**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-K**
 
 x
              
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934****For
                  the fiscal year ended December 31, 2005****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 x
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Exchange Act.
 Yes o   No x
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes x   No o
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. o
 
 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 filero
                
                Accelerated
                    filero
                
                Non-accelerated
                    filerx
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o   No x
 
 The
        aggregate market value of the registrant’s common stock held by non-affiliates
        of the registrant, computed by reference to the last reported price at which
        the
        stock was sold on June 30, 2005 (the last business day of the registrant’s most
        recently completed second quarter) was $3,034,585.
  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, 2006Common
                  Stock, $.05 par value per share
              
              4,548,644
                  sharesConvertible
                  Preferred Stock, $.05 par value per share
              
              480,536
                  shares
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
 See
        Index
        to Exhibits
  
 
  **TABLE
        OF CONTENTS**
  PART
                  IPageItem
                  1.
              Business
              2Item
                  1A.
              Risk
                  Factors
              3Item
                  2.
              Properties
              6Item
                  3.
              Legal
                  Proceedings
              6Item
                  4.
              Submission
                  of Matter to a
                  Vote of Security Holders
              9PART
                  IIItem
                  5.
              Market
                  for the
                  Registrant’s Common Stock, Convertible Preferred Stock and Related
                  Stockholder Matters
              9Item
                  6.
              Selected
                  Financial Data
              11Item
                  7.
              Management’s
                  Discussion
                  and Analysis of Financial Condition and Results of
                  Operations
              12Item
                  7A.
              Quantitative
                  and
                  Qualitative Disclosures About Market Risk
              18Item
                  8.
              Financial
                  Statements and
                  Supplementary Data
              19Item
                  9.
              Changes
                  In and
                  Disagreements With Accountants on Accounting and Financial
                  Disclosure
              19Item
                  9A.
              Controls
                  and Procedures
              19PART
                  IIIItem
                  10.
              Directors
                  and Executive
                  Officers of the Registrant
              20Item
                  11.
              Executive
                  Compensation
              23Item
                  12.
              Security
                  Ownership of
                  Certain Beneficial Owners and Management
              25Item
                  13.
              Certain
                  Relationships and
                  Related Transactions
              27Item
                  14.
              Principal
                  Accountant Fees and
                  Services
              29PART
                  IVItem
                  15.
              Exhibits,
                  Financial
                  Statements Schedules and Reports on Form 8-K
              29
  *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, and plumbing fixtures and supplies, primarily, in
        New
        Jersey, New York and portions of eastern 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 with demand for heating equipment
        usually highest in the fourth quarter.
 
 We
        are
        the exclusive supplier of 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 six locations in New Jersey and one
        location in Willow Grove, Pennsylvania.
 
 We
        distribute general heating, ventilating, and air conditioning supplies and
        plumbing fixtures and supplies through six locations in Fishkill, Middletown,
        New Windsor, Peekskill, Poughkeepsie and Suffern, New York. The Fishkill,
        Middletown, New Windsor and Suffern, New York locations utilize showrooms
        for
        the display and sale of products.
 
 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
        2005,
        2004 and 2003, 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%, 42% and
        42%
        HVAC equipment; 38%, 38% and 38% parts and accessories; and 16%, 15% and
        19%
        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 general liability coverage, plus a $10,000,000
        umbrella policy.
 
 No
        material regulatory requirements apply specifically to our
        business.
 
 As
        of
        December 31, 2005, we had 159 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.
  2
 *Table
            of Contents*
  Distribution,
        Customers and Suppliers
 
 We
        stock
        inventory in most of our 17 locations and in one public warehouse. We deliver
        products to customers with our fleet of 17 leased and 13 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 2005. No customer accounted for more than 2% of consolidated
        net
        sales in 2005. 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
        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 2005, two suppliers accounted for 37% 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, with 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.
 
 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.
  3
 *Table
            of Contents*
 
 ***We
        may lose business to competitors and may otherwise be unable to favorably
        compete.***
 
 See
        “Business-Competition.” 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 will depend, 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.
 
 ***Our
        ability to operate our business effectively could be impaired if manufacturers
        are unable to change their production lines in order to comply with federal
        government requirements.***
 
 The
        major
        heating, ventilating and air conditioning equipment manufacturers are changing
        their production lines in order to comply with federal government mandates
        relating to the manufacturing of higher efficiency equipment. Our business
        may
        be negatively impacted if, as a result of manufacturers’ inability to implement
        this transition in a seamless manner, there is a shortage of products in
        the
        industry.
 
 ***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.
  4
 *Table
            of Contents*
  ***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.
 
 ***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
        Bernard Korn, Chairman of the Board and Chief Executive Officer, William
        Pagano,
        a Director and President, and William Salek, Chief Financial Officer and
        Secretary have entered into employment agreements with us that expire in
        2008,
        2010 and 2007, respectively, our ability to operate our businesses and implement
        our strategies will depend upon our ability to attract and retain other
        qualified personnel.
  5
 *Table
            of Contents*
  ***Our
        profitability may be adversely affected by an unfavorable resolution of the
        results of a New Jersey Sales and Use Tax audit.***
 
 One
        of
        our subsidiaries is being audited by the State of New Jersey for Sales and
        Use
        Tax for 2001, 2002, 2003 and 2004. Preliminary indications are that the state
        is
        assessing an unpaid tax with interest and penalties in an amount of
        approximately $177,898. Management disputes this amount and is currently
        reserving $50,000 that it believes is the correct amount due. An unfavorable
        resolution of this issue will result in a charge to the Company’s profit of the
        difference between the reserve amount and the amount of final determination
        or
        resolution. See Item 15(d), Sales Tax, in the Notes to the
        Financials.
 
 ***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 a total of 311,770 square feet for showrooms, counter sales
        and warehousing. We own no real estate. Our leases expire at various times
        between December 31, 2006 and November 30, 2014. 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 17 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, Suffern and New Hampton, New York consisting
        of 311,770 square feet under leases expiring between 2006 and 2014 with current
        aggregate annual rents of approximately $2,692,409. The premises located
        at
        Middletown, Fishkill, New Windsor and Suffern, New York also include showrooms
        of plumbing fixtures and accessories.
 
 Our
        premises are suitable and adequate for their intended use and are adequately
        covered by insurance. As of December 31, 2005, we leased all our
        facilities.
 
 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.
 
  6
 *Table
            of Contents*
  The
        Company understands that Predecessor and many other companies have been sued
        in
        the Superior Court of New Jersey (Middlesex County) by plaintiffs filing
        lawsuits alleging injury due to asbestos. Currently, there exist 118 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, 15 filed actions in 2005, 38 filed actions in 2004,
        31
        filed actions in 2003, and 34 filed actions in 2002. Seventy-eight other
        plaintiffs have had their actions dismissed and seven other plaintiffs have
        settled as of December 31, 2005 for a total of $3,306,000. There has been
        no
        judgment against the Predecessor. Our Universal subsidiary was named by eighteen
        of the existing plaintiffs; of these, six filed actions in 2001, one filed
        an
        action in 2003 and eleven filed actions in 2005. No case that names our
        Universal subsidiary has been settled or dismissed.
 
 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, 2005 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 under an agreement reached in connection with a
        $10,000,000 jury verdict that was rendered on August 5, 2005. The Company
        was
        not a defendant in the Rhodes case.
 
 The
        Company believes that Rhodes differed
        from the other lawsuits in that plaintiff established that he contracted
        mesothelioma as a result of his occupational exposure to asbestos dust and
        fibers and that a predecessor of the Company was a major supplier of the
        asbestos containing products that allegedly caused his disease.
 
 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.
  7
 *Table
            of Contents*
  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.
 
 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.
 
 Atlantic
        Hardware & Supply Corporation
 
 On
        January 28, 2002, Atlantic Hardware & Supply Corporation (“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.
  8
 *Table
            of Contents*
  Item
        4. Submission
        of Matters to a Vote of Security Holders
 
 The
        Company held its Annual Meeting on June 15, 2005. The results of matters
        voted
        at that Meeting were reported in Part II, Item 4 of the Company’s Form 10-Q for
        the period ended June 30, 2005.
 
 PART
        II
 
 Item
        5. Market
        for the Registrant’s Common Stock, Convertible Preferred
 
 Stock
        and Related Stockholder Matters
 
 (a) Price
        Range of Common Stock and Convertible Preferred Stock
 
 From
        July
        11, 2002 through March 30, 2004, the Company’s common stock was traded on the
        Over the Counter (OTC) - Pink Sheets market. Commencing March 31, 2004, the
        Company’s common stock and convertible preferred stock were traded on the Over
        the Counter (OTC)-Bulletin Board market. The following table sets forth the
        quarterly high and low bid prices during 2005 and 2004. 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 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
 
 Common
                  Stock
              
              Convertible
                  Preferred Stock2004
              
              High
              
              Low
              
              High
              
              LowFirst
                  Quarter
              
              $
              1.95
              
              $
              .50
              
              $
              1.05
              
              $
              .60Second
                  Quarter
              
              
              1.85
              
              
              1.20
              
              
              1.50
              
              
              .95Third
                  Quarter
              
              
              2.05
              
              
              1.16
              
              
              2.00
              
              
              1.20Fourth
                  Quarter
              
              
              1.78
              
              
              1.35
              
              
              1.80
              
              
              1.30
  9
 *Table
            of Contents*
  (b) Approximate
        number of common and convertible preferred stockholders:
 
 
 Approximate
                  Number of Record HoldersTitle
                  of Class
              
              (As
                  of March 1, 2006)Common
                  stock par value $.05 per share
              
              295Convertible
                  preferred stock par value $.05 per share
              
              877
 
 (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, 2005 certain information regarding
        the securities authorized for issuance under the 1996 Stock Incentive Plan,
        which is the sole equity compensation plan of the Company as of December
        31,
        2005.
  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 plansEquity
                  compensation plans approved by security holders
              
              
              106,000
              
              $
              0.25
              
              
              0Equity
                  compensation plans not approved by security holders
              
              
              0
              
              $
              0.00
              
              
              0Total
              
              
              106,000
              
              $
              0.25
              
              
              0
  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, 2005, a total of 106,000 options were outstanding under the
        Company’s 1996 Stock Option Plan, which have expiration dates ranging from 2009
        to 2013.
  10
 *Table
            of Contents*
  Item
        6. Selected
        Financial Data
  Years
                  Ended December 31,2005
              
              2004
              
              2003
              
              2002
              
              2001Sales
              
              $
              66,690,945
              
              $
              61,454,128
              
              $
              44,671,136
              
              $
              36,998,800
              
              $
              31,080,398
              (1)Operating
                  income
              
              
              2,400,424
              
              
              1,717,812
              
              
              1,296,597
              
              
              226,567
              
              
              519,860Income
                  (loss) from continuing operations
              
              
              2,115,631
              
              
              1,661,156
              
              
              1,320,263
              
              
              (106,310
              )
              
              (1,610,810
              )Income
                  (loss) from operations of discontinued segment
              
              
              -
              
              
              -
              
              
              -
              
              
              3,300,695
              (2)
              
              (6,098,023
              )Income
                  on disposal of discontinued operation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              106,509Income
                  (loss) on discontinued operation
              
              
              -
              
              
              -
              
              
              -
              
              
              3,300,695
              
              
              (5,991,514
              )Net
                  income
              
              $
              2,115,631
              
              $
              1,661,156
              
              $
              1,320,263
              
              $
              3,194,385
              
              $
              (7,602,324
              )Income
                  (loss) per common share:Basic:Continuing
                  operations
              
              $
              .49
              
              $
              .49
              
              $
              .67
              
              $
              (0.07
              )
              $
              (1.00
              )Income
                  (loss) on discontinued operation
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              2.06
              
              $
              (3.74
              )Net
                  income (loss) per common share
              
              $
              .49
              
              $
              .49
              
              $
              .67
              
              $
              1.99
              
              $
              (4.74
              )Diluted:Continuing
                  operations
              
              $
              .40
              
              $
              .36
              
              $
              .38
              
              $
              (0.07
              )
              $
              (1.00
              )Income
                  (loss) on discontinued operation
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              2.06
              
              $
              (3.74
              )Net
                  income (loss) per common share
              
              $
              .40
              
              $
              .36
              
              $
              .38
              
              $
              1.99
              
              $
              (4.74
              )
  11
 *Table
            of Contents*
 
 December
                  31,2005
              
              2004
              
              2003
              
              2002
              
              2001Total
                  assets
              
              $
              27,537,375
              
              $
              24,515,258
              
              $
              20,618,987
              
              $
              13,686,842
              
              $
              13,925,490Current
                  liabilitiesBorrowings
                  under credit facility
              
              
              11,745,985
              
              
              12,325,209
              
              
              12,232,030
              (2)
              
              10,350,889
              (2)
              
              7,929,576Other
              
              
              8,216,989
              
              
              6,617,377
              
              
              7,089,276
              (3)
              
              3,953,063
              (3)
              
              9,659,183
              (3)Long-term
                  liabilities, less currentObligations
              
              
              1,400,834
              
              
              1,398,774
              
              
              326,700
              
              
              64,775
              
              
              213,001
  (1)
              Due
                  to the discontinuance of operations in 2001, excludes sales from
                  Atlantic
                  which were $24,561,972 in 2001.
 
