**
  Property
              and equipment consists of the
              following at December 31:
  2006
                    
                    
                    2005Computer
                        hardware and software
                    
                    $
                    1,040,441
                    
                    
                    $
                    884,011Furniture
                        and fixtures
                    
                    
                    91,558
                    
                    
                    
                    85,180Leasehold
                        improvements
                    
                    
                    1,410,425
                    
                    
                    
                    1,361,620Showroom
                        fixtures and displays
                    
                    
                    79,606
                    
                    
                    
                    0Automobiles
                    
                    
                    550,829
                    
                    
                    
                    560,4843,172,859
                    
                    
                    
                    2,891,295Less
                        accumulated depreciation and amortization
                    
                    
                    1,660,193
                    
                    
                    
                    1,221,811$
                    1,512,666
                    
                    
                    $
                    1,669,484
  **4.
            Other Intangible Assets**
  December
                      31, 2006
                  
                  
                  December
                      31, 2005Gross
                      Carrying Amount
                  
                  
                  Accumulated
                      Amortization
                  
                  
                  Net
                      Carrying Amount
                  
                  
                  Gross
                      Carrying Amount
                  
                  
                  Accumulated
                      Amortization
                  
                  
                  Net
                      Carrying Amount
                  
                  
                  Estimated
                      Useful Life(Years)CovenantsNot
                          to Compete
                  
                  $
                  241,667
                  
                  
                  $
                  (238,167
                  )
                  
                  $
                  3,500
                  
                  
                  $
                  241,667
                  
                  
                  $
                  (230,333
                  )
                  
                  $
                  11,334
                  
                  
                  
                  5
  The
            Company has certain identifiable
            intangible assets that are subject to amortization.  Intangible assets
            are included in “Other intangibles” in the consolidated balance sheets. The
            components of intangible assets are as follows:
  Amortization
            expense amounted to
            $7,834, $16,166 and $26,667 for the years ended December 31, 2006, 2005
            and
            2004, respectively.
  Estimated
            Amortization
            Expense:
 
 For
                      the Years Ended December 31,2007
                  
                  $
                  2,0002008
                  
                  
                  1,500$
                  3,500
   F-15
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  **5.
              Financing Arrangements**
  The
              Company has a total secured loan facility of $15,000,000 pursuant to
              a credit
              and security agreement (“Agreement”) with Wells Fargo Business Credit, Inc.
              (“Wells”) consisting of a revolving line of credit including a $2,000,000
              two-year term loan.  Final payment of the term loan was made in July
              of 2006.  The revolving credit line bears interest at .25% below
              prime, and the term loan bore interest at .50% above prime.  On May
              11, 2006 the Company received a $500,000 overadvance, payable in equal
              installments of $12,500 each business day commencing July 11,
              2006.  The overadvance was paid in full on September 5,
              2006.  Effective June 23, 2006, the Agreement was amended to extend
              the maturity date from August 1, 2009 to August 1, 2010.  The facility
              consists of a $15,000,000 revolving line of credit which expires on
              August 1,
              2010.  The Company has standby letters of credit which expire on July
              31, 2007 and September 1, 2007, that reduce the credit facility by
              $300,000 and
              $100,000, respectively, and additional reserves determined by the bank
              that
              reduce the credit facility by $100,000.  Availability under the
              revolving credit line is determined by a percentage of available assets
              as
              defined in the Agreement, less letters of credit and reserves, and
              was $142,216
              as of December 31, 2006.  The balance outstanding under the revolving
              line of credit was $13,615,696 as of December 31, 2006.  The interest
              rate on the revolving credit facility, as of December 31, 2006 was
              8.0%.
 Substantially
            all of the assets of the Company, as well as a pledge of the stock of
            Colonial
            Commercial Corp.’s operating subsidiaries, collateralize the
            loans.  The facility contains covenants relating to the financial
            condition of the Company, its business operations, and restricts the
            payment of
            dividends, subordinated debt, purchase of securities, and capital
            expenditures.  The Company must maintain a tangible net worth of
            approximately $3.8 million for the fiscal year ending December 31,
            2006.  In addition, the Company is required to maintain certain levels
            of net income and cash flows, as defined in the agreement.  All loans
            are due on demand by the bank, and accordingly, have been classified
            as current
            liabilities.  In the event that Mr. Pagano no longer performs the
            duties of the President of Universal or the Vice President of RAL or
            American
            for any reason other than death or disability, the Company will be considered
            in
            default of its credit agreement with Wells Fargo Business Credit, Inc.
            unless a
            waiver is obtained.
   F-16
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  **6.
              Notes Payable**
  Notes
              payable consist of the following at December 31:
 2006
                    
                    
                    2005Various
                        term notes payable, (collateralized by the equipment purchased)
                        with
                        aggregate monthly principal and interest installments of
                        $6,378 and $8,760
                        for 2006 and 2005, respectively, bearing interest between
                        .9% to
                        5.9%*
                    
                    $
                    155,808
                    
                    
                    $
                    245,321Subordinated
                        term note payable to a private individual, $30,000 annual
                        principal
                        payment, interest at 9% payable monthly.**
                    
                    
                    60,000
                    
                    
                    
                    90,000Subordinated
                        term note payable to an investment company, $30,000 annual
                        principal
                        payments, interest at 9% payable monthly.
                    
                    
                    60,000
                    
                    
                    
                    90,000Term
                        notes payable to private investors, subordinated unsecured
                        convertible
                        notes payable, bearing interest at 11% per annum, interest
                        payable
                        quarterly, with 50% of the principal payable on June 1, 2008
                        and the
                        balance on June 1, 2009.  The notes are convertible into 175,000
                        shares of common stock at $3.00 per share during the term
                        of the
                        notes.***
                    
                    
                    525,000
                    
                    
                    
                    525,000Term
                        note payable of $750,000 to a corporation, subordinated secured
                        note
                        payable, bearing interest at the prime rate and payable quarterly,
                        principal payable on June 30, 2008 and warrants to purchase
                        150,000 shares
                        of common stock at $3.00 per share expiring June 30, 2008.
                        The warrant was
                        initially recorded at a fair value of $187,500 and recorded
                        as a discount
                        from the face value of the note and an increase to additional
                        paid in
                        capital. The discount is being accreted over the term of
                        the note as
                        additional interest expense. The Company recorded $37,500
                        and $37,500 in
                        interest expense during 2006 and 2005, respectively, related
                        to the
                        warrant.****
                    
                    
                    653,125
                    
                    
                    
                    615,6251,453,933
                    
                    
                    
                    1,565,946Less
                        current installments
                    
                    
                    136,539
                    
                    
                    
