<PAGE> 1












                            COLONIAL COMMERCIAL CORP.

                                  ANNUAL REPORT

                                      1996







<PAGE> 2






                               INSIDE FRONT COVER





Contents                                           Page
--------                                           ----

Chairman's Letter                                   1

About the Company                                   2

Market Price of the Company's Stock                 3

Managements Discussion and Analysis
  of Financial Condition and Results
  of Operations                                     4

Independent Auditors' Report                        6

Consolidated Financial Statements                   7




<PAGE> 3



To Our Stockholders:

     The year 1996 was a year of  continued  progress  for  Colonial  Commercial
Corp.  Colonial reported net income of $547,675 in 1996,  compared to net income
of $875,259 in 1995. While gain on land sales declined, reported net income from
Colonial's  principal  subsidiary,  Atlantic  Hardware  and  Supply  Corporation
("Atlantic") increased to $964,439 from $616,585 as a result of the inclusion of
Atlantic's results for a full year in 1996.

     Atlantic was acquired by Colonial in May 1995.  It is a 51 year old company
headquartered  in  New  York  City  with  operating   branches  in  New  Jersey,
Pennsylvania,   Georgia  and  Illinois.   Atlantic's  primary  business  is  the
distribution  of door  hardware  and doors and door frames used in new  building
construction,  buildings being  rehabilitated,  interior tenant  buildouts,  and
building maintenance. Atlantic is neither a wholesaler nor a retailer, it serves
architects, engineers and general contractors in the contract hardware market on
a  wide  range  of  commercial,   residential,  and  institutional  construction
projects,  such as office buildings,  hospitals,  schools,  hotels and high-rise
apartment buildings.

Atlantic  had  internal  growth  in  1996  recording   sales  of   approximately
$25,100,000  compared  to  approximately  $20,100,000  in all of  1995.  Because
Colonial  purchased  Atlantic in May 1995, it reported only  $13,653,000  of the
1995 sales. Atlantic contemplates future growth by intelligent  acquisitions and
internal expansion in the near term.

Sales  proceeds  from land held for sale  located in Utah was  $336,088 in 1996,
compared  to  $800,000  in 1995  and gain on land  sales  was  $258,651  in 1996
compared to $744,936 in 1995.  Colonial  retains a 50% joint venture interest in
two  parcels  of land in Salt Lake  County,  Utah.  The Utah land is  carried on
Colonial's books at less than its estimated realizable value.

     Since 1977,  Colonial  has had an  investment  position in Monroc,  Inc., a
concrete  products  company with  facilities in Utah,  Idaho and Wyoming.  Since
Colonial's  original  investment  in Monroc of $4 million in 1977,  Colonial has
received a cash return of  approximately  $17 million.  This cash return  should
increase from sales of the  remaining  two parcels of land,  payment of Monroc's
remaining  debt to Colonial  and the future sale of  Colonial's  378,000  common
shares of Monroc,  Inc. Due to the increase in Monroc's  NASDAQ  market price in
1996,  Colonial's carrying value of its Monroc's shares increased  approximately
19%. Because of a management change and one time reorganization charges in 1996,
Monroc  reported  a  net  loss  of  $1,368,000;   however,   because  of  record
construction activities in Monroc's market area, future operating profitability
is anticipated. Additionally, Monroc anticipates gains on sale of certain of its
real estate.

As indicated in the accompanying financial statements, Colonial is in litigation
regarding an unpaid  $1,000,000  note  receivable.  We feel  strongly we will be
successful in the  litigation  but the timing of collection  cannot be predicted
presently.  Colonials  operations and liquidity have not been affected adversely
by its inability to collect this note.