 (2)
              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’s line of credit. The release from the $3,300,695 of the
                  guarantee resulted in the recognition of income from discontinued
                  operations in 2002. See “General Business
                  Developments.”
 
 (3)
              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.
  12
 *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 net accounts receivable of
        $8,489,717 and an allowance for doubtful accounts of $185,971 as of December
        31,
        2005. 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.
  13
 *Table
            of Contents*
  Under Statement
        of Financial Accounting Standards No. 142, goodwill is no longer be
        amortized, but 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 their 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
        $11,334 at December 31, 2005, 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, 2005, the Company
        had a deferred tax valuation allowance of approximately
        $10,000,000.
 
 Comparison
        of Year Ended December 31, 2005 with Year Ended December 31, 2004
 
 The
        Company’s net income increased 27.4% to $2,115,631 for the year ended December
        31, 2005, compared to net income of $1,661,156 for the same period in
        2004.
 
 Sales
        increased 8.5% to $66,690,945 for the year ended December 31, 2005 from
        $61,454,128 for the same period in 2004. The
        increase in sales is primarily a result of increased market penetration at
        two
        of the Company’s subsidiaries, an increase in general industry pricing, above
        average temperatures during the summer cooling season, and a continuing strong
        demand for residential and light commercial HVAC products and plumbing fixtures
        and supplies.
 
 Gross
        profit increased 9.8% to $20,183,176 for the year ended December 31, 2005
        from
        $18,384,147 for the same period in 2004. The increase in gross profit is
        primarily the result of the mentioned increases in sales, and the Company’s
        improved ability to purchase products at more favorable pricing. Gross profit
        expressed as a percentage of sales increased to 30.3% in 2005 compared to
        29.9 %
        for the comparable period in 2004. Cost of sales excludes the distribution
        costs
        of incoming freight, purchasing, receiving, inspection, warehousing and handling
        costs, as these costs are included in our selling, general and administrative
        expenses. Our gross margins may not be comparable to those of other entities
        since some entities include these distribution costs in the cost of sales.
        These
        distribution costs were $421,248 and $325,109 for the years ended December
        31,
        2005 and 2004, respectively.
 
 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.
  14
 *Table
            of Contents*
  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.
 
 Comparison
        of Year Ended December 31, 2004 with Year Ended December 31, 2003
 
 The
        Company had net income of $1,661,156 for the year ended December 31, 2004.
        This
        compares with net income of $1,320,263 for the year ended December 31,
        2003.
 
 Sales
        for
        the year ended December 31, 2004 were $61,454,128, an increase of $16,782,992
        (37.6%), from $44,671,136 in 2003. This increase reflects approximately
        $9,625,000 additional sales from the inclusion of sales from RAL (a subsidiary
        we acquired in September 2003) for the full year of 2004 as compared to three
        months of 2003. In addition, $3,337,000 of the increase resulted from two
        new
        locations for a full year compared to six months in 2003 and the balance
        relates
        to increased market penetration from existing locations.
 
 Gross
        profit in 2004 increased $5,217,665 or 39.6% over 2003, primarily as a result
        of
        the revenue increases related to the RAL acquisition being included for the
        full
        year of 2004, the inclusion of two new branches for the full year of 2004
        and
        improved selling margins. Gross profit margin increased to 29.9% in 2004
        from
        29.5% in 2003, primarily due to a change in product mix and higher gross
        margins
        at RAL. Cost of sales excludes the distribution costs of incoming freight,
        purchasing, receiving, inspection, warehousing and handling costs; we include
        these costs 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 $325,109 and $206,264 for the years ended December 31, 2004 and 2003,
        respectively.
 
 Selling,
        general, and administrative expenses in 2004 increased $4,796,450 or 40.4%
        over
        2003, primarily related to the full year costs of the RAL acquisition, two
        new
        locations opened in 2003, and the opening of the Deptford location on November
        1, 2004.
 
 Other
        income in 2004 decreased $4,008 or 1.3%, compared to 2003. Interest expense
        in
        2004 increased $237,826 or 37.2% over 2003, as a factor of increased credit
        facility borrowings to support increased sales, accounts receivable and
        inventory.
  15
 *Table
            of Contents*
  Income
        tax benefit increased by $161,512 to a net tax benefit of $498,668 for the
        year
        ended December 31, 2004 from a $337,156 net tax benefit for the same period
        in
        2003. In accordance with FASB Statement Number 109, the Company recorded
        a
        deferred tax benefit of $645,600 for the year ended December 31, 2004 in
        order
        to recognize the expected utilization of available operating loss carryforwards,
        compared to $421,400 in the year ended December 31, 2003. In addition, the
        Company recorded a state tax provision of $137,932 for the year ended December
        31, 2004 compared to $154,214 for the year ended December 31, 2003.
 
 Liquidity
        and Capital Resources
 
 Credit
        Facility
 
 The
        Company has a $15,000,000 secured loan facility pursuant to a credit and
        security agreement (“Agreement”) with Wells Fargo Business Credit, Inc.
        (“Wells”). The facility consists of a revolving line of credit which expires on
        August 1, 2009, and a term loan with a balance of $562,977 as of December
        31,
        2005, payable in six monthly installments of approximately $83,333 and a
        final
        payment of approximately $62,977, unless sooner paid pursuant to the terms
        of
        the loan agreement. In addition, the Company has a standby letter of credit
        in
        the amount of $300,000 which expires on July 31, 2006. Availability under
        the
        revolving credit line is determined by a percentage of available assets as
        defined in the Agreement, less letter of credit and reserves, and was
        $13,307,082 as of December 31, 2005. The balance outstanding under the revolving
        line of credit including the term loan was $11,745,985 as of December 31,
        2005.
        The revolving credit line bears interest at .25% below prime, and the term
        loan
        bears interest at .50% above prime. 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 and its business operations
        and restricts the payment of dividends, subordinated debt, purchase of
        securities and capital expenditures ($550,000 per year). The Company must
        maintain a tangible net worth of approximately $2.7 million for the fiscal
        quarter ending December 31, 2005. 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.
 
 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, 2005, the Company had $613,456 in cash compared with $310,659
        at
        December 31, 2004.
 
 Net
        cash
        provided by operating activities was $1,262,068 for the year ended December
        31,
        2005 compared to net cash used in operating activities of $2,165,280 for
        the
        year ended December 31, 2004.  The net cash provided by operating
        activities for the 2005 period is primarily a result of net income approximating
        $2,115,631, offset by non-cash charges approximating $220,953 and by cash
        used
        in operating assets and liabilities approximating $632,610.  The increase
        in accounts receivable approximating $816,853 was primarily a result of
        increased sales volume.  Accounts payable increased due to increased
        inventory purchases to support the increased sales.
 
 Cash
        flows used in investing activities of $401,054 during the year ended December
        31, 2005 were due to purchases of equipment.
  16
 *Table
            of Contents*
  The
        cash
        flows used in financing activities of $558,217 consisted of $1,103,690
        repayments under the credit facility-term loan, $141,292 for repayments on
        notes
        payable and $15,400 from the purchase and retirement of preferred shares. 
Cash flows provided by financing activities consisted of $524,466 borrowings
        under the credit facility-revolving credit, $22,000 received from the exercise
        of stock options, and $155,699 from the issuance of notes payable.
 
 Equity
        Transactions
 
 During
        the year ended December 31, 2005, the Company issued 88,000 shares of common
        stock pursuant to the exercise of stock options. Bernard Korn acquired 35,000
        shares of common stock, by exercising 10,000 stock options on February 2,
        2005
        and 25,000 stock options on September 20, 2005. Mr. Korn is Chairman of the
        Board and the Chief Executive Officer of the Company. A non-executive employee
        acquired 4,000 shares of common stock, by exercising 4,000 stock options
        on
        March 22, 2005. William Pagano acquired 20,000 shares of common stock, by
        exercising 20,000 stock options on September 20, 2005. Mr. Pagano is the
        President and a Director of the Company. Carl Sussman acquired 12,000 shares
        of
        common stock, by exercising 12,000 stock options on September 26, 2005. Mr.
        Sussman is a Director of the Company. William Salek acquired 5,000 shares
        of
        common stock, by exercising 5,000 stock options on September 28, 2005. Mr.
        Salek
        is the Chief Financial Officer of the Company. William Koon acquired 12,000
        shares of common stock, by exercising 12,000 stock options on October 19,
        2005.
        Mr. Koon is a Director of the Company.
 
 During
        the year ended December 31, 2005, holders of a total of 298,018 shares of
        redeemable convertible preferred stock converted these shares into 298,018
        shares of Common Stock, of which 174,878 shares of convertible preferred
        stock
        were converted by Directors of the Company. As of December 31, 2005, the
        number
        of convertible preferred shares outstanding was 484,721. 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 will vote together as one class to elect one
        class
        of directors.
 
 On
        August
        16, 2005, the Company announced that it was offering to purchase all shares
        of
        convertible preferred stock that on August 15, 2005 were owned by shareholders
        who then owned 99 shares or less for $2.00 per share. The offer expired
        September 30, 2005. As a result of the offer, the Company purchased 7,700
        shares
        of its convertible preferred stock, which were retired.
  17
 *Table
            of Contents*
  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, 2005:
 
 Payment
                  Due by Period (in thousands)Less
                  than
              
              
              
              
              
              OverTotal
              
              1
                  Year
              
              1-3
                  Years
              
              4-5
                  Years
              
              5
                  YearsOperating
                  leases
              
              $
              10,382
              
              $
              2,751
              
              $
              5,700
              
              $
              1,085
              
              $
              846Compensation
                  agreements
              
              
              2,155
              
              
              730
              
              
              1,225
              
              
              200
              
              
              -Notes
                  payable
              
              
              1,566
              
              
              165
              
              
              1,395
              
              
              6
              
              
              -Notes
                  payable interest
              
              
              346
              
              
              132
              
              
              214
              
              
              -
              
              
              -Line
                  of credit
              
              
              11,746
              
              
              11,746
              
              
              -
              
              
              -
              
              
              -Line
                  of credit interest
              
              
              881
              
              
              881
              
              
              -
              
              
              -
              
              
              -Totals
              
              $
              27,076
              
              $
              16,405
              
              $
              8,534
              
              $
              1,291
              
              $
              846
 
 Notes
        payable carry a fixed interest percentage rate per annum, with the exception
        of
        a $750,000 note that accrues interest at the prime rate. “Notes payable
        interest” in the table assumes an average annual prime rate of 7.75%. The prime
        rate as of December 31, 2005 was 7.25%. See Note 6, Notes Payable, of the
        Financial Statements for the terms of these notes.
 