                    165,112$
                    1,317,394
                    
                    
                    $
                    1,400,834
  *Included
              in 2005 in the above term note payable is $30,389 bearing interest
              at 9% to a
              company owned by Paul Hildebrandt, who is a related party.
 **The
            term note payable bearing interest at 9% is to Paul Hildebrandt, who
            is a
            related party.
  ***Included
            in the above term note payable bearing interest at 11%, are five notes
            considered to be related party transactions; $100,000 term note payable
            to
            William Pagano, President of Universal and Director of the Company, $50,000
            term
            note payable to William Salek, Chief Financial Officer and Secretary
            of the
            Company, $100,000 term note payable to Rita Folger, beneficial owner
            of greater
            than 5% of the Company, $25,000 term note payable to Eileen Goldman,
            the wife of
            Michael Goldman and $50,000 term note payable to Paul Hildebrandt.
   F-17
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
 
 ****The
              term note payable bearing interest at prime rate is to Goldman Associates
              of NY,
              Inc., in which Michael Goldman is President, is also considered a related
              party.
              Pursuant to the Private Placement Agreement, Goldman Associates agreed
              that it
              and its affiliates will not until May 31, 2008 without the prior written
              consent
              of the Board of Directors of the Company (i) acquire, agree to acquire
              or make
              any proposal to acquire any voting securities or assets of the Company
              or any of
              its affiliates, (ii) propose to enter into any merger, consolidation,
              recapitalization, business combination, or other similar transaction
              involving
              the Company or any of its affiliates, (iii) make, or in any way participate
              in
              any “solicitation” of “proxies” (as such terms are used in the proxy rules of
              the Securities and Exchange Commission) to vote or seek to advise or
              influence
              any person with respect to the voting of any voting securities of the
              Company or
              any of its affiliates or (iv) form, join or in any way participate
              in a “group”
as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
              as
              amended, in connection with any of the foregoing or (v) advise, assist
              or
              encourage any other persons in connection with the foregoing.
   Maturities
                        of notes payable are as follows:2007
                    
                    $
                    136,5392008
                    
                    
                    1,033,3842009
                    
                    
                    277,9912010
                    
                    
                    6,019$
                    1,453,933
  **7.
              Capital Stock**
  Each
              share of the Company’s convertible
              preferred stock is convertible into one share of the Company’s common
              stock.  Convertible preferred stockholders will be entitled to a
              dividend, based upon a formula, when and if any dividends are declared
              on the
              Company’s common stock.  The convertible preferred stock is
              redeemable, at the option of the Company, at $7.50 per share.  The
              shares contain a liquidation preference provision entitling the holder
              to
              receive payments equaling $5.00 per share.
  The
              voting rights of the common
              stockholders and preferred stockholders are based upon the number of
              shares of
              convertible preferred stock outstanding.  There are currently less
              than 600,000 shares of convertible preferred stock outstanding.  The
              Company's Restated Certificate of Incorporation provides that the Board
              of
              Directors is to consist of one class of Directors if there are less
              than 600,000
              shares Convertible Preferred Stock outstanding.  As of December 31,
              2006, the number of preferred shares outstanding was 467,500; accordingly,
              the
              Board of Directors to be elected at the 2007 annual shareholders’ meeting will
              consist of one class of Directors elected by the holders of common
              stock and
              convertible preferred stock voting together as one class on a share
              for share
              basis.
  At
              December 31, 2006, there were
              906,500 shares of common stock reserved for conversion of preferred
              stock and
              for the exercise of vested stock options, convertible notes and
              warrants.
 Messrs.
            Goldman, Korn, Pagano, Rozzi,
            and Mrs. Folger each signed a stock purchase and sale standstill agreement
            in
            which they agreed until May 31, 2008 not to purchase any stock without
            written
            consent from the Company and they will not sell any stock to anyone when
            such a
            sale would create a new 5% shareholder unless such person first enters
            into a
            similar standstill agreement.
  F-18
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
 
 **8.Equity
              Transactions**
  During
              the year ended December 31,
              2006, the Company issued 32,000 shares of common stock pursuant to
              the exercise
              of stock options.  On April 3, 2006, Ronald H. Miller obtained 12,000
              shares of common stock, by exercising 12,000 outstanding stock
              options.  Mr. Miller is a Director of the Company. On April 17, 2006,
              Jack Rose obtained 12,000 shares of common stock, by exercising 12,000
              outstanding stock options.  Mr. Rose was a Director of the Company at
              the time of the transaction.  On May 16, 2006, a non-executive
              employee of the Company obtained 4,000 shares of common stock by exercising
              4,000 outstanding stock options.  On May 31, 2006, a non-executive
              employee of the Company obtained 4,000 shares of common stock by exercising
              4,000 outstanding stock options.
  During
              the year ended December 31,
              2006, holders of a total of 17,221 shares of redeemable convertible
              preferred
              stock converted these shares into 17,221 shares of Common Stock.
  **9.
              Stock Option Plans**
  In
              June
              1996, the Company adopted the 1996 Stock Option Plan (the “1996 Plan”) to grant
              options to key employees and other persons who render service (non-employee)
              to
              the Company.  The ability to grant options under this plan expired on
              December 31, 2005.
  At
              December 31, 2006, a total of 74,000
              options were outstanding under the Company’s 1996 Stock Option Plan, which have
              expiration dates ranging from 2009 to 2013.
  On
              September 29, 2006, the Company
              adopted the Colonial Commercial Corp. 2006 Stock Plan, (the “2006
              Plan”).  The 2006 Plan enables the Company to grant equity and
              equity-linked awards to our Directors, officers, employees and other
              persons who
              provide services to the Company.  The 2006 Plan is intended to allow
              us to provide incentives that will (1) strengthen the desire of highly
              competent
              persons to provide services to us and (2) further stimulate their efforts
              on our
              behalf.
  The
              following is a summary of certain provisions of the 2006 Plan.
  Shares
              Available. The maximum number of shares of common stock that may be
              delivered under the 2006 Plan is 1,000,000, subject to adjustment for
              certain
              specified changes to the Company's capital structure.  As of December
              31, 2006, 900,000 options were available to be issued.
  Eligibility.
              All directors, officers and other employees and other persons who provide
              services to the Company are eligible to participate in the 2006
              Plan.
  Administration.
              The administrator of the 2006 Plan will be the board or any other committee
              which the board designates to serve as the administrator of the 2006
              Plan.
 Types
            of Awards. The types of
            awards that may be made under the 2006 Plan are stock options, stock
            appreciation rights, restricted stock awards, and stock units. The board
            or the
            committee that administers the 2006 Plan will fix the terms of each award,
            including, to the extent relevant, the following: (1) exercise price
            for
            options, base price for stock appreciation rights, and purchase price,
            if any,
            for restricted stock awards, (2) vesting requirements and other conditions
            to
            exercise, (3) term and termination, (4) effect, if any, of a change of
            control
            and (5) method of exercise and of any required payment by the
            recipient.
   F-19
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  Term
              of Plan. No award may be
              granted under the 2006 Plan after the close of business on the day
              immediately
              preceding the tenth anniversary of the adoption of the 2006 Plan. However,
              all
              awards made prior to such time will remain in effect in accordance
              with their
              terms.
  On
              December 6, 2006, 100,000 10-year
              options were granted to independent directors at the closing market
              price of
              that day, or $1.85, 40,000 options vested immediately and 20,000 options
              vest
              and become exercisable on each of the first three anniversaries of
              the grant
              date.  If an independent director resigns, their unvested options are
              immediately forfeited and they have 60 days to exercise their vested
              options.
  The
              Company uses the Black-Scholes
              valuation method to estimate the fair value of stock options at the
              grant
              date.  The Black-Scholes valuation model uses the option exercise
              price and the number of options expected to be exercised as well as
              assumptions
              related to the expected price volatility of the Company’s stock, the rate of
              return on risk-free investments, the period during which the options
              will be
              outstanding, and the expected dividend yield for the Company’s stock to estimate
              the fair value of the stock option on the grant date.  The fair value
              of the stock options, which are subject to grading vesting, is expensed
              on a
              straight-line basis over the vesting life of the stock options.
  The
              fair value of each option granted
              on December 6, 2006 under the 2006 Stock Plan was estimated using the
              Black-Scholes option pricing model and the following assumptions:
  2006Historical
                        stock price volatility
                    