Colonial  has signed a  non-binding  memorandum  of intent to  purchase  all the
outstanding  stock of US  Computer  Group,  Inc.  and  subsidiaries  (USCG)  for
1,800,000 shares of Colonial Common Stock.  Headquartered  in Farmingdale,  Long
Island, NY, USCG has three fully-equipped and staffed offices in Manhattan,  NY;
Carlstadt, NJ and Fort Washington, PA. From its operating divisions, US Computer
Maintenance,  US Computer Products and US Computer Solutions, the Company offers
maintenance  for Digital,  IBM Midrange,  Sun and leading brand PCs, the sale of
new and used  computer  equipment,  network  integration  and  design  services,
disaster recovery and business relocation services.  On closing,  Colonial would
purchase  certain  obligations of USCG by issuing  700,000  warrants to purchase
Colonial  Common  Stock at $1.25 per share and a $500,000  note.  The closing is
subject to the execution of a definitive purchase  agreement,  due diligence and
other  conditions.  There  can be no  assurance  that  the  transaction  will be
completed.





<PAGE> 4






Whether the USCG  acquisition is completed or not,  Colonial intends to continue
to seek  acquisitions of companies  generating a recurring  stream of income and
make other strategic investments.

We appreciate the continued confidence of our stockholders and employees.

                                      Sincerely,

                                      /s/ Bernard Korn
April 9, 1997                         Bernard Korn
                                      Chairman








<PAGE> 5



About the Company

     Colonial Commercial Corp. ("Colonial" or the "Company") was founded in 1964
and was involved in various  facets of the  financial  services  industry  until
1992.  Colonial  was  engaged in the  collection  and  realization  of  consumer
accounts  receivable  portfolios and other assets purchased for its own account,
and  intermittently  provided  consumer accounts  receivable  services for other
companies. In early 1993, Colonial began evaluating private companies outside of
the financial services industry for the purpose of acquisition or merger.

     In May 1995,  Colonial  purchased  100% of the  capital  stock of  Atlantic
Hardware and Supply  Corporation  ("Atlantic") for approximately $3.8 million in
cash.  Atlantic  distributes  door  hardware,  doors and door frames used in new
building construction, buildings being rehabilitated,  interior tenant buildouts
and building maintenance. Atlantic serves the contract hardware market on a wide
range of the commercial,  residential and institutional  construction  projects,
such as office buildings,  hospitals,  schools,  hotels and high-rise  apartment
buildings. A 51-year old company, Atlantic is headquartered in New York City and
has operating branches in New Jersey,  Pennsylvania,  Georgia, Illinois and Long
Island, New York.

     Colonial owns presently 8.5% of Monroc,  Inc., a concrete  products company
with operations in Utah, Idaho and Wyoming.  The shareholders' equity of Monroc,
Inc.  has grown  over the last  several  years as a result of net  earnings  and
issuance  of its common  stock.  Monroc,  Inc.'s  common  stock is traded on the
NASDAQ National Market.  Colonial  considers its holdings in Monroc,  Inc. to be
available  for sale,  and will  consider a sale,  if funds are  required for new
acquisition opportunities.

     Colonial has  holdings in several  parcels of land held for sale located in
Salt Lake County, Utah.

      Colonial continues to seek strategic acquisitions and investments in order
to maximize stockholder's equity.







<PAGE> 6



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

(a) Price Range of Common Stock and Preferred Stock

     The Company's  Common Stock and  Convertible  Preferred Stock are traded in
the  over-the-counter  market on the  NASDAQ  automated  quotation  system.  The
following table sets forth the quarterly high and low bid prices during 1996 and
1995 as reported by the National Association of Securities Dealers, Inc. monthly
statistical  reports.  The  quotations  set forth below  represent  inter-dealer
quotations  which exclude retail  markups,  markdowns and commissions and do not
necessarily reflect actual transactions.

<TABLE>
<CAPTION>


                                              Convertible Preferred
                            Common Stock              Stock
                            High     Low        High         Low
                            ----     ---        ----         ---
<S>                         <C>      <C>        <C>          <C>
1996

First Quarter               15/32     1/4        3/8          1/4
Second Quarter              15/32    11/32      15/32        11/32
Third Quarter               15/32    11/32      15/32         5/16
Fourth Quarter               3/4      3/8       21/32        13/32

1995

First Quarter               11/32     1/4       11/32         1/4
Second Quarter               7/16     1/4        7/16         1/4
Third Quarter                3/8      1/4       11/32         9/32
Fourth Quarter              11/32     5/16      11/32         5/16

</TABLE>

(b) Approximate Number of Common and Convertible Preferred Stockholders

<TABLE>
<CAPTION>

                                 Approximate Number of Record Holders
Title of Class                           (as of March 10, 1997)
--------------                           ----------------------
<S>                                              <C>  
Common Stock                                     1,217
par value $.01 per share

Convertible Preferred Stock                      7,883
par value $.01 per share
</TABLE>

(c)  Dividends

   The Company does not contemplate  Common Stock dividend  payments in the near
future.