 “Line
        of
        credit” in the table is shown as a less than one year obligation because the
        lending bank may demand payment at any time. The line of credit consists
        of a
        revolving credit line that bears interest at .25% below prime and a term
        loan
        that bears interest at .50% above prime. “Line of credit interest” in the table
        assumes that the principal amount outstanding on the line is paid in full
        on
        December 31, 2006, that the principal amount to be repaid on that date will
        be
        $11,746,000 (which is the principal amount that was outstanding on December
        31,
        2005), and assumes that the average prime rate will be 7.75% in 2006. The
        prime
        rate was 7.25% as of December 31, 2005. See Note 5, Financing Arrangements,
        of
        the Financial Statements for the terms of the line of credit.
 
 Impact
        of Inflation and Seasonality
 
 To
        date,
        inflation has had a minor impact on the Company’s operations causing limited
        price increases in certain product lines. The Company’s business is affected by
        significant outdoor temperature swings. Demand related to the residential
        central air conditioning replacement market is highest in the second and
        third
        quarters with demand for heating equipment usually highest in the fourth
        quarter.
 
 Item
        7A. Quantitative
        And Qualitative Disclosures About Market Risk
 
 Market
        risk represents the risk of changes in value of a financial instrument,
        derivative or non-derivative, caused by fluctuations in interest rates, foreign
        exchange rates and equity prices. The Company has no financial instruments
        that
        give it exposure to foreign exchange rate or equity price risk.
  18
 *Table
            of Contents*
  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%, except for a term loan with a balance of $562,977 as
        of
        December 31, 2005, which bears interest at a rate of prime plus .5% and a
        $750,000 note to Goldman Associates of NY, Inc. which 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, 2005 by
        approximately $88,000 over a one-year period, assuming the borrowing level
        remains consistent with the outstanding borrowings as of December 31, 2005.
        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, appears
        herein. See Index to Financial Statements appearing on page F-1.
 
 Item
        9. Changes
        In and Disagreements With Accountants on Accounting and Financial
        Disclosure
 
 None
 
 Item
        9A. Controls
        and Procedures
 
 Evaluation
        of Disclosure Controls and Procedures
 
 An
        evaluation has been carried out under the supervision and with the participation
        of our management, including our Chief Executive Officer and Chief Financial
        Officer, of the effectiveness of the design and the operation of our "disclosure
        controls and procedures" (as such term is defined in Rule 13a-15(e) under
        the
        Securities Exchange Act of 1934) as of December 31, 2005 (“Evaluation Date”).
        Based on such evaluation, our Chief Executive Officer and Chief Financial
        Officer have concluded that, as of the Evaluation Date, the disclosure controls
        and procedures are reasonably designed and effective to ensure that (i)
        information required to be disclosed by us in the reports we file or submit
        under the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported within the time periods specified in the SEC's rules and forms,
        and
        (ii) such information is accumulated and communicated to our management,
        including our Chief Executive Officer and Chief Financial Officer, as
        appropriate to allow timely decisions regarding required
        disclosure.
  19
 *Table
            of Contents*
  PART
        III
 
 Item
        10. Directors
        and Executive Officers of the Registrant
 
 The
        names, ages and positions of the Registrant’s directors and executive officers
        as of December 31, 2005 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 officers, 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. Melissa
        Goldman is the daughter of Michael Goldman.
  Name
              
              Age
              
              Position
                  with the CompanyCommon
                Stock Directors and Executive Officers:E.
                  Bruce Fredrikson
              
              67
              
              Director,
                  Chairman of Audit CommitteeMelissa
                  Goldman
              
              37
              
              DirectorMichael
                  Goldman
              
              67
              
              DirectorBernard
                  Korn
              
              80
              
              Chairman
                  of the Board and Chief Executive Officer of the CompanyWilliam
                  Pagano
              
              66
              
              Director
                  and President of the Company and President of UniversalWilliam
                  Salek
              
              44
              
              Chief
                  Financial Officer and Secretary of the Company and Vice President
                  of
                  UniversalCarl
                  L. Sussman
              
              81
              
              DirectorConvertible
                Preferred Stock Directors:William
                  Koon
              
              76
              
              DirectorRonald
                  Miller
              
              62
              
              DirectorJack
                  Rose
              
              87
              
              Director
  20
 *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
 
 Melissa
        Goldman has been a Director of the Company since October 22, 2004. Ms. Goldman
        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. Ms. Goldman 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. 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.
 
 Bernard
        Korn
 
 Bernard
        Korn has been Chairman of the Board of Directors and Chief Executive Officer
        of
        the Company since its inception in 1964. Mr. Korn is a Certified Public
        Accountant and is the holder of a B.S. in Accounting from Long Island
        University. He is also the holder of an honorary degree, Doctor of Humane
        Letters, from Long Island University.
 
 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 and as President
        of the
        Company on October 27, 2005. 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. He also
        holds a J.D. from Seton Hall University and is an attorney at law licensed
        in
        the State of New Jersey.
 
 William
        Salek
 
 William
        Salek has been the Vice President of Universal since June 1999 and was appointed
        as the Chief Financial Officer of the Company in October 2004 and Secretary
        of
        the Company in February 2005. He 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.
 
 Carl
        L. Sussman
 
 Carl
        L.
        Sussman has been a Director of the Company since 1964. Mr. Sussman holds
        a B.S.
        in Pharmacy from Long Island University. He was a practicing pharmacist and
        a
        Vice President of Southern Mortgage Associates, Inc., a licensed mortgage
        banking company. He is currently retired and is a private investor in the
        Company.
  21
 *Table
            of Contents*
  William
        Koon
 
 William
        Koon has been a Director of the Company since 1983. Mr. Koon has been Chairman
        of the Board of Republic Mills, Inc. since 1995, a manufacturer of pet feed
        and
        related products, and Chairman of the Board of Lord’s Enterprises, Inc. since
        1958, a grain storage and sales company, and owner and manager of farms.
 
 Jack
        Rose
 
 Jack
        Rose
        has been a Director of the Company since 1983. Mr. Rose is a farm owner and
        manager. Mr. Rose is a former President of the Ohio Farmers’ Union and a former
        member of the Executive Advisory Board of Ohio State University. He is retired
        and is a private investor in the Company.
 
 Ronald
        Miller
 
 Ronald
        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. He is an acting Judge of Auglaize County Municipal
        Court in the State of Ohio.
 
 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, Ronald Miller and Carl Sussman. The Board
        of
        Directors had determined that it has two audit committee financial experts
        serving on the audit committee, Dr. Fredrikson and Ronald Miller. Both Dr.
        Fredrikson and Mr. Miller are independent directors as defined in Item
        7(d)(3)(iv) of Schedule 14A.
 
 Code
        of Ethics
 
 The
        Company has adopted a Code of Ethics that applies to its Chief Executive
        Officer, Chief Financial Officer and President.
 
 Compliance
        with Section 16(a) of the Exchange Act
 
 The
        Company believes that during the period from January 1, 2005 through December
        31, 2005, all executive officers, directors and greater than 10% beneficial
        owners, complied with Section 16(a) filing requirements, except as follows:
        Jack
        Rose failed until December 2, 2005 to file Form 4 reports for purchases of
        stock
        that he made from November 8, 2004 to November 16, 2004 and Ronald Miller
        filed
        one late report of Form 4 regarding shares which escheated to the State of
        Ohio.
   22
 *Table
            of Contents*
  Item
        11. Executive
        Compensation
 
 Executive
        Compensation
 
 The
        following table sets forth information about compensation paid or accrued
        by the
        Company during the fiscal years ended December 31, 2005, 2004 and 2003 to
        Bernard Korn, William Pagano and William Salek, the only executive officers
        of
        the Company whose compensation exceeded $100,000.
 
 Summary
        Compensation Table
 
 Long-TermCompensationAnnual
                    Compensation
                StockName
                    and Principal Position
                
                Year
                Salary
                    ($)
                Bonus
                    ($)
                Options
                    (Shares)Bernard
                    Korn
                
                2005
                150,000
                -
                -Chairman
                    of the Board, and Chief Executive
                
                2004
                150,000
                -
                -Officer
                    of the Company
                
                2003
                158,654
                -
                60,000William
                    Pagano
                
                2005
                200,000
                317,924
                -Director
                    and President of the Company and
                
                2004
                200,000
                240,862
                -President
                    of Universal
                
                2003
                200,000
                232,257
                -William
                    Salek
                
                2005
                120,000
                41,798
                -Chief
                    Financial Officer and Secretary of the
                
                2004
                105,000
                27,350
                -Company
                    and Vice President of Universal
                
                2003
                95,000
                25,736
                -
  The
        above
        table does not include certain perquisites and other personal benefits, the
        total value of which does not exceed the lesser of $50,000 or 10% of the
        total
        of annual salary and bonus reported for such person.
  23
 *Table
            of Contents*
  Aggregated
        Option Exercises in Last Fiscal Year and Fiscal Year-End Option
        Values
 
 The
        following table sets forth information concerning the value of unexercised
        stock
        options at the end of the 2005 fiscal year for the persons named in the Summary
        Compensation Table.
 
 Shares
                  Acquired on Exercise (#)
              
              Value
                  Realized ($)
              
              Number
                  of Unexercised Options at Fiscal Year-End
                  Exercisable/Unexercisable
              
              Value
                  of Unexercised In-The-Money Options at Fiscal Year-End
                  Exercisable/UnexercisableBernard
                  Korn
              
              
              35,000
              
              $
              70,000
              
              
              52,000/0
              
              $
              96,200/0William
                  Pagano
              
              
              20,000
              
              $
              46,000
              
              
              0/0
              
              $
              0/0William
                  Salek
              
              
              5,000
              
              $
              10,500
              
              
              0/0
              
              $
              0/0
 
 There
        are
        no stock appreciation rights, long-term incentive plans or pension plans.
 
 Employment
        Contracts and Termination of Employment and Change-in-Control
        Arrangements
  Mr.
        Korn
        is employed pursuant to an employment agreement (the “Agreement”), expiring
        December 31, 2008, at an annual compensation of $150,000 per annum for the
        years
        2004 and 2005 and increasing to $200,000 per annum for the period January
        1,
        2006 through December 31, 2008. In the event of Mr. Korn’s death, the Agreement
        provides for continued compensation payments for a period of one year. In
        the
        event of Mr. Korn’s disability, he will receive compensation for the balance of
        the term of the agreement at the rate of compensation then in effect.
 
 Mr.
        Pagano is employed pursuant to an employment agreement expiring on December
        31,
        2010 at a compensation of $200,000 per annum. The agreement also provides
        for
        additional incentive compensation based on a percentage of earnings, as defined,
        of the subsidiaries, limited to two times his base compensation.
 
 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, of the subsidiaries.
 
 Mr.
        Korn
        is the Chairman of the Board and Chief Executive Officer of the Company.
        Mr.
        Pagano is the President and a Director of the Company. Mr. Salek is the Chief
        Financial Officer and Secretary of the Company.
 
 Note:
        See
“Certain Relationships and Related Transactions,” Item 13.
 
 Director’s
        Compensation
 
 Prior
        to
        April 1, 2005, members of the Board of Directors, other than those employed
        by
        the Company, received a fee of $1,000 for each meeting of the Board attended,
        limited to $4,000 per annum, in addition to an annual retainer of $2,000.
        Effective April 1, 2005, outside Directors’ fees increased to $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. Members of the Board of Directors
        receive no fees if they are employed by the Company.
  24
 *Table
            of Contents*
  Compensation
        Committee Interlocks and Insider Participation
 
 The
        Company does not have a Compensation Committee or any other committee of
        the
        Board of Directors performing equivalent functions. Decisions regarding
        compensation of executive officers of the Company are made by the Board of
        Directors. Two of the company’s executive officers, Bernard Korn and William
        Pagano, are directors of the Company. Each of these individuals participated
        in
        deliberations of the Board during the fiscal year ended December 31, 2005
        concerning executive officer compensation, except that they abstained from
        deliberations and voting regarding their own compensation.
 
 Item
        12. Security
        Ownership of Certain Beneficial Owners and Management
 
 The
        following table sets forth, as of March 1, 2006, information with respect
        to
        beneficial ownership by directors of the Company, holders of over 5% of a
        class
        of stock and of directors and officers of the Company as a group.
 