                    
                    160.50
                    %Risk-free
                        interest rate
                    
                    
                    4.44
                    %Expected
                        life (in years)
                    
                    
                    6.34Dividend
                        yield
                    
                    
                    0.00
  The
              valuation assumptions were
              determined as follows:
  Historical
              stock price volatility: The
              Company used the daily closing stock prices to calculate historical
              annualized
              volatility.
  Risk-free
              interest rate: The Company
              bases the risk-free interest rate on the interest rate payable on U.S.
              Treasury
              securities in effect at the time of the grant for a period that is
              commensurate
              with the assumed expected option life.
  Expected
              life: The expected life of the
              options represents the period of time options are expected to be
              outstanding.  The Company uses historical data of previously issued
              options to estimate expected option life.
  Dividend
              yield: The estimate for
              dividend yield is 0.00, because the Company has not historically paid,
              and does
              not intend for the foreseeable future to pay, a dividend.
 F-20
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  Changes
              in options outstanding are as
              follows:
  Shares
                          Subject to Option
                      
                      
                      Weighted
                          Average Exercise Price
                      
                      
                      Aggregate
                          Intrinsic ValueBalance
                          at December 31, 2003
                      
                      
                      245,500
                      
                      
                      
                      0.25Options
                          Exercised
                      
                      
                      (51,500
                      )
                      
                      
                      0.25Balance
                          at December 31, 2004
                      
                      
                      194,000
                      
                      
                      
                      0.25Options
                          Exercised
                      
                      
                      (88,000
                      )
                      
                      
                      0.25Balance
                          at December 31, 2005
                      
                      
                      106,000
                      
                      
                      
                      0.25Options
                          Exercised
                      
                      
                      (32,000
                      )
                      
                      
                      0.25Options
                          Granted
                      
                      
                      100,000
                      
                      
                      
                      1.85Balance
                          at December 31, 2006
                      
                      
                      174,000
                      
                      
                      
                      1.17
                      
                      $
                      330,600Exercisable
                          at December 31, 2006
                      
                      
                      114,000
                      
                      
                      
                      0.81
                      
                      $
                      216,600
  Prior
              to January 1, 2006, the Company
              used the intrinsic method previously allowed under APB Opinion No.
              25 to value
              options. The number of options outstanding under the variable pricing
              method as
              of December 31, 2005 and 2004 were 43,000 and 110,000, respectively,
              which
              caused the Company to incur additional stock-based compensation income
              (expense)
              of $74,450 and $(62,025) for the years ended December 31, 2005 and
              2004,
              respectively.  As of January 1, 2006 all options outstanding were
              fully vested therefore the Company was not required to make a stock
              compensation
              expense entry under the rules of SFAS No. 123(R).
  The
              Company did incur stock-based compensation expense of $53,412 and unearned
              compensation of $80,118 which is expected to be recognized over of
              period of
              three years as of December 31, 2006 under the modified prospective
              application
              method of SFAS No. 123(R) for options granted on December 6, 2006.
  On
              January 22, 2007, a Director
              resigned and his 10,000 shares of Common Stock issuable upon exercise
              of his
              options expire sixty days after his resignation.  In addition, his
              15,000 options that vest over three years were forfeited on his date
              of
              resignation.  On January 2, 2007 an employee exercised 52,000
              options.
 F-21
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  The
                following table summarizes
                information about stock options at December 31, 2006:
  Options
                          Outstanding and ExercisableRange
                          of Exercise Prices
                      
                      
                      Shares
                      
                      
                      Weighted
                          Average Remaining Contractual Life
                      
                      
                      Weighted
                          Average Exercise Price$
                      .25
                      
                      
                      
                      74,000
                      
                      
                      
                      5.03
                      
                      
                      $
                      .25$
                      1.85
                      
                      
                      
                      40,000
                      
                      
                      
                      9.94
                      
                      
                      $
                      1.85Options
                          Outstanding and Non-exercisable$
                      1.85
                      
                      
                      
                      60,000
                      
                      
                      
                      9.94
                      
                      
                      $
                      1.85
  **10.
                Net Income Per Common Share**
  Basic
                net income per share is computed
                by dividing income available to common shareholders by the weighted-average
                number of common shares outstanding. Diluted earnings per share reflect,
                in
                periods in which they have a dilutive effect, the impact of common
                shares
                issuable upon exercise of stock options.
  A
                reconciliation between the numerators
                and denominators of the basic and diluted income per common share
                is as
                follows:
  As
                          
                          
                          
                          
                          
                          As
                          
                          
                          
                          
                          
                          AsPreviously
                          
                          
                          
                          
                          
                          Previously
                          
                          
                          
                          
                          
                          PreviouslyRestated
                          
                          
                          Reported
                          
                          
                          Restated
                          
                          
                          Reported
                          
                          
                          Restated
                          
                          
                          Reported2006
                          
                          
                          2006
                          
                          
                          2005
                          
                          
                          2005
                          
                          
                          2004
                          
                          
                          2004Net
                              income (numerator for basic income per share)
                          
                          $
                          815,772
                          
                          
                          $
                          815,772
                          
                          
                          $
                          2,062,852
                          
                          
                          $
                          2,115,631
                          
                          
                          $
                          1,523,420
                          
                          
                          $
                          1,661,156Interest
                              expense on convertible notes (net of tax)
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          51,513
                          
                          
                          
                          
                          
                          
                          
                          22,776Adjusted
                              net income (numerator for diluted income per share)
                          
                          $
                          815,772
                          
                          
                          
                          
                          
                          
                          $
                          2,114,365
                          
                          
                          
                          
                          
                          
                          $
                          1,546,196Weighted
                              average common shares (denominator for basic income
                              per
                              share)
                          
                          
                          4,579,129
                          
                          
                          
                          4,579,129
                          
                          
                          
                          4,295,697
                          
                          
                          
                          4,295,697
                          
                          
                          
                          3,403,152
                          
                          
                          
                          3,403,152Effect
                              of dilutive securities:Convertible
                              preferred stock
                          
                          
                          472,451
                          
                          
                          
                          472,451
                          
                          
                          
                          683,695
                          
                          
                          