<PAGE> 7



Management's  Discussion and Analysis of Financial Condition and Results of
Operations

Results of Operations 1996-1995

The Company  reported net income of $547,675  for the year 1996  compared to net
income of $875,259 for the year 1995. The 1996 income consisted of net income of
$964,439 from Atlantic for the full 12 months in 1996, compared to $616,585 from
the date of its  acquisition  on May 19, 1995 to December 31,  1995,  less a net
loss of $416,764  from  parent  company  operations  compared to a net income of
$258,674 in the 1995 period  principally  due to the  reduction in the gain from
the sale of land to $258,651 in the 1996 period from  $744,936 in the year 1995.
Proceeds  from the sale of land was  $336,088 in 1996 as compared to $800,000 in
1995. Parent company  operations  include investing  activities,  supervision of
operating subsidiaries and management of various liquidating assets.

     Total revenues  increased to $25,194,337 in the year 1996 from  $13,957,286
reported in the 1995 year principally attributable to Atlantic's full year sales
of $25,059,492. Atlantic's full year sales for 1995 were $20,106,956. Atlantic's
sales backlog was  $9,630,000 at December 31, 1996 as compared to $11,480,000 at
December 31, 1995. It is anticipated that  approximately 95% of the backlog will
be shipped during the 1997 year.

     Total  cost  of  sales   increased   $8,528,513;   selling,   general   and
administrative  expenses  increased  $2,381,676 and interest  expense  increased
$86,061 all  principally  due to including  Atlantic's  operations for a full 12
month period  compared to the shorter  period in 1995.  As a percentage of sales
selling, general and administrative expenses decreased approximately 2%. This 2%
decrease is due to a full year of Atlantic's sales offsetting the parent company
expenses.  The  expenses  of Atlantic on a  percentage  of sales basis  remained
consistent.

The  parent  company  continues  to seek the  acquisition  of, or  merger  with,
privately  held  companies,  which  businesses  generate a  recurring  stream of
income.  Reported  earnings  in the near term will be affected by the timing and
the size of any new  acquisitions,  the timing of additional  land sales and the
operating results of Atlantic.

The Company has  provided  for income  taxes  primarily  for State  income taxes
associated with income from Atlantic and Federal alternative minimum tax applied
to consolidated earnings.

Results of Operations 1995-1994

The Company  reported net income of $875,259 for the year 1995,  compared to net
income of $293,115 for the year 1994. The 1995 income consisted of net income of
$616,585 from Atlantic,  since its  acquisition  date of May 19, 1995,  plus net
income of $258,674  from parent  company  operations.  Proceeds from the sale of
land was $800,000 and the gain on sale was $744,936 for the year 1995,  compared
to proceeds of $2,282,185 and a gain of $930,145 for the year 1994.

Total  revenues  increased to $13,957,286 in the year 1995 from $297,561 in
the 1994 year,  principally  attributable  to Atlantic's  sales of  $13,653,247.
Atlantic's sales backlog  increased  $1,980,000 to $11,480,000 since the May 19,
1995 acquisition date.

Total cost of sales  increased  $10,039,756  entirely due to the  acquisition of
Atlantic.  General and administrative  expense increased $2,707,613 and interest
expense increased $177,729 principally due to the acquisition of Atlantic.

Impact of Changing Prices

The Company was not materially affected by changing prices in 1996.

Capital Resources

As of December 31, 1996, the Company had $1,322,533 in cash and cash equivalents
compared to $1,856,008 in cash and cash equivalents at December 31, 1995.



<PAGE> 8



Cash flows used in operations during the 1996 year were principally attributable
to an increase in accounts  receivable  resulting from Atlantic's approximate $5
million annualized increase in sales volume during the 1996 year.