 Common
                  StockAmount
                  andNature
                  ofBeneficialName
                  of Beneficial Owner
              
              Ownership*
              
              Percent
                  of ClassOfficers
                  and Directors:E.
                  Bruce Fredrikson
              
              
              6,000
              
              
              **Melissa
                  Goldman
              
              
              5,400
              
              
              **Michael
                  Goldman
              
              
              933,000
              (1)
              
              19.86
              %William
                  Koon
              
              
              18,741
              (2)
              
              **Bernard
                  Korn
              
              
              629,255
              (3)
              
              13.68
              %Ronald
                  H. Miller
              
              
              12,054
              (4)
              
              **William
                  Pagano
              
              
              667,973
              (5)
              
              14.58
              %Jack
                  Rose
              
              
              222,767
              (6)
              
              4.88
              %William
                  Salek
              
              
              61,667
              (7)
              
              1.35
              %Carl
                  L. Sussman
              
              
              99,607
              (8)
              
              2.19
              %All
                  Officers and Directors as a Group:
              
              
              2,656,464
              
              
              55.06
              %Other
                  Holders of Over 5%:Rita
                  C. Folger
              
              
              478,719
              (9)
              
              10.45
              %Richard
                  Rozzi
              
              
              335,000
              
              
              7.36
              %Goldman
                  Associates of NY, Inc.
              
              
              750,000
              (10)
              
              15.96
              %
  25
 *Table
            of Contents*
 
 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.
 
 (1) Michael
        Goldman is the President and majority shareholder of Goldman Associates of
        NY,
        Inc. ("Goldman Associates"). Goldman Associates is the owner of 600,000 shares
        of Common Stock ("Goldman Shares") and warrants ("Warrants") to purchase150,000
        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 disclaims beneficial ownership.
        Mr. Goldman’s wife disclaims beneficial ownership of Mr. Goldman’s shares.
  26
 *Table
            of Contents*
  (2) William
        Koon’s beneficial ownership consists of 18,741 shares of Common Stock. Mr.
        Koon’s beneficial ownership excludes 15,600 shares of Common Stock owned by his
        wife. Mr. Koon disclaims beneficial ownership of his wife’s shares and his wife
        disclaims beneficial ownership of Mr. Koon’s shares.
 
 (3) Bernard
        Korn’s beneficial ownership consists of 577,255 shares of Common Stock and
        52,000 shares of Common Stock issuable upon exercise of his options.
 
 (4) Ronald
        H.
        Miller’s beneficial ownership consists of 54 shares of Common Stock and 12,000
        shares of Common Stock issuable upon exercise of his options.
 
 (5) William
        Pagano’s beneficial ownership consists of 634,640 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) Jack
        Rose’s beneficial ownership consists of 145,226 shares of Common Stock, 12,000
        shares of Common Stock issuable at any time upon exercise of his options,
        and
        65,541 shares of Common Stock owned jointly by Mr. Rose and his
        wife.
 
 (7) 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.
 
 (8) Carl
        L.
        Sussman’s beneficial ownership consists of 68,000 shares of Common Stock and
        31,607 shares of Common Stock owned jointly by Mr. Sussman and his
        wife.
 
 (9) Rita
        C.
        Folger’s beneficial ownership consists of 445,386 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.
 
 (10)The
        beneficial
        ownership of Goldman Associates of NY, Inc. consists of 600,000 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 1 for information relating
        to
        beneficial ownership of these securities held by Michael Goldman.
 
 Item
        13. 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 $215,674 during the year ended December 31, 2005. The Company owes
        Mr.
        Hildebrandt $170,000 pursuant to two notes: (a) a subordinated note in the
        amount of $120,000, 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.
  27
 *Table
            of Contents*
  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 Ms. 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, Ms. 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.
 
 Pioneer
        Realty Holdings, LLC, a New York limited liability company (“Pioneer”), is the
        owner of the premises located at 2213 Route 9, Fishkill, New York that is
        leased
        to a subsidiary of the Company under a lease that expires September 2008,
        subject to renewal options, and provides for a current aggregate annual rent
        of
        $133,500. Each of Messrs. Pagano and Paul Hildebrandt has a 35% interest
        in this
        entity. Each of Rita Folger and Jeffrey Folger has a 4% interest in this
        entity.
        Jeffrey Folger is the son of Oscar and Rita Folger. The Company paid Pioneer
        Realty Holdings, LLC $90,882 in rent during the year ended December 31, 2005.
 
 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 and Jeffrey
        Folger
        for the years ended 2005, 2004 and 2003 were $79,973, $71,115 and $70,773,
        respectively.
 
 The
        positions with the Company and the relevant stock ownerships of the persons
        and
        entities referenced in this Item are set forth in Items 10 and 12.
  28
 *Table
            of Contents*
  Item
        14. Principal
        Accountant Fees And Services
 
 Audit
        Fees
 
 The
        audit
        fees for 2005 and 2004 were $227,385 and $170,125, 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.
 
 Audit
        Related Fees
 
 The
        Company did not incur audit related fees from Weiser in 2005 and 2004.
        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 2005 and 2004. Tax Fees consist
        of
        fees billed for professional services rendered for tax compliance. These
        services include assistance regarding federal, state and local tax
        compliance.
 
 Other
        Fees
 
 There
        were no other fees for professional services rendered to the Company during
        the
        fiscal years 2005 and 2004, other than the service reported above.
 
 The
        Audit Committee:
 
 Meets
        with the independent auditor prior to the audit and discusses the planning
        and
        staffing of the audit;
 
 Approves
        in advance the engagement of the independent auditor for all audit services
        and
        non-audit services and approves the fees and other terms of any such engagement;
        and
 
 Obtains
        periodically from the independent auditor a formal verbal communication of
        the
        matters required to be discussed by Statements of Auditing Standards No.
        61 and
        SEC Rule 10(a). In addition, the Company obtains a letter describing all
        relationships between the auditor and the Company and discusses with the
        auditor
        any disclosed relationships or services that may impact auditor objectivity
        and
        independence.
 
 PART
        IV
 
 Item
        15. Exhibits
        and Financial Statement Schedules
 
 (a)
              Exhibits
                  and Financial Statements
 
 (1)
              Financial
                  Statements. See Item 8. Index to Financial
                  Statements
 
 (2)
              Financial
                  Statement Schedules. See F-1 through F-28,
                  attached
 
 (3)
              Exhibits
  29
 *Table
            of Contents*
   INDEX
          TO
          EXHIBITS
 Incorporated
                    ByFiled
                
                
                
                Date
                    Filed
                
                ReferenceExhibit
                
                
                Exhibit
                    Name
                
                Herewith
                
                Form
                
                With
                    SEC
                
                From
                    Exhibit3.01
                
                
                Restated
                    Certificate of Incorporation of Registrant dated January 6,
                    1983
                
                Yes(a)
                
                Certificate
                    of Amendment of the Certificate of Incorporation dated October
                    31,
                    1986
                
                Yes(b)
                
                Certificate
                    of Amendment of the Certificate of Incorporation dated June 24,
                    1988
                
                Yes(c)
                
                Certificate
                    of Amendment of the Certificate of Incorporation dated January
                    13,
                    1998
                
                Yes(d)
                
                Certificate
                    of Amendment of the Certificate of Incorporation dated January
                    13,
                    1998
                
                Yes3.02
                
                
                By-Laws
                    of Registrant
                
                Yes4.01
                
                
                Specimen
                    of Common Stock Certificate
                
                Yes4.02
                
                
                Specimen
                    of Convertible Preferred Stock Certificate
                
                Yes10.01
                
                
                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
                
                Yes10.02
                
                
                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
  30
 *Table
              of Contents*
 
 10.03
                
                
                Employment
                    Agreement dated June 25, 1999 between Universal Supply Group,
                    Inc. and
                    William Salek
                
                Yes(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
                
                
                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)10.06
                
                
                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
                
                10.110.07
                
                
                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)
 
 31
 *Table
              of Contents*
 (b)
                
                Reaffirmation
                    Agreement, General Release Consent and Acknowledgement of Commercial
                    Reasonableness of Private Sale dated February 1, 2001between
                    Well-Bilt
                    Steel Products, Inc. and the Secured Lender
                
                
                
                8-K
                
                02-16-01
                
                10(a)(ii)(c)
                
                Foreclosure
                    Agreement dated February 1, 2001 between Independent Steel Products,
                    LLC,
                    the Secured Lender, Atlantic Hardware & Supply Corporation, Universal
                    Supply group, Inc. and Well-Bilt Steel Products, Inc.
                
                
                
                8-K
                
                02-16-01
                
                10(a)(iii)(d)
                
                Bill
                    of Sale and Assignment dated February 1, 2001 made by the Secured
                    Lender
                    in favor of Independent Steel Products, LLC
                
                
                
                8-K
                
                02-16-01
                
                10(a)(iv)10.08
                
                
                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)10.09
                
                
                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)10.10
                
                
                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”
                
                Yes10.11
                
                
                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”
                
                Yes10.12
                
                
                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
                
                4.210.13
                
                
                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
                
                4.610.14
                
                
                Asset
                    Purchase Agreement dated September 5, 2003 for the purchase of
                    certain
                    assets, subject to certain liabilities of The RAL Supply Group,
                    Inc., by
                    RAL Purchasing Corp., a wholly-owned subsidiary of Colonial Commercial
                    Corp.
                
                
                
                8-K
                
                10-15-03
                
                10(a)(i)
  32
 *Table
              of Contents*
 10.15
                
                
                RAL
                    Closing Statement dated September 30, 2003
                
                
                
                8-K
                
                10-15-03
                
                10(a)(ii)10.16
                
                
                Lease
                    Agreement by and between Zanzi Realty, Inc. and The RAL Supply
                    Group,
                    Inc., dated September 1, 1998
                
                
                
                8-K
                
                11-02-05
                
                10.04(a)
                
                First
                    Modification of Lease Agreement dated September 30, 2003 to Lease
                    Agreement by and between Zanzi Realty, Inc. and The RAL Supply
                    Group,
                    Inc., dated September 1, 1998
                
                
                
                8-K
                
                11-02-05
                
                10.05(b)
                
                Second
                    Modification of Lease Agreement dated April 12, 2005 to Lease
                    Agreement by
                    and between Zanzi Realty, Inc. and The RAL Supply Group, Inc.,
                    dated
                    September 1, 1998
                
                
                
                8-K
                
                11-02-05
                
                10.0610.17
                
                
                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
                
                Yes
  33
 *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, 2005 and 2004
              F-3Consolidated
                  Statements of Operations for the Years Ended December 31, 2005,
                  2004 and
                  2003
              F-4Consolidated
                  Statements of Stockholders’ Equity for the Years Ended December 31, 2005,
                  2004 and 2003
              F-5Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2005,
                  2004 and
                  2003
              F-6Notes
                  to the Consolidated Financial Statements
              F-7Schedule
                  II - Valuation and Qualifying Accounts
              F-28All
                  other schedules are omitted because they are not required or the
                  information required is given in the consolidated financial statements
                  or
                  notes thereto.
 
 F-1
 *Table
            of Contents*
  REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors and Stockholders of
 Colonial
        Commercial Corp. and Subsidiaries
 
 We
        have
        audited the accompanying consolidated balance sheets of Colonial Commercial
        Corp. and Subsidiaries (the "Company") as of December 31, 2005 and 2004 and
        the
        related consolidated statements of operations, stockholders’ equity and cash
        flows for the years ended December 2005, 2004 and 2003. 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, 2005 and 2004 and the consolidated
        results of their operations and their cash flows for the years ended December
        31, 2005, 2004 and 2003, in conformity with U.S. generally accepted accounting
        principles.
 