                          683,695
                          
                          
                          
                          918,778
                          
                          
                          
                          918,778Convertible
                              notes
                          
                          
                          -
                          
                          
                          
                          175,000
                          
                          
                          
                          175,000
                          
                          
                          
                          175,000
                          
                          
                          
                          72,931
                          
                          
                          
                          72,931Employee
                              stock options
                          
                          
                          74,066
                          
                          
                          
                          74,066
                          
                          
                          
                          138,722
                          
                          
                          
                          138,722
                          
                          
                          
                          193,105
                          
                          
                          
                          193,105Weighted
                              average common and potential common shares outstanding
                              (denominator for
                              diluted income per share)
                          
                          
                          5,125,646
                          
                          
                          
                          5,300,646
                          
                          
                          
                          5,293,114
                          
                          
                          
                          5,293,114
                          
                          
                          
                          4,587,966
                          
                          
                          
                          4,587,966Basic
                              net income per share
                          
                          $
                          0.18
                          
                          
                          $
                          0.18
                          
                          
                          $
                          0.48
                          
                          
                          $
                          0.49
                          
                          
                          $
                          0.45
                          
                          
                          $
                          0.49Diluted
                              net income per share
                          
                          $
                          0.16
                          
                          
                          $
                          0.15
                          
                          
                          $
                          0.40
                          
                          
                          $
                          0.40
                          
                          
                          $
                          0.34
                          
                          
                          $
                          0.36
 F-22
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
 **11.
              Income Taxes**
  The
              provision for income taxes consists of the following:
  2006
                        
                        
                        2005
                        
                        
                        2004State
                        
                        
                        
                        
                        
                        
                        
                        
                        State
                        
                        
                        
                        
                        
                        
                        
                        
                        StateAnd
                        
                        
                        
                        
                        
                        
                        
                        
                        And
                        
                        
                        
                        
                        
                        
                        
                        
                        AndFederal
                        
                        
                        Local
                        
                        
                        Total
                        
                        
                        Federal
                        
                        
                        Local
                        
                        
                        Total
                        
                        
                        Federal
                        
                        
                        Local
                        
                        
                        TotalCurrent
                        
                        $
                        17,698
                        
                        
                        $
                        106,693
                        
                        
                        $
                        124,391
                        
                        
                        $
                        (16,239
                        )
                        
                        $
                        170,675
                        
                        
                        $
                        154,436
                        
                        
                        $
                        9,000
                        
                        
                        $
                        137,932
                        
                        
                        $
                        146,932Deferred
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (641,500
                        )
                        
                        
                        -
                        
                        
                        
                        (641,500
                        )
                        
                        
                        (645,600
                        )
                        
                        
                        -
                        
                        
                        
                        (645,600
                        )Total
                            tax expense (benefit)
                        
                        $
                        17,698
                        
                        
                        $
                        106,693
                        
                        
                        $
                        124,391
                        
                        
                        $
                        (657,739
                        )
                        
                        $
                        170,675
                        
                        
                        $
                        (487,064
                        )
                        
                        $
                        (636,600
                        )
                        
                        $
                        137,932
                        
                        
                        $
                        (498,668
                        )
  The
              components of deferred income tax
              benefit are as follows:
  2006
                    
                    
                    2005
                    
                    
                    2004Deferred
                        tax expense (benefit), exclusive of the effects of the other
                        components
                        listed below
                    
                    $
                    0
                    
                    
                    $
                    0
                    
                    
                    $
                    0Decrease
                        in beginning-of-the-year balance of the valuation allowance
                        for deferred
                        tax assets
                    
                    
                    0
                    
                    
                    
                    (641,500
                    )
                    
                    
                    (645,600
                    )Generation
                        of continuing operations net operating loss carryforward
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0$
                    0
                    
                    
                    $
                    (641,500
                    )
                    
                    $
                    (645,600
                    )
  A
              reconciliation of the provision for
              income taxes computed at the Federal statutory rate to the reported
              provision
              for income taxes follows:
  2006
                        
                        
                        2005
                        
                        
                        2005
                        
                        
                        2004
                        
                        
                        2004Restated
                        
                        
                        As
                        
                        
                        Restated
                        
                        
                        AsPreviously
                        
                        
                        
                        
                        
                        PreviouslyReported
                        
                        
                        
                        
                        
                        ReportedTax
                            provision at Federal statutory rate
                        
                        
                        34.00
                        %
                        
                        
                        34.00
                        %
                        
                        
                        34.00
                        %
                        
                        
                        34.00
                        %
                        
                        
                        34.00
                        %Utilization
                            of net operating loss
                        
                        
                        (34.00
                        )%
                        
                        
                        (34.00
                        )%
                        
                        
                        (34.00
                        )%
                        
                        
                        (34.00
                        )%
                        
                        
                        (34.00
                        )%State
                            income taxes, net of federal benefit
                        
                        
                        7.08
                        %
                        
                        
                        7.15
                        %
                        
                        
                        6.90
                        %
                        
                        
                        13.48
                        %
                        
                        
                        6.00
                        %Change
                            in valuation allowance for deferred tax assets
                        
                        
                        0.00
                        %
                        
                        
                        (40.71
                        )%
                        
                        
                        (39.3
                        )%
                        
                        
                        (63.00
                        )%
                        
                        
                        (49.70
                        )%Permanent
                            differences
                        
                        
                        1.67
                        %
                        
                        
                        1.59
                        %
                        
                        
                        1.70
                        %
                        
                        
                        0.00
                        %
                        
                        
                        0.00
                        %Other
                        
                        
                        4.48
                        %
                        
                        
                        1.05
                        %
                        
                        
                        0.80
                        %
                        
                        
                        0.86
                        %
                        
                        
                        0.80
                        %Total
                        
                        
                        13.23
                        %
                        
                        
                        (30.92
                        )%
                        
                        
                        (29.90
                        )%
                        
                        
                        (48.66
                        )%
                        
                        
                        (42.90
                        )%
  F-23
 *Table
                  of Contents*
  **COLONIAL
              COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
              to Consolidated Financial Statements, Continued**
  The
            tax
            effects of temporary differences that give rise to significant portions
            of the
            deferred tax assets and liabilities at December 31, 2006 and 2005 are
            presented
            below.
  2006
                  
                  
                  2005Current
                      Deferred Tax Assets:Federal
                      net operating loss carryforwards
                  
                  $
                  420,000
                  
                  
                  $
                  637,500Current
                      Deferred Tax Assets
                  
                  $
                  420,000
                  
                  
                  $
                  637,500Non-current
                      Deferred Tax Assets:Federal
                      net operating loss carryforwards
                  
                  $
                  9,937,591
                  
                  
                  $
                  10,718,325State
                      net operating loss carryforwards
                  
                  
                  75,121
                  
                  
                  
                  64,435Allowance
                      for doubtful accounts
                  
                  
                  107,647
                  
                  
                  
                  114,837Additional
                      costs inventoried for tax purposes
                  
                  
                  553,991
                  
                  
                  