Cash flows provided by investing  activities of $761,986  during 1996 was due to
proceeds  received from the sale of land and payment on a note receivable offset
slightly by capital expenditures.

Cash flows used in  financing  activities  of  $430,895  during  1996 was due to
payments  made on notes  offset  by a  $63,315  net  increase  in line of credit
borrowings.

     A $1,000,000  note  receivable  due December 31, 1995 remains  unpaid.  The
Company is engaged in  litigation  in  connection  with this note.  The  Company
anticipates eventual payment of the note as a result of the litigation; however,
cannot estimate when such payment will be made. The delay in payment of the note
has not  negatively  impacted the  Company's  present  operations  or liquidity.
Although  the  final  resolution  of this  matter  on the  Companys  results  of
operations  or  liquidity  in  a  particular  reporting  period  is  not  known,
management  is of the opinion that the ultimate  outcome of this matter will not
have a material adverse effect on the Company's consolidated financial position.

     The Company  believes that its cash and cash  equivalents  are adequate for
its present  operations and that credit is available should it be required.  The
Company's  $2,500,000  line of credit is currently  expiring in May of 1997. The
Company has begun  negotiating  an extension of the line for an  additional  two
years. The Company's resources consist primarily of cash, investment in Atlantic
and Monroc,  notes  receivable and land held for sale. The Company  believes the
carrying value of its land held for sale is less than its market value.





<PAGE> 9













                             COLONIAL COMMERCIAL CORP.
                                  AND SUBSIDIARIES

                         CONSOLIDATED FINANCIAL STATEMENTS

                             DECEMBER 31, 1996 AND 1995

                     (WITH INDEPENDENT AUDITORS' REPORT THEREON)






<PAGE> 10









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

The Board of Directors and Stockholders
Colonial Commercial Corp.:


We have  audited  the  accompanying  consolidated  balance  sheets  of  Colonial
Commercial  Corp.  and  subsidiaries  as of December 31, 1996 and 1995,  and the
related consolidated statements of income,  stockholders' equity, and cash flows
for each of the years in the three-year  period ended  December 31, 1996.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Colonial Commercial
Corp.  and  subsidiaries  as of December  31, 1996 and 1995,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.




                                          /S/ KPMG PEAT MARWICK LLP


March  7 , 1997







<PAGE> 11
<TABLE>
<CAPTION>
                            COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
      
                                    Consolidated Balance Sheets

                                    December 31, 1996 and 1995


                        Assets                                           1996        1995
                        ------                                           ----        ----
<S>                                                               <C>              <C>      
Current assets:
   Cash and cash equivalents                                      $  1,322,533      1,856,008
   Accounts receivable, net of allowance for doubtful
     accounts of $317,250 in 1996 and $137,650 in 1995               8,305,224      6,815,401
   Inventory                                                         1,705,747      1,301,455
   Notes receivable - current portion                                  105,000        659,500
   Prepaid expenses and other assets                                    82,292        156,360
                                                                   -----------    -----------
            Total current assets                                    11,520,796     10,788,724

Notes receivable, excluding current portion (note 3)                 1,313,750      1,271,750
Investment in Monroc, Inc.                                           2,410,203      2,032,132
Property and equipment, net                                            126,972        109,300
Land held for sale                                                     324,139        407,377
                                                                   -----------    -----------
                                                                  $ 15,695,860     14,609,283
                                                                   ===========    ===========
            Liabilities and Stockholders' Equity
            ------------------------------------

Current liabilities:
   Accounts payable                                                  3,177,550      2,565,016
   Accrued liabilities                                               1,094,335        930,013
   Income taxes payable                                                137,000        206,356
   Borrowings under line of credit                                   2,273,130      2,209,815
   Notes payable - current portion                                     469,082        494,211
                                                                   -----------    -----------
            Total current liabilities                                7,151,097      6,405,411

Notes payable, excluding current portion                               447,363        916,444
Excess of acquired net assets over cost                                950,475      1,066,249
                                                                   -----------    -----------