 We
        have
        also audited the financial statement Schedule II (Valuation and Qualifying
        Accounts) for the years ended December 31, 2005, 2004 and 2003. 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
        30,
        2006
  F-2
 *Table
            of Contents*
 
 PART
        I. FINANCIAL INFORMATION
 Item
        1.
        Financial Statements
 
 COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Consolidated
        Balance Sheets
  December
                    31,
                
                December
                    31,2005
                
                2004AssetsCurrent
                    assets:Cash
                
                $
                613,456
                
                $
                310,659Accounts
                    receivable, net of allowance for doubtful accounts of $185,971
                    in 2005 and
                    $290,448 in 2004
                
                
                8,489,717
                
                
                7,774,588Inventory
                
                
                12,214,261
                
                
                11,002,314Prepaid
                    expenses and other current assets
                
                
                1,066,658
                
                
                865,732Deferred
                    tax asset - current portion
                
                
                637,500
                
                
                574,061Total
                    current assets
                
                
                23,021,592
                
                
                20,527,354Property
                    and equipment
                
                
                1,669,484
                
                
                1,656,149Goodwill
                
                
                1,628,133
                
                
                1,628,133Other
                    intangibles
                
                
                11,334
                
                
                27,500Other
                    assets - noncurrent
                
                
                135,832
                
                
                183,183Deferred
                    tax asset - noncurrent
                
                
                1,071,000
                
                
                492,939$
                27,537,375
                
                $
                24,515,258Liabilities
                    and Stockholders' EquityCurrent
                    liabilities:Trade
                    payables
                
                $
                5,991,946
                
                $
                4,721,790Accrued
                    liabilities
                
                
                2,047,159
                
                
                1,744,006Income
                    taxes payable
                
                
                12,772
                
                
                36,316Borrowings
                    under credit facility - revolving credit
                
                
                11,183,008
                
                
                10,658,542Borrowings
                    under credit facility - term loan
                
                
                562,977
                
                
                1,666,667Notes
                    payable - current portion; includes related party notes of $60,389
                    in 2005
                    and $30,000 in 2004
                
                
                165,112
                
                
                115,265Total
                    current liabilities
                
                
                19,962,974
                
                
                18,942,586Notes
                    payable, excluding current portion; includes related party notes
                    of
                    $1,000,625 in 2005 and $993,125 in 2004
                
                
                1,400,834
                
                
                1,398,774Total
                    liabilities
                
                
                21,363,808
                
                
                20,341,360Commitments
                    and contingenciesStockholders'
                    equity:Redeemable
                    convertible preferred stock, $.05 par value, 2,500,000 shares
                    authorized,
                    484,721 in 2005 and 790,439 in 2004 shares issued and outstanding,
                    liquidation preference of $2,423,605 in 2005 and $3,952,195 in
                    2004
                
                
                24,236
                
                
                39,522Common
                    stock, $.05 par value, 20,000,000 shares authorized, 4,544,459
                    in 2005 and
                    4,158,441 in 2004 shares issued and outstanding
                
                
                227,223
                
                
                207,922Additional
                    paid-in capital
                
                
                10,626,859
                
                
                10,746,836Accumulated
                    deficit
                
                
                (4,704,751
                )
                
                (6,820,382
                )Total
                    stockholders' equity
                
                
                6,173,567
                
                
                4,173,898$
                27,537,375
                
                $
                24,515,258
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-3
 *Table
            of Contents*
 
 COLONIAL
                  COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
                  Statements of OperationsFor
                  the Years Ended December 31,2005
              
              2004
              
              2003Net
                  sales
              
              $
              66,690,945
              
              $
              61,454,128
              
              $
              44,671,136Cost
                  of sales
              
              
              46,507,769
              
              
              43,069,981
              
              
              31,504,654Gross
                  profit
              
              
              20,183,176
              
              
              18,384,147
              
              
              13,166,482Selling,
                  general and administrative expenses, net
              
              
              17,782,752
              
              
              16,666,335
              
              
              11,869,885Operating
                  income
              
              
              2,400,424
              
              
              1,717,812
              
              
              1,296,597Other
                  income
              
              
              272,597
              
              
              320,359
              
              
              324,367Interest
                  expense, net; includes related party interest of $94,703 in 2005,
                  $45,007
                  in 2004 and $3,181 in 2003
              
              
              (1,044,454
              )
              
              (875,683
              )
              
              (637,857
              )Income
                  from operations before income tax benefit
              
              
              1,628,567
              
              
              1,162,488
              
              
              983,107Income
                  tax benefit
              
              
              (487,064
              )
              
              (498,668
              )
              
              (337,156
              )Net
                  income
              
              $
              2,115,631
              
              $
              1,661,156
              
              $
              1,320,263Income
                  per common share:Basic
              
              $
              0.49
              
              $
              0.49
              
              $
              0.67Diluted
              
              $
              0.40
              
              $
              0.36
              
              $
              0.38Weighted
                  average shares outstanding:Basic
              
              
              4,295,697
              
              
              3,403,152
              
              
              1,971,129Diluted
              
              
              5,293,114
              
              
              4,587,966
              
              
              3,501,698
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4
 *Table
            of Contents*
  
 COLONIAL
                  COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
                  Statements of Stockholders' EquityFor
                  The Years Ended December 31, 2005, 2004, and 2003Number
                  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, 2002
              
              
              1,464,252
              
              
              1,603,794
              
              $
              73,213
              
              $
              80,190
              
              $
              8,966,513
              
              $
              (9,801,801
              )
              $
              (681,885
              )Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,320,263
              
              
              1,320,263Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              92,000
              
              
              -
              
              
              92,000Issuance
                  of common stock
              
              
              -
              
              
              802,000
              
              
              -
              
              
              40,100
              
              
              200,500
              
              
              -
              
              
              240,600Other
              
              
              2,540
              
              
              (2,476
              )
              
              127
              
              
              (124
              )
              
              -
              
              
              -
              
              
              3Balance
                  at December 31, 2003
              
              
              1,466,792
              
              
              2,403,318
              
              
              73,340
              
              
              120,166
              
              
              9,259,013
              
              
              (8,481,538
              )
              
              970,981Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,661,156
              
              
              1,661,156Stock-based
                  compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              62,025
              
              
              
              
              
              62,025Conversion
                  of shares of preferred stock to common stock
              
              
              (83,623
              )
              
              83,623
              
              
              (4,181
              )
              
              4,181
              
              
              
              
              
              
              
              
              -Retirement
                  of preferred stock
              
              
              (592,730
              )
              
              
              
              
              (29,637
              )
              
              
              
              
              (326,002
              )
              
              
              
              
              (355,639
              )Issuance
                  of common stock
              
              
              
              
              
              1,620,000
              
              
              
              
              
              81,000
              
              
              1,554,000
              
              
              
              
              
              1,635,000Options
                  exercised
              
              
              
              
              
              51,500
              
              
              
              
              
              2,575
              
              
              10,300
              
              
              
              
              
              12,875Warrant
                  value
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              187,500
              
              
              
              
              
              187,500Balance
                  at December 31, 2004
              
              
              790,439
              
              
              4,158,441
              
              
              39,522
              
              
              207,922
              
              
              10,746,836
              
              
              (6,820,382
              )
              
              4,173,898Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,115,631
              
              
              2,115,631Stock-based
                  compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (74,450
              )
              
              
              
              
              (74,450
              )Conversion
                  of shares of preferred stock to common stock
              
              
              (298,018
              )
              
              298,018
              
              
              (14,901
              )
              
              14,901
              
              
              
              
              
              
              
              
              -Retirement
                  of preferred stock
              
              
              (7,700
              )
              
              
              
              
              (385
              )
              
              
              
              
              (15,015
              )
              
              
              
              
              (15,400
              )Options
                  exercised
              
              
              
              
              
              88,000
              
              
              
              
              
              4,400
              
              
              17,600
              
              
              
              
              
              22,000Tax
                  effect of options exercised
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (48,112
              )
              
              
              
              
              (48,112
              )Balance
                  at December 31, 2005
              
              
              484,721
              
              
              4,544,459
              
              $
              24,236
              
              $
              227,223
              
              $
              10,626,859
              
              $
              (4,704,751
              )
              $
              6,173,567
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-5
 *Table
            of Contents*
  COLONIAL
                  COMMERCIAL CORP. AND SUBSIDIARIESConsolidated
                  Statements of Cash FlowsFor
                  The Years Ended December 31,2005
              
              2004
              
              2003Cash
                  flows from operating activities:Net
                  income
              
              $
              2,115,631
              
              $
              1,661,156
              
              $
              1,320,263Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activities:Deferred
                  tax benefit
              
              
              (641,500
              )
              
              (645,600
              )
              
              (421,400
              )Stock-based
                  compensation
              
              
              (74,450
              )
              
              62,025
              
              
              92,000Provision
                  for doubtful accounts
              
              
              101,724
              
              
              225,183
              
              
              188,050Depreciation
              
              
              387,719
              
              
              366,223
              
              
              232,315Amortization
                  of intangibles
              
              
              16,166
              
              
              26,667
              
              
              41,666Accretion
                  of debt discount
              
              
              37,500
              
              
              15,625
              
              
              -Tax
                  effect of options exercised
              
              
              (48,112
              )
              
              -
              
              
              -Changes
                  in operating assets and liabilities, net of the effects of
                  acquisition:Accounts
                  receivable
              
              
              (816,853
              )
              
              (1,745,871
              )
              
              (671,771
              )Inventory
              
              
              (1,211,947
              )
              
              (1,219,492
              )
              
              (1,770,078
              )Prepaid
                  expenses and other current assets
              
              
              (200,926
              )
              
              (245,054
              )
              
              (151,378
              )Other
                  assets - noncurrent
              
              
              47,351
              
              
              (183,183
              )
              
              -Trade
                  payables
              
              
              1,270,156
              
              
              (574,089
              )
              
              1,533,048Accrued
                  liabilities
              
              
              303,153
              
              
              230,428
              
              
              (118,196
              )Income
                  taxes payable
              
              
              (23,544
              )
              
              (139,298
              )
              
              135,384Net
                  cash provided by (used in) operating activities
              
              
              1,262,068
              
              
              (2,165,280
              )
              
              409,903Cash
                  flows from investing activities:Cash
                  acquired in acquisition of RAL Supply Group, Inc.
              
              
              -
              
              
              -
              
              
              3,575Additions
                  to property and equipment
              
              
              (401,054
              )
              
              (507,241
              )
              
              (377,407
              )Net
                  cash used in investing activities
              
              
              (401,054
              )
              
              (507,241
              )
              
              (373,832
              )Cash
                  flows from financing activities:Issuance
                  of common stock and exercise of stock options
              
              
              22,000
              
              
              1,647,875
              
              
              240,600Retirement
                  of preferred stock
              
              
              (15,400
              )
              
              (355,639
              )
              
              -Repayments
                  of notes payable: includes related party repayments of $48,091
                  in 2005,
                  $30,000 in 2004, and -0- in 2003.
              
              
              (141,292
              )
              
              (105,883
              )
              
              (38,402
              )Issuance
                  of notes payable: includes related party notes of $48,480 in 2005,
                  $1,075,000 in 2004, and -0- in 2003.
              
              
              155,699
              
              
              1,173,392
              
              
              73,643Issuance
                  of warrants
              
              
              -
              
              
              187,500
              
              
              -Repayments
                  under credit facility - term loan
              
              
              (1,103,690
              )
              
              (572,333
              )
              
              (261,000
              )Repayments
                  (borrowings) under credit facility - revolving credit
              
              
              524,466
              
              
              665,512
              
              
              (4,920
              )Net
                  cash (used in) provided by financing activities
              
              
              (558,217
              )
              
              2,640,424
              
              
              9,921Increase
                  (decrease) in cash
              
              
              302,797
              
              
              (32,097
              )
              
              45,992Cash
                  - beginning of year
              
              
              310,659
              
              
              342,756
              
              
              296,764Cash
                  - end of year
              
              $
              613,456
              
              $
              310,659
              
              $
              342,756
  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, 2005, 2004 and 2003
 
 (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) and climate
        control products and plumbing fixtures and supplies to building contractors
        and
        other users, which the Company considers its only continuing 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. The Company’s discontinued
        subsidiary, Atlantic Hardware & Supply Corporation (“Atlantic”), in January
        2002, filed for reorganization under Chapter 11 of the United States Bankruptcy
        Code, and on May 18, 2005, the United States Bankruptcy Court for the Eastern
        District of New York dismissed the petition. See Note 2 for more information
        on
        acquisitions and discontinued operations.
 