                  562,998Alternative
                      Minimum Tax Credit Carryforward
                  
                  
                  47,467
                  
                  
                  
                  46,243Compensation
                  
                  
                  206,031
                  
                  
                  
                  204,428Rent
                  
                  
                  64,557
                  
                  
                  
                  57,320Non-current
                      Deferred Tax Assets
                  
                  
                  10,992,405
                  
                  
                  
                  11,768,586Non-current
                      Deferred Tax Liabilities:Goodwill
                  
                  
                  (755,542
                  )
                  
                  
                  (667,224
                  )Depreciation
                  
                  
                  (47,483
                  )
                  
                  
                  (162,985
                  )Non-current
                      Deferred Tax Liabilities
                  
                  
                  (803,025
                  )
                  
                  
                  (830,209
                  )Non-current
                      Deferred Tax Assets
                  
                  
                  10,189,380
                  
                  
                  
                  10,938,377Less
                      Valuation Allowance
                  
                  
                  (8,900,880
                  )
                  
                  
                  (9,867,377
                  )Net
                      Non-Current Deferred Tax Assets
                  
                  $
                  1,288,500
                  
                  
                  $
                  1,071,000
  As
            of December 31, 2005, management
            reassessed its future income projections and increased the deferred tax
            asset by
            $641,500 to $1,708,500.  As of December 31, 2006, management once
            again assessed the deferred tax asset and determined that the net asset
            should
            remain unchanged and that the valuation allowance should be reduced by
            approximately $970,000.
  As
            of December 31, 2006, the Company’s
            net operating loss carryforwards for federal income tax purposes were
            approximately $28,589,000.  Various amounts of net operating loss
            carryforwards will expire from 2007 through 2022.  Approximately $4.3
            million net operating loss expired during the fiscal year ended
            2006.
  Expiration
                      Year
                  
                  Net
                      Operating Losses2007
                  
                  $
                  4,945,0002008
                  
                  
                  415,0002020
                  
                  
                  5,960,0002021
                  
                  
                  2,737,0002022
                  
                  
                  14,532,000$
                  28,589,000
  The
            utilization of the net operating
            loss carryforwards is subject to certain annual limitations. If certain
            substantial changes in ownership occur, there would be a further annual
            limitation on the amount of tax carryforwards that can be utilized in
            the
            future.
  Universal’s
            Sales and Use Tax audit
            conducted by the State of New Jersey, Department of Treasury, Division
            of
            Taxation, for Sales and Use Tax for the years 2001, 2002, 2003 and 2004
            was
            completed in June 2006.  The State assessed the Company $111,686 which
            included interest and penalties.  Of this amount, $50,000 was charged
            against the Company’s tax reserve that was set in 2005, $41,382 was invoiced to
            customers who were responsible for this tax and the Company incurred
            a charge
            for the balance of $20,304 in 2006.
  F-24
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  Universal
            was recently under
            examination for New York State income tax for the years 2003 through
            2005.  The State auditors have concluded that there will be no income
            tax adjustments related to this examination.
  American
            recently closed a sales tax
            examination with an amount of $2,398 for additional taxes and interest
            due for
            the period of March 1, 2003 through May 31, 2006.
  In
            addition, RAL is scheduled for
            examination for New York State sales tax for the period March 1, 2004
            through
            February 28, 2007.  The audit has not yet begun and the Company does
            not expect there to be significant exposure.
  **12.
            Fair Value of Financial Instruments**
  Statement
            of Financial Accounting
            Standards No.107, “Disclosures about Fair Value of Financial Instruments,”
defines the fair value of a financial instrument as the amount at which
            the
            instrument could be exchanged in a current transaction between willing
            parties.  The carrying value of all financial instruments classified
            as current assets or liabilities is deemed to approximate fair value,
            with the
            exception of the notes payable, because of the short term nature of these
            instruments.
  The
            fair value of long-term debt is
            based on current rates at which the Company could borrow funds with similar
            remaining maturities.  The Company believes the fair value of
            long-term debt approximates the book value.
  **13.
            Supplemental Cash Flow Information**
  The
            following is supplemental information relating to the consolidated statements
            of
            cash flows:
  Cash
                      paid during the years for:
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Interest
                  
                  $
                  1,290,724
                  
                  
                  $
                  971,629
                  
                  
                  $
                  852,288Income
                      taxes
                  
                  $
                  104,932
                  
                  
                  $
                  308,585
                  
                  
                  $
                  173,665
  Non-cash
            transactions:
  During
            2006, 2005 and 2004, there were
            17,221, 298,018 and 83,623 shares, respectively, of convertible preferred
            stock
            that were converted to a similar number of common shares.
  **14.
            Employee Benefit Plans**
  401(k)
            Plan
  The
            Company has a 401(k) plan, which
            covers substantially all employees. Participants in the plan may contribute
            a
            percentage of compensation, but not in excess of the maximum allowed
            under the
            Internal Revenue Code. The plan provides for matching contributions up
            to a
            maximum of 3% of employees’ qualified wages.  In 2006, 2005 and 2004,
            $180,712, $183,269 and $169,319, respectively, of contributions were
            made to the
            plan.
  **15.
            Business and Credit Concentrations**
  The
            Company purchases products from
            primarily 275 suppliers.  In 2006, two suppliers accounted for 34% of
            the Company’s purchases. The loss of one or both of these suppliers could have a
            material adverse effect upon its business for a short-term period. In
            2005, two
            suppliers accounted for 37% of the Company’s purchases.  In 2004, two
            suppliers accounted for 38% of the Company’s purchases.
  F-25
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
 **16.
              Commitments and Contingencies**
  (a)  Compensation
  The
            Company has employment contracts
            with two officers and various employees with remaining terms ranging
            from one to
            four years.  The amounts due under these contracts are $770,000,
            $545,000, $545,000, and $400,000 in the years ended December 31, 2007,
            2008,
            2009 and 2010, respectively.  These commitments do not include amounts
            that may be earned as an annual incentive compensation award.
  (b)  Leases
  The
            Company recorded lease payments via
            the straight line method and, for leases with step rent provisions whereby
            the
            rental payments increase over the life of the lease, the Company recognizes
            the
            total minimum lease payments on a straight-line basis over the lease
            term.  The Company is obligated under operating leases for warehouse,
            office facilities and certain office equipment which amounted to $3,098,491,
            $2,997,887 and $2,705,911 for the years ended December 31, 2006, 2005
            and 2004,
            respectively.  At December 31, 2006, future minimum lease payments in
            the aggregate and for each of the five succeeding years are as
            follows:
  2007
                  