 (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, 2005 and 2004.
  F-7
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 (e) Accounts
        Receivable
 
 Accounts
        receivable consist of trade receivables recorded at original invoice amount,
        less an estimated allowance for uncollectible accounts. Trade credit is
        generally extended on a short-term basis; thus trade receivables generally
        do
        not bear interest. However, a service charge may be applied to receivables
        that
        are past due. These charges, when collected,  are
        included as other income. Trade receivables are periodically evaluated for
        collectibility based on past credit history with customers and their current
        financial condition. Changes in the estimated collectibility of trade
        receivables are recorded in the results of operations for the period in which
        the estimate is revised. Trade receivables that are deemed uncollectible
        are
        offset against the allowance for uncollectible accounts. The Company generally
        does not require collateral for trade receivables.
 
 (f) Inventory
 
 Inventory
        is stated at the lower of cost or market and consists solely of finished
        goods.
        Cost is determined using the first-in, first-out method.
 
 Distribution
        costs of incoming freight, purchasing, receiving, inspection, warehousing
        and
        handling costs are included in selling, general and administrative expenses.
        Such costs were $421,248, $325,109, and $206,264 for the years ended December
        31, 2005, 2004 and 2003, respectively.
 
 (g) Property
        and Equipment
 
 Property
        and equipment are stated at cost. Depreciation is calculated on the
        straight-line method over the estimated useful lives of the assets as follows:
  Computer
                  hardware and software
              
              3-5
                  yearsFurniture
                  and fixtures
              
              5
                  yearsAutomobiles
              
              3-5
                  years
  Leasehold
        improvements are amortized over the shorter of the lease term or the estimated
        useful life of the asset.
 
 (h) Goodwill and Other Intangible Assets
 
 Statement
        of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
        Assets," requires that goodwill having indefinite lives not be amortized,
        but
        instead 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 that Universal and RAL are reporting units.
  F-8
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 (i) Stock
        Option Plan
 
 The
        Company uses 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”.
 
 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
              
              2004
              
              2003Net
                  income, as reported
              
              $
              2,115,631
              
              $
              1,661,156
              
              $
              1,320,263Add:
                  Stock-based compensation related to option repricing
              
              
              (74,450
              )
              
              62,025
              
              
              92,000Deduct:
                  Total stock-based employee compensation determined under fair value-based
                  method for all awards
              
              
              -
              
              
              -
              
              
              (26,000
              )Pro
                  forma
              
              $
              2,041,181
              
              $
              1,723,181
              
              $
              1,386,263Basic
                  net income per common shareAs
                  reported
              
              $
              .49
              
              $
              .49
              
              $
              .67Pro
                  forma
              
              $
              .48
              
              $
              .51
              
              $
              .70Diluted
                  net income per common shareAs
                  reported
              
              $
              .40
              
              $
              .36
              
              $
              .38Pro
                  forma
              
              $
              .39
              
              $
              .38
              
              $
              .40
 
 In
        calculating the above stock-based employee compensation for 2003 determined
        under the fair-value based method for all awards granted, the Company utilized
        the following assumptions; expected volatility of 4.88%, expected life of
        10
        years, risk free interest rate of 3.18% and dividend yield of 0%.
 
 (j) Net
        Income Per Common Share
 
 Basic
        income per share excludes any dilution. It is based upon the weighted average
        number of common shares outstanding during the period. Dilutive earnings
        per
        share reflect the potential dilution that would occur if securities or other
        contracts to issue common stock were exercised or converted into common stock.
 
 (k) Income
        Taxes
 
 Income
        taxes are accounted for under the asset and liability method. Deferred tax
        assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amounts
        of
        existing assets and liabilities and their respective tax bases, and operating
        loss and tax credit carryforwards. Deferred tax assets and liabilities are
        measured using enacted tax rates expected to apply to taxable income in the
        years in which those temporary differences are expected to be recovered or
        settled. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment
        date.
  F-9
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 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.
 
 (l) Impairment
        of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
 
 Long-lived
        assets, such as intangible assets, furniture, equipment and leasehold
        improvements, are evaluated for impairment when events or changes in
        circumstances indicate that the carrying amount of the assets may not be
        recoverable through estimated undiscounted future cash flows from the use
        of
        these assets. When any such impairment exists, the related assets will be
        written down to fair value.
 
 (m) Use
        of
        Estimates
 
 The
        preparation of the financial statements in accordance with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.
 
 (n) Recent
        Issued Accounting Pronouncements
 
 In
        December 2004, the FASB issued 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 Company is in the process of
        evaluating the impact to its financial statements and believes the adoption
        will
        not have a material effect on the Company’s income statement.
 
 In
        December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets,
        an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
        The amendments made by SFAS No. 153 are based on the principle that exchanges
        of
        nonmonetary assets should be measured based on the fair value of the assets
        exchanged. Further, the amendments eliminate the narrow exception for
        nonmonetary exchanges of similar productive assets and replace it with a
        broader
        exception for exchanges of nonmonetary assets that do not have commercial
        substance. A nonmonetary exchange has commercial substance if the future
        cash
        flows of the entity are expected to change significantly as a result of the
        exchange. This statement shall be applied prospectively and is effective
        for
        nonmonetary asset exchanges occurring in fiscal periods beginning after June
        15,
        2005. Earlier application is permitted for nonmonetary asset exchanges occurring
        in fiscal periods beginning after the date of issuance. The Company does
        not
        anticipate that the adoption of SFAS No. 153 will have a significant impact
        on
        the Company's overall results of operations or financial
        position.
  F-10
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 In
        May
        2005, the FASB issued Statement No. 154, “Accounting Changes and Error
        Corrections. This Statement replaces APB Opinion No. 20, “Accounting Changes,”
and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,”
and changes the requirements for the accounting for and reporting of a change
        in
        accounting principle. This Statement applies to all voluntary changes in
        accounting principles. It also applies to changes required by an accounting
        pronouncement in the unusual instance that the pronouncement does not include
        specific transition provisions. When a pronouncement includes specific
        transition provisions, those provisions will continue to be followed. SFAS
        No.
        154 is effective for accounting changes and corrections of errors made in
        fiscal
        years beginning after December 15, 2005. Earlier application is permitted
        for
        accounting changes and corrections of errors made occurring in fiscal years
        beginning after June 1, 2005. The Company does not expect the adoption of
        SFAS
        No. 154 to have a material impact on its consolidated financial
        statements.
 
 (2) Business
        Acquisitions and Discontinued Operations
 
 (a) RAL
        Acquisition
 
 On
        September 30, 2003, RAL Purchasing, Inc., a newly formed, wholly owned
        Subsidiary of the Company, purchased substantially all of the assets and
        assumed
        certain liabilities of RAL for a price of $2,447,061.
 
 Presented
        below are the pro forma financial results (unaudited) prepared under the
        assumption that the acquisition of RAL had been completed at the beginning
        of
        2003.
 
 (Unaudited)For
                  The Year Ended(in
                  000s except for EPS data)
              
              December
                  31, 2003Net
                  Sales
              
              $
              51,657Operating
                  Income
              
              
              1,741Net
                  Income From Continuing Operations
              
              
              1,631Earnings
                  Per Share From Continuing OperationsBasic
              
              $
              .83Diluted
              
              $
              .47
 
 RAL
        is a
        distributor of heating and cooling equipment and plumbing fixtures and supplies
        with six locations, servicing Orange, Rockland, Ulster and Sullivan counties
        in
        New York. Four locations have showrooms. RAL’s products are marketed primarily
        to contractors, consumers, builders and the commercial sector.
 
 As
        a
        result of the acquisition, the Company is expecting to be one of the leading
        distributors of heating and cooling equipment and plumbing fixtures and supplies
        in its market.
 
 (b) 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.
 
  F-11
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 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.
 
 Since
        the
        Company was treating Atlantic as an unconsolidated Subsidiary, Atlantic was
        being carried at cost on the Company’s balance sheet until June 2004.
 
 (3) Property
        and Equipment
 
 Property
        and equipment consists of the following at December 31:
  2005
              
              2004Computer
                  hardware and software
              
              $
              884,011
              
              $
              678,737Furniture
                  and fixtures
              
              
              85,180
              
              
              67,015Leasehold
                  improvements
              
              
              1,361,620
              
              
              1,249,954Automobiles
              
              
              560,484
              
              
              498,0252,891,295
              
              
              2,493,731Less
                  accumulated depreciation and amortization
              
              
              1,221,811
              
              
              837,582$
              1,669,484
              
              $
              1,656,149
 
 (4)  Other
        Intangible Assets
  The
          Company has certain identifiable intangible assets that are subject to
          amortization. Intangible assets are included in “Other intangibles” in the
          consolidated balance sheets. The components of intangible assets are as
          follows:
 
 December
                  31, 2005
              
              December
                  31, 2004EstimatedGross
              
              
              
              Net
              
              Gross
              
              
              
              Net
              
              UsefulCarrying
              
              Accumulated
              
              Carrying
              
              Carrying
              
              Accumulated
              
              Carrying
              
              LifeAmount
              
              Amortization
              
              Amount
              
              Amount
              
              Amortization
              
              Amount
              
              (Years)Covenants
                  Not to Compete
              
              $
              241,667
              
              $
              (230,333
              )
              $
              11,334
              
              $
              241,667
              
              $
              (214,167
              )
              $
              27,500
              
              
              5
 
  Amortization
        expense amounted to $16,166, $26,667 and $41,666 for the years ended December
        31, 2005, 2004 and 2003, respectively.
 
 Estimated
        Amortization Expense
 
 For
                  the Years Ended December 31,2006
              
              $
              7,8342007
              
              
              2,0002008
              
              
              1,500$
              11,334
 
  F-12
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 (5) Financing
        Arrangements
 
 On
        July
        29, 2004, the Company completed a $15,000,000 secured loan facility expiring
        on
        August 1, 2009 with Wells Fargo Business Credit, Inc. (“WFBCI”) consisting of a
        revolving line of credit including a $2,000,000 two-year term loan. The
        revolving credit line bears interest at .25% below prime, and the term loan
        bears interest at .50% above prime. Substantially all of the assets of the
        Company, as well as a pledge of the stock of Colonial’s operating subsidiaries,
        collateralize all loans. The facility contains covenants relating to the
        financial condition of the Company and its business operations and restricts
        the
        payment of dividends, subordinated debt, purchase of securities and capital
        expenditures ($550,000 per year). The Company must maintain a tangible net
        worth
        of approximately $2.7 million for the fiscal quarter ending December 31,
        2005.
        In addition, the Company is required to maintain certain levels of net income
        and cash flows, as defined in the agreement. Availability under the revolving
        credit line is determined by a percentage of eligible assets as defined in
        the
        agreement.
 
 At
        December 31, 2005, amounts outstanding under the credit facility were
        $11,745,985, of which $562,977 represents a term loan payable in six monthly
        installments of approximately $83,333 and a final payment of approximately
        $62,977, unless sooner paid pursuant to the terms of the loan agreement.
        Although the term loan is payable over a specified period, the Bank can demand
        payment at any time. At December 31, 2005, the amount of the unused available
        credit was $1,561,097. The interest rate on the $562,977 term loan was 7.75%
        (prime plus .5%) as of December 31, 2005. The interest rate on the remaining
        credit facility, as of December 31, 2005 was 7.0% (prime minus .25%). 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-13
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 (6) Notes
        Payable
 
 (a)
        Notes
        payable consist of the following at December 31:
 
 2005
              
              2004Various
                  term notes payable, (collateralized by the equipment purchased)
                  with
                  aggregate monthly principal and interest installments of $8,760
                  and $4,019
                  for 2005 and 2004, respectively, bearing interest between .9% to
                  5.9%*
              
              $
              245,321
              
              $
              170,914Subordinated term note
                  payable to a private individual, $30,000 annual principal payment,
                  interest at 9% payable monthly.**
              
              
              90,000
              
              
              120,000Subordinated
                  term note payable to an investment company, $30,000 annual principal
                  payments, interest at 9% payable monthly
              
              
              90,000
              
              
              120,000Term
                  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 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 $15,625
                  in
                  interest expense during 2005 and 2004, respectively, related to
                  the
                  warrant.****
              
              
              615,625
              
              
              578,1251,565,946
              
              
              1,514,039Less
                  current installments
              
              
              165,112
              
              
              115,265$
              1,400,834
              
              $
              1,398,774
 
 *Included
        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-14
 *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:
 
 2006
              
              $
              165,1122007
              
              
              131,8502008
              
              
              984,9742009
              
              
              277,9912010
              
              
              6,019$
              1,565,946
 
 (b)
        During the year ended December 31, 2003, $91,885 of the unclaimed payments
        on
        notes payable were recorded as other income in the accompanying consolidated
        statements of operations.
 
 (7) Capital
        Stock
 
 Each
        share of the Company’s preferred stock is convertible into one share of the
        Company’s common stock. Preferred stockholders will be entitled to a dividend,
        based upon a formula, when and if any dividends are declared on the Company’s
        common stock. The preferred stock is redeemable, at the option of the Company,
        at $7.50 per share. The shares contain a liquidation preference provision
        entitling the holder to receive payments equaling $5.00 per share.
  F-15
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 The
        voting rights of the common stockholders and preferred stockholders are based
        upon the number of shares of convertible preferred stock outstanding. If
        1,250,000 or more shares of preferred stock are outstanding, five of the
        nine
        directors are elected by the common stockholders and the remainder by the
        preferred stockholders. If more than 600,000 but less than 1,250,000 preferred
        shares are outstanding, six of the nine directors are elected by common
        stockholders. If 600,000 or less preferred shares are outstanding, all nine
        directors are elected by common stockholders. A majority of the directors
        elected by preferred stockholders and a majority of the directors elected
        by the
        common stockholders are required to approve certain transactions, including,
        but
        not limited to, incurring certain indebtedness, merger, consolidation or
        liquidation of the Company, and the redemption of common stock. Preferred
        and
        common directors vote together on all other matters. As of December 31, 2005,
        the number of preferred shares outstanding was 484,721; accordingly, the
        Board
        of Directors to be elected at the 2006 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, 2005, there were 915,721 shares of common stock reserved for
        conversion of preferred stock and for the exercise of 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.
 
 (8) Equity
        Transactions
 
 During
        the year ended December 31, 2005, the Company issued 88,000 shares of common
        stock pursuant to the exercise of stock options. Bernard Korn acquired 35,000
        shares of common stock, by exercising 10,000 stock options on February 2,
        2005
        and 25,000 stock options on September 20, 2005. Mr. Korn is Chairman of the
        Board and the Chief Executive Officer of the Company. A non-executive employee
        acquired 4,000 shares of common stock, by exercising 4,000 stock options
        on
        March 22, 2005. William Pagano acquired 20,000 shares of common stock, by
        exercising 20,000 stock options on September 20, 2005. Mr. Pagano is the
        President and a Director of the Company. Carl Sussman acquired 12,000 shares
        of
        common stock, by exercising 12,000 stock options on September 26, 2005. Mr.
        Sussman is a Director of the Company. William Salek acquired 5,000 shares
        of
        common stock, by exercising 5,000 stock options on September 28, 2005. Mr.
        Salek
        is the Chief Financial Officer of the Company. William Koon acquired 12,000
        shares of common stock, by exercising 12,000 stock options on October 19,
        2005.
        Mr. Koon is a Director of the Company.
 
 During
        the year ended December 31, 2005, holders of a total of 298,018 shares of
        redeemable convertible preferred stock converted these shares into 298,018
        shares of Common Stock, of which 174,878 shares of convertible preferred
        stock
        were converted by Directors of the Company. As of December 31, 2005, the
        number
        of convertible preferred shares outstanding was 484,721. 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 will vote together as one class to elect one
        class
        of directors.
 
  F-16
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 On
        August
        16, 2005, the Company announced that it was offering to purchase all shares
        of
        convertible preferred stock that on August 15, 2005 were owned by shareholders
        who then owned 99 shares or less for $2.00 per share. The offer expired
        September 30, 2005. As a result of the offer, the Company purchased 7,700
        shares
        of its convertible preferred stock, which were retired.
 
 (9) Stock
        Options
 
 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, 2005, a total of 106,000 options were outstanding under the
        Company’s 1996 Stock Option Plan, which have expiration dates ranging from 2009
        to 2013.
 
 Changes
        in options outstanding are as follows:
  Shares
                  Subject to Option
              
              Weighted
                  Average Exercise PriceBalance
                  at December 31, 2002
              
              
              233,000
              
              
              3.06Expired
              
              
              (91,500
              )
              
              2.25Granted
              
              
              104,000
              
              
              .25Balance
                  at December 31, 2003
              
              
              245,500
              
              
              .25Options
                  Exercised
              
              
              (51,500
              )
              
              .25Balance
                  at December 31, 2004
              
              
              194,000
              
              
              .25Options
                  Exercised
              
              
              (88,000
              )
              
              .25Balance
                  at December 31, 2005
              
              
              106,000
              
              
              .25
 
 On
        February 11, 2003, 141,500 outstanding stock options were repriced to an
        exercise price of $.25, the fair market value on that date. The number of
        options outstanding under the variable pricing method as of December 31,
        2005,
        2004 and 2003 were 43,000, 110,000 and 141,500, respectively, which caused
        the
        Company to incur additional stock-based compensation income (expense) of
        $74,450, $(62,025) and $(92,000) for the years ended December 31, 2005, 2004
        and
        2003, respectively.
  The
        following table summarizes information about stock options at December 31,
        2005:
  Options
                    Outstanding and ExercisableWeighted
                    AverageRange
                    of
                
                
                
                Remaining
                
                Weighted
                    AverageExercise
                    Prices
                
                Shares
                
                Contractual
                    Life
                
                Exercise
                    Price$.25
                
                106,000
                
                5.62
                
                $.25
 F-17
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 (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:
 
 2005
              
              2004
              
              2003Net
                  income (numerator)
              
              $
              2,115,631
              
              $
              1,661,156
              
              $
              1,320,263Weighted
                  average common shares (denominator for basic income per
                  share)
              
              
              4,295,697
              
              
              3,403,152
              
              
              1,971,129Effect
                  of dilutive securities:Convertible
                  preferred stock
              
              
              683,695
              
              
              918,778
              
              
              1,466,792Convertible
                  notes
              
              
              175,000
              
              
              72,931
              
              
              -Employee
                  stock options
              
              
              138,722
              
              
              193,105
              
              
              63,777Weighted
                  average common and potential common shares outstanding (denominator
                  for
                  diluted income (loss) per share)
              
              
              5,293,114
              
              
              4,587,966
              
              
              3,501,698Basic
                  net income (loss) per share
              
              $
              .49
              
              $
              .49
              
              $
              .67Diluted
                  net income (loss) per share
              
              $
              .40
              
              $
              .36
              
              $
              .38
 
 (11) Income
        Taxes
 
 The
        provision for income taxes consists of the following:
 
 2005
              
              2004
              
              2003State
              
              
              
              
              
              State
              
              
              
              
              
              StateAnd
              
              
              
              
              
              And
              
              
              
              
              
              AndFederal
              
              Local
              
              Total
              
              Federal
              
              Local
              
              Total
              
              Federal
              
              Local
              
              TotalCurrent
              
              $
              (16,239
              )
              $
              170,675
              
              $
              154,436
              
              $
              9,000
              
              $
              137,932
              
              $
              146,932
              
              $
              (69,970
              )
              $
              154,214
              
              $
              84,244Deferred
              
              
              (641,500
              )
              
              -
              
              
              (641,500
              )
              
              (645,600
              )
              
              -
              
              
              (645,600
              )
              
              (421,400
              )
              
              -
              
              
              (421,400
              )Total
                  tax (benefit) expense
              
              $
              (657,739
              )
              $
              170,675
              
              $
              (487,064
              )
              $
              (636,600
              )
              $
              137,932
              
              $
              (498,668
              )
              $
              (491,370
              )
              $
              154,214
              
              $
              (337,156
              )
  F-18
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 The
        components of deferred income tax benefit are as follows:
 
 2005
              
              2004
              
              2003Deferred
                  tax expense (benefit), exclusive of the effects of the other components
                  listed below
              
              $
              -
              
              $
              -
              
              $
              -Decrease
                  in beginning-of-the-year balance of the valuation allowance for
                  deferred
                  tax assets
              
              
              (641,500
              )
              
              (645,600
              )
              
              (421,400
              )Generation
                  of continuing operations net operating loss carryforward
              
              
              -
              
              
              -
              
              
              -$
              (641,500
              )
              $
              (645,600
              )
              $
              (421,400
              )
 
 A
        reconciliation of the provision for income taxes computed at the Federal
        statutory rate to the reported provision for income taxes follows:
 
 2005
              
              2004
              
              2003Tax
                  provision at Federal statutory rate
              
              
              34.0
              %
              
              34.0
              %
              
              34.0
              %State
                  income taxes, net of federal benefit
              
              
              6.9
              %
              
              6.0
              %
              
              6.0
              %Benefit
                  from Alternative Minimum Tax carryback refund
              
              
              0.0
              %
              
              0.0
              %
              
              (9.0
              )%Change
                  in valuation allowance for deferred tax assets
              
              
              (73.3
              )%
              
              (83.7
              )%
              
              (65.3
              )%Permanent
                  differences
              
              
              1.7
              %
              
              0.0
              %
              
              0.0
              %Other
              
              
              0.8
              %
              
              0.8
              %
              
              0.0
              %Total
              
              
              (29.9
              )%
              
              (42.9
              )%
              
              (34.3
              )%
 
 The
        tax
        effects of temporary differences that give rise to significant portions of
        the
        deferred tax assets and liabilities at December 31, 2005 and 2004 are presented
        below.
 
 2005
              
              2004Current
                  Deferred Tax Assets:Federal
                  net operating loss carryforwards
              
              $
              637,500
              
              $
              574,061Current
                  Deferred Tax Assets
              
              $
              637,500
              
              $
              574,061Non-current
                  Deferred Tax Assets:Federal
                  net operating loss carryforwards
              
              $
              10,718,325
              
              $
              13,585,090State
                  net operating loss carryforwards
              
              
              64,435
              
              
              138,789Allowance
                  for doubtful accounts
              
              
              114,837
              
              
              98,752Additional
                  costs inventoried for tax purposes
              
              
              562,998
              
              
              376,730Alternative
                  Minimum Tax Credit Carryforward
              
              
              46,243
              
              
              -Compensation
              
              
              204,428
              
              
              -Rent
              
              
              57,320
              
              
              -Non-current
                  Deferred Tax Assets
              
              
              11,768,586
              
              
              14,199,361Non-current
                  Deferred Tax Liabilities:Goodwill
              
              
              (667,224
              )
              
              (138,111
              )Depreciation
              
              
              (162,985
              )
              
              (29,722
              )Non-current
                  Deferred Tax Liabilities
              
              
              (830,209
              )
              
              (167,833
              )Non-current
                  Deferred Tax Assets
              
              
              10,938,377
              
              
              14,031,528Less
                  Valuation Allowance
              
              
              (9,867,377
              )
              
              (13,538,589
              )Net
                  Non-Current Deferred Tax Assets
              
              $
              1,071,000
              
              $
              492,939
  F-19
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 In
        July
        2004, the Company entered into a new financing agreement along with two private
        placements. The combination of the private placements and debt financing
        provided an additional $4,050,000 in liquidity. It is management’s opinion that
        this additional liquidity will allow the Company to expand inventory levels
        while taking advantage of purchase discounts and programs. Management believes
        that this will ultimately result in increased revenues and gross margin
        percentages. Therefore, management adjusted its future income projections
        as a
        result of these events and increased the deferred tax asset by $645,600 to
        $1,067,000. As of December 31, 2005, management has again reassessed its
        future
        income projections and has increased the deferred tax asset by $641,500 to
        $1,708,500.
 
 At
        December 31, 2005, the Company’s operating loss carryforwards for federal income
        tax purposes are approximately $33,400,000. Varying amounts of the net operating
        loss carryforwards will expire from 2006 through 2022. Approximately $7.1
        million of net operating loss expired in 2005.
 