                  $
                  3,287,8452008
                  
                  
                  2,660,3072009
                  
                  
                  1,863,6142010
                  
                  
                  1,482,6482011
                  
                  
                  1,196,571Thereafter
                  
                  
                  2,946,864Total
                  
                  $
                  13,437,849
  (c)
            Private Placement
  On
            July 30, 2004, the Company completed
            a private placement with Michael Goldman and Goldman Associates of New
            York,
            Inc. pursuant to Regulation D of the Securities Exchange Act of
            1933.  For total consideration of $1,500,000, the Company issued to
            Goldman Associates of New York, Inc. 600,000 shares of common stock at
            $1.25 per
            share, a $750,000 subordinated secured note payable, earning interest
            at the
            prime rate, interest payable quarterly, principal payable June 30, 2008,
            and
            warrants to purchase 150,000 shares of common stock at $3.00 per share
            expiring
            June 30, 2008.  The $187,500 estimated value of the warrants was
            accounted for as an increase to additional paid in capital and as a discount
            to
            the note payable.
  On
            July 29, 2004, the Company completed
            a private placement, pursuant to Regulation D of the Securities Exchange
            Act of
            1933.  The Company raised $1,050,000 through the issuance of 420,000
            shares of common stock at $1.25 per share and the issuance of $525,000
            of
            subordinated unsecured convertible notes payable (“Notes”), bearing interest at
            11% per annum, interest payable quarterly, with 50% of the principal
            payable on
            June 1, 2008 and the balance on June 1, 2009.  The Notes are
            convertible into 175,000 shares of common stock at $3.00 per share during
            the
            term of the Notes.
  On
            February 12, 2004, the Company
            completed a private placement, pursuant to Regulation D of the Securities
            Act of
            1933.  The Company raised $360,000 through the issuance of 600,000
            shares of common stock at $0.60 per share.  Bernard Korn (Chairman and
            President of the Company), purchased 165,000 shares, William Pagano (Director
            of
            the Company and President of Universal), purchased 165,000 shares, Michael
            Goldman (appointed Director of the Company on September 29, 2004) purchased
            170,000 shares and Rita Folger (a private investor, who owned 9.42% of
            the
            Company as of that date), purchased 100,000 shares.
  F-26
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  The
            Company has used substantially all
            of the proceeds from the February 12, 2004 private placement to purchase
            592,730
            shares of escheated convertible preferred stock at $0.60 per share from
            the
            State of Ohio.  The Company has retired these convertible preferred
            shares.
  The
            stock from the private placement
            cannot be sold, transferred or otherwise disposed of, unless subsequently
            registered under the Securities Act of 1933 and applicable state or Blue
            Sky
            laws, or pursuant to an exemption from such registration, which is available
            at
            the time of desired sale, and bears a legend to that effect.
  (d)
            Litigation
  Universal
            Supply Group, Inc. is a New
            York corporation (“Universal”).  On June 25, 1999, Universal acquired
            substantially all of the assets of Universal Supply Group, Inc., a New
            Jersey
            corporation, including its name, pursuant to the terms of a purchase
            agreement.  The Company filed a copy of the purchase agreement with
            the Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g)
            on
            Form 10KSB, and the Company filed a copy of an amendment to the purchase
            agreement on July 9, 1999 as Exhibit 10(a)(ii) on Form
            8-K.  Subsequent to the sale, Universal Supply Group, Inc. (the
            selling corporation) formerly known as Universal Engineering Co., Inc.,
            changed
            its name to Hilco, Inc.  Hilco, Inc. acquired the assets of Amber
            Supply Co., Inc., formerly known as Amber Oil Burner Supply Co., Inc.,
            in 1998,
            prior to Hilco’s sale of assets to Universal.  Hilco, Inc. is
            hereinafter referred to as the “Predecessor.”  The majority
            shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
            Hildebrandt.
  The
            Company understands that
            Predecessor and many other companies have been sued in the Superior Court
            of New
            Jersey (Middlesex County) by plaintiffs filing lawsuits alleging injury
            due to
            asbestos. Currently, there exist 93 plaintiffs in these lawsuits relating
            to
            alleged sales of asbestos products, or products containing asbestos,
            by the
            Predecessor. The Company never sold any asbestos related products.
  Of
            the existing plaintiffs, seven filed
            actions in 2006, 15 filed actions in 2005, 44 filed actions in 2004,
            24 filed
            actions in 2003, and three filed actions in 2002. There are 108 other
            plaintiffs
            that have had their actions dismissed and eight other plaintiffs that
            have
            settled as of December 31, 2006 for a total of $3,313,000. There has
            been no
            judgment against the Predecessor.
  Our
            Universal subsidiary was named by
            24 plaintiffs; of these, two filed actions in 1999, one filed an action
            in 2000,
            five filed actions in 2001, eleven filed actions in 2005 and five filed
            actions
            in 2006. Six plaintiffs naming Universal have had their actions dismissed
            and,
            of the total $3,313,000 of settled actions, two plaintiffs naming Universal
            have
            settled for $26,500.  No money was paid by Universal in connection
            with any settlement.  Following these dismissed and settled actions,
            there currently exist 16 plaintiffs that name Universal.
  As
            set forth in more detail below, the
            Company has been indemnified against asbestos-based claims, and insurance
            companies are defending the interests of the Predecessor and the Company
            in
            these cases.
  F-27
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  Based
            on advice of counsel, the Company
            believes that none of the litigation that was brought against the Company’s
            Universal subsidiary through December 31, 2006 is material, and that
            the only
            material litigation that was brought against Predecessor through that
            date was
            Rhodes v. A.O. Smith Corporation, filed on April 26, 2004 in the Superior
            Court
            of New Jersey, Law Division, Middlesex County, Docket Number MID-L-2979-04AS.
            The Company was advised that the Rhodes case was settled for $3,250,000
            (“Settlement”) under an agreement reached in connection with a $10,000,000 jury
            verdict that was rendered on August 5, 2005. The Company was not a defendant
            in
            the Rhodes case.
  On
            April
            29, 2005, prior to the Rhodes case trial, the Predecessor filed a third
            party
            complaint against Sid Harvey Industries (“Third Party Complaint”) in an action
            demanding contributor payment in connection with the Settlement. Sid
            Harvey
            Industries moved successfully for summary judgment.  The Predecessor
            filed an appeal as to the dismissal of Predecessor’s Third Party
            Complaint.  In a decision dated December 29, 2006, the Superior Court
            of New Jersey, Appellate Division, reversed the dismissal of Predecessor’s Third
            Party Complaint and remanded the matter for further proceedings as to
            Predecessor’s claim for contribution.
  The
            Company believes that Rhodes
            differed from the other lawsuits in that plaintiff established that he
            contracted mesothelioma as a result of his occupational exposure to asbestos
            dust and fibers and that a predecessor of the Company was a major supplier
            of
            the asbestos containing products that allegedly caused his disease.
  Indemnification
  John
            A. Hildebrandt, Paul Hildebrandt
            and the Predecessor have jointly and severally agreed to indemnify our
            Universal
            subsidiary from and against any and all damages, liabilities and claims
            due to
            exposure to asbestos at any time prior to the June 25, 1999 closing of
            the
            purchase agreement referred to earlier.  These agreements are set
            forth in the purchase agreement. Paul Hildebrandt, one of the indemnitors,
            was a
            Director of the Company from September 29, 2004 to January 28,
            2005.
  The
            indemnitors may use their own
            counsel to defend these claims. The indemnitors are not liable for any
            settlement effected without their consent. The indemnitors may settle
            and pay
            money claims without the consent of the Company. There is no indemnification
            unless claims aggregate $50,000; once this trigger point is reached,
            indemnification is required for all claims, including the first $50,000,
            but
            excluding claims of less than $10,000. The indemnification requirement
            survives
            at least until 30 days after the running of any relevant statutes of
            limitation.
  The
            obligation of the indemnitors is
            joint and several, so that the Company can have recourse against any
            one or more
            of these indemnitors, whether or not any other indemnitor has previously
            defaulted on its obligation to us. There are no other limitations to
            our rights
            to indemnification.
  Insurance
  The
            assets that the Predecessor sold to
            us included its insurance policies and other agreements and contracts.
            The
            policies provide coverage for liability accruing during the periods for
            which
            premiums were paid.  The Predecessor was formed in 1940. Copies of
            policies are available for each year beginning in 1970 and ending with
            the
            closing under the purchase agreement in 1999. Copies of policies for
            the period
            from 1940 to 1969 are not available.
  F-28
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  Insurance
            companies acknowledge
            coverage for potential asbestos claims under certain of these
            policies.  Insurance companies under additional policies have reserved
            their right to deny coverage but have continued to defend and indemnify
            the
            Predecessor and the Company under the contested policies.
  There
            are periods during the years from
            1940 to 1999 in which our Predecessor did not have coverage for potential
            asbestos claims.  Subject to litigation, insurance companies may
            maintain that the existence of these periods’ results in coverage for only a
            portion of a particular injury that varies with the period during which
            there
            was asbestos coverage relating to the injury, and that the balance of
            any
            settlement or judgment is to be paid by the insured.  To date, no
            insurance company has claimed any contribution for a gap in coverage
            except for
            a claim for $159.64 made by one insurance company to the Predecessor
            in
            1995.  The Predecessor asserted that it had no obligation to pay this
            amount and did not make any payment.
  Insurance
            companies have to date
            defended us and the Predecessor, and have paid all settlement amounts
            and
            defense costs.  Except for $159.64 referred to above, the insurance
            companies have not requested any payments from us or from the
            Predecessor.
  Our
            Universal subsidiary has not
            engaged in the sale of asbestos products since its formation in 1997.
            Its
            product liability policies for all years since 1998 exclude asbestos
            claims.
  General
  Regardless
            of indemnification and
            insurance coverage, we do not in any event consider our Company to be
            liable for
            the asbestos-based lawsuits that name us or for any other claim that
            arises as a
            result of actions or omissions by Predecessor companies. We expressly
            disclaimed
            the assumption of any liabilities when we purchased the assets of the
            Predecessor. It is our opinion that the existing asbestos litigation
            will not
            have a material adverse effect on the Company.  Nevertheless, we could
            be materially and adversely affected if we are held liable for substantial
            asbestos claims or if the Company incurs substantial legal or settlement
            costs.
            This material and adverse effect would occur if indemnitors fail to honor
            their
            indemnification agreements and insurance is not available either because
            policy
            limits are exceeded, or because insurance companies successfully claim
            limitations on their liabilities by reason of gaps in coverage or
            otherwise.
  Since
            we do not regard as likely the
            potential payment of any asbestos-based claim, we have not accrued any
            balance
            for any period relating to asbestos claims, and we have not recorded
            any amount
            for asbestos claims for any period in any of our financial
            statements.
  Other
            Litigation
  The
            Company is involved in other
            litigation incidental to the operation of its business.  The Company
            vigorously defends all matters in which the Company or its subsidiaries
            are
            named defendants and, for insurable losses, maintains significant levels
            of
            insurance to protect against adverse judgments, claims or
            assessments.  Although the adequacy of existing insurance coverage or
            the outcome of any legal proceedings cannot be predicted with certainty,
            the
            Company does not believe the ultimate liability associated with any claims
            or
            litigation will have a material impact to its financial condition or
            results of
            operations.
  (e)
            Standby Letters of Credit
  The
            Company has standby letters of
            credit in the amount of $300,000 and $100,000, which expire on July 31,
            2007 and
            September 1, 2007, respectively.
  F-29
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  **17.
            Related Party Transactions**
  Universal
            leases a warehouse and store
            in Wharton, New Jersey comprising of 27,000 square feet from a company
            owned by
            Mr. Paul Hildebrandt under a lease that expires in June 2010.  The
            Company paid Mr. Hildebrandt’s company $224,885, $215,674 and $206,097 during
            the years ended December 31, 2006, 2005 and 2004, respectively.
  Oscar
            and Jeffrey Folger acted as legal
            counsel for the Company through April 20, 2005.  Oscar and Jeffrey
            Folger acted as legal consultants for the Company from April 21, 2005
            through
            December 31, 2005 and each became an employee of the Company as Vice
            President-Chief Legal Counsel and Assistant Vice President-Legal, respectively,
            on January 1, 2006.  Mrs. Folger is the wife of Oscar Folger and the
            mother of Jeffrey Folger.  Professional fees paid to Oscar Folger’s
            law firm for the years ended 2006, 2005 and 2004 were $89,826, $79,973
            and
            $71,115, respectively.  Jeffrey Folger is an associate of Oscar
            Folger’s law firm.  Additionally, in 2006, $12,000 was paid to each
            Oscar and Jeffrey Folger as part time employees of the Company.  As of
            December 31, 2006, there is $3,975 in outstanding liabilities to Oscar
            Folger.  As of December 31, 2005, there was $2,775 in outstanding
            liabilities to Oscar Folger.  There were no outstanding liabilities at
            December 31, 2004.
  Pioneer
            Realty Holdings, LLC, a New
            York limited liability company (“Pioneer”), is the owner of the premises located
            at 836 Route 9, Fishkill, New York, formerly known as 2213 Route 9, Fishkill,
            New York that is leased to a subsidiary of the Company under a lease
            that
            expired September 2008, subject to renewal options, and provided for
            a current
            aggregate annual rent of $133,500.  Pioneer is the landlord under the
            Lease pursuant to an assignment and assumption agreement dated April
            12,
            2005.
  On
            February 21, 2007, the Lease was
            further amended by the Third Modification of Lease Agreement to provide,
            among
            other things, for 25,947 square feet of the leased premises, a net increase
            of
            14,443 square feet, for $245,844 total annual fixed rent, an increase
            of
            $106,740 per annum.  The Third Modification of Lease Agreement
            commences on the date of issuance of a certificate of occupancy for the
            Premises
            that are currently undergoing reconstruction.  The term of the lease
            expires on March 31, 2017, subject to two five-year renewal
            options.
  Additionally,
            on February 21, 2007,
            Pioneer granted the Company an option (“Option”) to purchase the Premises for
            (i) an exercise price equal to Pioneer’s total financial investment in the
            Premises through the date of exercise and (ii) the release of Mr. Pagano
            (and
            any other guarantors) from guaranties of mortgage loans secured by the
            Premises.  The Option expires on July 31, 2007.  William
            Pagano has a 55% interest in Pioneer and each of Rita Folger and Jeffrey
            Folger
            has an 8% interest in Pioneer Realty Partners I, LLC, which has a 40%
            interest
            in Pioneer.  Mrs. Folger is the beneficial owner of more than 5% of
            the outstanding shares of the Company and is the wife of Oscar Folger
            and the
            mother of Jeffrey Folger.  Oscar Folger and Jeffrey Folger are the
            Vice President-Chief Legal Counsel and Assistant Vice President-Legal,
            respectively.  The Company paid Pioneer Realty Holdings, LLC $137,239
            in rent during the year ended December 31, 2006.
  See
            Notes 6 and 7 for additional
            related party transactions.
  F-30
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  **18.
            Quarterly Results (Unaudited)**
  The
                following table sets forth selected
                unaudited quarterly financial data of the Company for the years ended
                December
                31, 2006 and 2005.  No changes have been made to the unaudited
                quarterly financial data of the Company for the year ended December
                31, 2006 as
                previously reported in the Form 10-K/A.
 QUARTER
                          ENDEDMarch
                          31
                      