 Expiration
                  Year
              
              Net
                  Operating Losses2006
              
              $
              4,811,0002007
              
              
              4,945,0002008
              
              
              415,0002020
              
              
              5,960,0002021
              
              
              2,737,0002022
              
              
              14,532,000$
              33,400,000
 
 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.
  (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.
 
 (13) Supplemental
        Cash Flow Information
 
 The
        following is supplemental information relating to the consolidated statements
        of
        cash flows:
 
 2005
              
              2004
              
              2003Cash
                  paid during the years for:Interest
              
              $
              971,629
              
              $
              852,288
              
              $
              543,646Income
                  Taxes
              
              $
              308,585
              
              $
              173,665
              
              $
              102,900
  F-20
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 Non-cash
        transactions:
 
 During
        2005, 2004 and 2003, there were 298,018, 83,623 and -0- shares, respectively,
        of
        convertible preferred stock that were converted to a similar number of common
        shares.
 
 During
        2003, notes payable of $300,000 were incurred relating to the acquisition
        of
        RAL.
 
 (14) Employee
        Benefit Plans
 
 (a) 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. In 2005, 2004 and 2003, $183,269, $169,319 and
        $137,508, respectively, of contributions were made to the plan.
 
 (15) Business
        and Credit Concentrations
 
 The
        Company purchases products from primarily 260 suppliers. In 2005, two suppliers
        accounted for 37% of the Company’s purchases. The loss of one of these suppliers
        could have a material adverse effect upon its business for a short-term period.
        In 2004 and 2003, two suppliers accounted for 38% and 47% of the Company’s
        purchases, respectively.
  (16) Commitments
        and Contingencies
 
 (a) Compensation
 
 The
        Company has employment contracts with three officers and various employees
        with
        remaining terms ranging from one to four years. The amounts due under these
        contracts are $730,000, $625,000, $400,000, $200,000 and $200,000 in the
        years
        ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively. These
        commitments do not include amounts that may be earned as a bonus.
  F-21
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 (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 $2,997,887, $2,705,911 and $1,404,475 for the years ended
        December 31, 2005, 2004 and 2003, respectively. At December 31, 2005, future
        minimum lease payments in the aggregate and for each of the five succeeding
        years are as follows:
 
 2006
              
              $
              2,750,8612007
              
              
              2,577,3992008
              
              
              2,074,8932009
              
              
              1,047,9892010
              
              
              670,225Thereafter
              
              
              1,260,279Total
              
              $
              10,381,646
 
 (c) Sales
        Tax
 
 The
        Company’s subsidiary, Universal, is currently under audit by the State of New
        Jersey, Department of the Treasury, Division of Taxation, for Sales and Use
        Tax
        for the years 2001, 2002, 2003 and 2004. The State has currently assessed
        $177,898 based upon an audit of this period. Universal has contested the
        State’s
        findings and has accrued $50,000 for what Universal believes is its liability
        for the examination. Management believes the outcome will be favorable and
        will
        not have a material impact on the financial statements.
 
 (d) 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.
  F-22
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 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.
 
 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.
 
 On
        July
        16, 2003, the Company completed a private placement, pursuant to Regulation D
        of the
        Securities Exchange Act of 1933. The Company raised $240,600 through the issuance
        of 802,000 shares of common stock at $0.30 per share, as determined by the Board
        of
        Directors. Bernard Korn (Chairman and President of the Company), purchased
        167,000 shares, James W. Stewart (who was Executive Vice President and Director
        of the Company as of July 16, 2003) purchased 100,000 shares, William Pagano
        (President and Director of the Company), purchased 335,000 shares, Jack Rose
        (Director of the Company), purchased 50,000 shares and Rita Folger (a private
        investor who owned 6.86% of the Company as of that date), purchased 150,000
        shares. The proceeds of the private placement will be used for general working
        capital purposes. The stock 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 will bear
        a
        legend to that effect.
 
 (e) 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.
  F-23
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 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 118 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, 15 filed actions in 2005, 38 filed actions in 2004,
        31
        filed actions in 2003, and 34 filed actions in 2002. Seventy-eight other
        plaintiffs have had their actions dismissed and seven other plaintiffs have
        settled as of December 31, 2005 for a total of $3,306,000. There has been
        no
        judgment against the Predecessor. The Company’s Universal subsidiary was named
        by eighteen of the existing plaintiffs; of these, six filed actions in 2001,
        one
        filed an action in 2003 and eleven filed actions in 2005. No case that names
        the
        Company’s Universal subsidiary has been settled or dismissed.
 
 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, 2005 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 under an agreement reached in connection with a
        $10,000,000 jury verdict that was rendered on August 5, 2005. The Company
        was
        not a defendant in the Rhodes case.
 
 The
        Company believes that Rhodes differed
        from the other lawsuits in that plaintiff established that he contracted
        mesothelioma as a result of his occupational exposure to asbestos dust and
        fibers and that a predecessor of the Company was a major supplier of the
        asbestos containing products that allegedly caused his disease.
 
 Indemnification
 
 John
        A.
        Hildebrandt, Paul Hildebrandt and the Predecessor have jointly and severally
        agreed to indemnify the Company’s 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.
  F-24
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 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 the
        Company.
 
 There
        are
        no other limitations to the Company’s rights to indemnification.
 
 Insurance
 
 The
        assets that the Predecessor sold to the Company 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 the Company’s 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 the Company 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 the Company
        or from
        the Predecessor.
 
 The
        Company’s 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, the Company does not in any event
        consider itself to be liable for the asbestos-based lawsuits that name it
        or for
        any other claim that arises as a result of actions or omissions by Predecessor
        companies. The Company expressly disclaimed the assumption of any liabilities
        when it purchased the assets of the Predecessor.
  F-25
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 It
        is
        management’s opinion that the existing asbestos litigation will not have a
        material adverse effect on the Company. Nevertheless, the Company could be
        materially and adversely affected if the Company is 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.
 
 There
        is
        no accrued balance for any period relating to asbestos claims, and no amount
        has
        been recorded for any period in any financial statement by the Company for
        asbestos claims. The Company does not regard as likely the potential payment
        of
        any asbestos-based claim.
 
 (f) Standby
        Letter of Credit
 
 The
        Company has a standby letter of credit in the amount of $300,000 which expires
        on July 31, 2006.
 
 (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 $215,674, $206,097 and
        $195,030 during the years ended December 31, 2005, 2004 and 2003, 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 and Jeffrey
        Folger
        for the years ended 2005, 2004 and 2003 were $79,973, $71,115 and $70,773,
        respectively. As of December 31, 2005, there is $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 2213 Route 9, Fishkill, New York. RAL is
        the
        tenant of the aforementioned property under a lease agreement by and between
        Zanzi Realty, Inc. and The RAL Supply Group Inc., dated September 1, 1998,
        as
        amended by the First Modification of Lease Agreement dated September 30,
        2003
        and as further amended by the Second Modification of Lease Agreement dated
        April
        12, 2005 (the lease agreement together with the First Modification of Lease
        Agreement and the Second Modification of Lease Agreement are referred to
        herein
        as the “Lease”). Pioneer completed its acquisition of the realty from Zanzi on
        April 12, 2005 and is the landlord under the Lease pursuant to an assignment
        and
        assumption agreement dated April 12, 2005. Each of Messrs. Pagano and Paul
        Hildebrandt has a 35% interest in this entity. Each of Rita Folger and Jeffrey
        Folger has a 4% interest in this entity. Jeffrey Folger is the son of Oscar
        and
        Rita Folger. The Company paid Pioneer Realty Holdings, LLC $90,882 during
        the
        year ended December 31, 2005.
  F-26
 *Table
            of Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Notes
        to
        Consolidated Financial Statements, Continued
 
 On
        July
        15, 2005, Universal issued a note payable to a company owned by Paul Hildebrandt
        for $48,480, at an interest rate of 9%, payable over thirteen months. Note
        payments in 2005 were $19,640 including principal and interest. The outstanding
        balance of the note at December 31, 2005 was $30,389.
 
 See
        Notes
        5, 6 and 7 for additional related party transactions.
 
 (18) Subsequent
        Events
 
 On
        January 12, 2006, holders of a total of 4,185 shares of Convertible Preferred
        Stock converted these shares into 4,185 shares of Common Stock.
 
 (19) Quarterly
        Results (Unaudited)
 
 The
        following table sets forth selected unaudited quarterly financial data of
        the
        Company for the years ended December 31, 2005 and 2004:
 
 QUARTER
                  ENDEDMarch
                  31
              
              June
                  30
              
              September
                  30
              
              December
                  31(Dollars
                  in thousands, except per share data)2005Net
                  sales
              
              $
              13,347
              
              $
              17,502
              
              $
              17,378
              
              $
              18,464Gross
                  profit
              
              
              4,253
              
              
              5,132
              
              
              5,092
              
              
              5,706Net
                  income (loss)
              
              
              (199
              )
              
              520
              
              
              1,019
              
              
              776Income
                  (loss) per common share:Basic:Net
                  income (loss)
              
              
              (0.05
              )
              
              0.12
              
              
              0.24
              
              
              0.17Diluted:Net
                  income (loss)
              
              
              (0.05
              )
              
              0.10
              
              
              0.19
              
              
              0.152004Net
                  sales
              
              $
              12,525
              
              $
              16,149
              
              $
              16,185
              
              $
              16,595Gross
                  profit
              
              
              3,810
              
              
              4,798
              
              
              4,731
              
              
              5,045Net
                  income (loss)
              
              
              (299
              )
              
              664
              
              
              839
              
              
              457Income
                  (loss) per common share:Basic:Net
                  income (loss)
              
              
              (0.11
              )
              
              0.22
              
              
              0.22
              
              
              0.11Diluted:Net
                  income (loss)
              
              
              (0.11
              )
              
              0.16
              
              
              0.17
              
              
              0.09
  F-27
 *Table
            of Contents*
 
 COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 
 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, 2005 Allowance for doubtful
                  accounts
              
              $
              290,448
              
              $
              101,724
              
              $
              69,144
              (a)
              $
              (275,345)
              (b)
              $
              185,971For
                  the year ended December 31, 2004 Allowance for doubtful
                  accounts
              
              $
              284,829
              
              $
              225,183
              
              $
              14,862
              (a)
              $
              (234,426)
              (b)
              $
              290,448For
                  the year ended December 31, 2003 Allowance for doubtful
                  accounts
              
              $
              265,211
              
              $
              188,050
              
              $
              14,040
              (a)
              $
              (182,472)
              (b)
              $
              284,829
 
 (a)
              Comprised
                  primarily of accounts that were previously charged against the
                  allowance,
                  and have since been collected.
 
 (b)
              Comprised
                  primarily of uncollected accounts charged against the
                  allowance.
  F-28
 *Table
            of Contents*
  SIGNATURES
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities and Exchange
        Act of
        1934, Registrant has duly caused this Report to be signed on its behalf by
        the
        undersigned thereunto duly authorized.
 
 COLONIAL
                  COMMERCIAL CORP.(Registrant)By:
              /s/
                  Bernard KornBernard
                  Korn, Chairman andChief
                  Executive OfficerBy:
              /s/
                  William SalekWilliam
                  Salek,Chief
                  Financial Officer
 
 Dated:
        March 30, 2006
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Report has
        been
        duly signed below on March 30, 2006 by the following persons on behalf of
        the
        Registrant and in the capacities indicated:
 
 By:
              /s/
                  E. Bruce FredriksonE.
                  Bruce Fredrikson, DirectorBy:
              /s/
                  Melissa GoldmanMelissa
                  Goldman, DirectorBy:
              /s/
                  Michael GoldmanMichael
                  Goldman, DirectorBy:
              /s/
                  Bernard KornBernard
                  Korn, Chairman andChief
                  Executive OfficerBy:
              /s/
                  William KoonWilliam
                  Koon, DirectorBy:
              /s/
                  Ronald MillerRonald
                  Miller, DirectorBy:
              /s/
                  William PaganoWilliam
                  Pagano, President and DirectorBy:
              /s/
                  Jack RoseJack
                  Rose, DirectorBy:
              /s/
                  Carl L. SussmanCarl
                  L. Sussman, Director