                      
                      June
                          30
                      
                      
                      September
                          30
                      
                      
                      December
                          31(Dollars
                          in thousands, except per share data)2006Net
                          sales
                      
                      $
                      14,884
                      
                      
                      $
                      18,156
                      
                      
                      $
                      19,218
                      
                      
                      $
                      19,237Gross
                          profit
                      
                      
                      4,685
                      
                      
                      
                      5,438
                      
                      
                      
                      5,659
                      
                      
                      
                      5,655Net
                          (loss) income
                      
                      
                      (325
                      )
                      
                      
                      338
                      
                      
                      
                      476
                      
                      
                      
                      327(Loss)
                          income per common share:Basic:Net
                          (loss) income
                      
                      
                      (0.07
                      )
                      
                      
                      0.07
                      
                      
                      
                      0.10
                      
                      
                      
                      0.07Diluted:Net
                          (loss) income
                      
                      
                      (0.07
                      )
                      
                      
                      0.06
                      
                      
                      
                      0.09
                      
                      
                      
                      0.062005,
                          RestatedNet
                          sales
                      
                      $
                      13,347
                      
                      
                      $
                      17,502
                      
                      
                      $
                      17,378
                      
                      
                      $
                      18,464Gross
                          profit
                      
                      
                      4,270
                      
                      
                      
                      5,148
                      
                      
                      
                      5,047
                      
                      
                      
                      5,665Net
                          (loss) income
                      
                      
                      (182
                      )
                      
                      
                      536
                      
                      
                      
                      974
                      
                      
                      
                      735(Loss)
                          income per common share:Basic:Net
                          (loss) income
                      
                      
                      (0.04
                      )
                      
                      
                      0.13
                      
                      
                      
                      0.23
                      
                      
                      
                      0.16Diluted:Net
                          (loss) income
                      
                      
                      (0.04
                      )
                      
                      
                      0.10
                      
                      
                      
                      0.19
                      
                      
                      
                      0.142005
                          As Previously ReportedNet
                          sales
                      
                      $
                      13,347
                      
                      
                      $
                      17,502
                      
                      
                      $
                      17,378
                      
                      
                      $
                      18,464Gross
                          profit
                      
                      
                      4,253
                      
                      
                      
                      5,132
                      
                      
                      
                      5,092
                      
                      
                      
                      5,706Net
                          (loss) income
                      
                      
                      (199
                      )
                      
                      
                      520
                      
                      
                      
                      1,019
                      
                      
                      
                      776(Loss)
                          income per common share:Basic:Net
                          (loss) income
                      
                      
                      (0.05
                      )
                      
                      
                      0.12
                      
                      
                      
                      0.24
                      
                      
                      
                      0.17Diluted:Net
                          (loss) income
                      
                      
                      (0.05
                      )
                      
                      
                      0.10
                      
                      
                      
                      0.19
                      
                      
                      
                      0.15
  F-31
 *Table
                of Contents*
  **COLONIAL
            COMMERCIAL CORP. AND SUBSIDIARIES**
 **Notes
            to Consolidated Financial Statements, Continued**
  Schedule
            II
  Colonial
            Commercial Corp. and Subsidiaries
  Schedule
            of Valuation and Qualifying Accounts
  AdditionsDescription
                  
                  Balance
                      at Beginning of Year
                  
                  
                  Charged
                      to Costs and Expenses
                  
                  
                  Charged
                      to Other Accounts
                  
                  
                  Deductions
                  
                  
                  Balance
                      at End of YearFor
                      the year ended December 31, 2006Allowance for doubtful
                      accounts
                  
                  $
                  185,971
                  
                  
                  $
                  191,357
                  
                  
                  $
                  90,405
                  (a)
                  
                  $
                  (255,690
                  )(b)
                  
                  $
                  212,043For
                      the year ended December 31, 2005Allowance for doubtful
                      accounts
                  
                  $
                  290,448
                  
                  
                  $
                  101,724
                  
                  
                  $
                  69,144
                  (a)
                  
                  $
                  (275,345
                  )(b)
                  
                  $
                  185,971For
                      the year ended December 31, 2004Allowance for doubtful
                      accounts
                  
                  $
                  284,829
                  
                  
                  $
                  225,183
                  
                  
                  $
                  14,862
                  (a)
                  
                  $
                  (234,426
                  )(b)
                  
                  $
                  290,448
  a.
                  Comprised
                      primarily of accounts that were previously charged against
                      the allowance,
                      and have since been collected.
  b.
                  Comprised
                      primarily of uncollected accounts charged against the
                      allowance.
  F-32
 *Table
                of Contents*
  SIGNATURES
  Pursuant
            to the requirements of Section 13 or 15(d) of the Securities and Exchange
            Act of
            1934, Registrant has duly caused this Report to be signed on its behalf
            by the
            undersigned thereunto duly authorized.
  COLONIAL
            COMMERCIAL CORP.
  (Registrant)
 By:
                  /s/
                      William PaganoWilliam
                      Pagano,Chief
                      Executive Officer and DirectorBy:
                  /s/
                      William SalekWilliam
                      Salek,Chief
                      Financial Officer & Principal Accounting Officer
  Dated:
                August 27, 2007
 Pursuant
                to the requirements of the Securities Exchange Act of 1934, this
                Report has been
                duly signed below on August 27, 2007 by the following persons on
                behalf of the
                Registrant and in the capacities indicated:
 By:
                  /s/
                      E. Bruce FredriksonE.
                      Bruce Fredrikson, DirectorBy:
                  /s/
                      Melissa Goldman-WilliamsMelissa
                      Goldman-Williams, DirectorBy:
                  /s/
                      Michael GoldmanMichael
                      Goldman, Chairman of the BoardBy:
                  /s/
                      Stuart H. LubowStuart
                      H. Lubow, DirectorBy:
                  /s/
                      Ronald H. MillerRonald
                      H. Miller, DirectorBy:
                  /s/
                      William PaganoWilliam
                      Pagano,Chief
                      Executive Officer and Director