            Total liabilities                                        8,548,935      8,388,104
                                                                   -----------    -----------
Stockholders' equity:
   Convertible  preferred  stock,  $.01 par  value,  
     liquidation  preference  of $8,599,696  and  
     $8,719,171  at December  31, 1996 and 1995,  
     respectively, 12,344,300 shares authorized,
     8,599,696 and 8,719,171 shares issued and outstanding
     at December 31, 1996 and 1995, respectively                        85,997         87,192
   Common stock, $.01 par value, 40,000,000 shares authorized,
      6,886,689  and 6,767,214 shares issued and outstanding at
     December 31, 1996 and 1995, respectively                           68,867         67,672
   Additional paid-in capital                                        9,023,669      9,023,669
   Unrealized gain on investment security                              760,203        382,132
   Accumulated deficit                                              (2,791,811)    (3,339,486)
                                                                   -----------    -----------

            Total stockholders' equity                               7,146,925      6,221,179
                                                                   -----------    -----------

Commitments and contingencies (notes 3 and 16)
                                                                  $ 15,695,860     14,609,283
See accompanying notes to consolidated financial statements.      ============     ==========                
</TABLE>




<PAGE> 12

<TABLE>
<CAPTION>


                      COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

                           Consolidated Statements of Income

                     Years ended December 31, 1996, 1995 and 1994




                                                       1996         1995       1994
                                                       ----         ----       ----
<S>                                             <C>           <C>           <C>
Revenues:
   Sales                                        $25,059,492   13,653,247             -
   Interest                                         121,781      271,866       284,646
   Other                                             13,064       32,173        12,915
                                                 ----------   ----------    ----------
            Total revenues                       25,194,337   13,957,286       297,561
                                                 ----------   ----------    ----------

Expenses:
   Cost of sales                                 18,568,269   10,039,756             - 
   Selling, general and administrative, net       5,886,881    3,505,205       916,167
                                                 ----------   ----------    ----------
            Total expenses                       24,455,150   13,544,961       916,167
                                                 ----------   ----------    ----------

            Operating income (loss)                 739,187      412,325      (618,606)

Other income (expense):
   Gain on land sales                               258,651      744,936       930,145
   Interest                                        (263,790)    (177,729)            -
   Writedown of investment in CRF Funding                 -            -       (18,424)
                                                 ----------   ----------    ----------
            Income before income taxes              734,048      979,532       293,115

Income taxes                                        186,373      104,273             -
                                                 ----------   ----------    ----------

            Net income                          $   547,675      875,259       293,115
                                                 ==========   ==========    ==========

Net income  per common and preferred share      $       .04          .06           .02
                                                 ==========   ==========    ==========

Common and preferred shares outstanding          15,486,385   15,486,385    15,486,385
                                                 ==========   ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.




<PAGE> 13

<TABLE>
<CAPTION>
                               COLONIAL COMMERCIAL CORP.
                                   AND SUBSIDIARIES

                    Consolidated Statements of Stockholders' Equity

                     Years ended December 31, 1996, 1995 and 1994

                                                                 Net un-
                                   Con-                         realized               Total
                                 vertible            Additional  gain on    Accu-      stock-
                                 preferred  Common    paid-in   investment  mulated    holders'
                                   stock    stock     capital    security   deficit    equity
                                   -----    -----     -------    --------   -------    ------ 
<S>                               <C>       <C>       <C>         <C>     <C>          <C>      
Balances at December 31, 1993     $ 90,442  64,422    9,023,669        -  (4,507,860)  4,670,673

Conversion of 209,332 shares of
   preferred stock to common
   stock                            (2,094)  2,094            -        -           -           -
Net income                               -       -            -        -     293,115     293,115
                                   ------- -------    ---------   ------  ----------   ---------
Balances at December 31, 1994       88,348  66,516    9,023,669        -  (4,214,745)  4,963,788

Conversion of 115,671 shares of
   preferred stock to common
   stock                            (1,156)  1,156            -        -           -           -
Net income                               -       -            -        -     875,259     875,259
Net unrealized gain on investment
    security                             -       -            -   382,132          -     382,132
                                   ------- -------    ---------   ------- ----------   ---------
Balances at December 31, 1995       87,192  67,672    9,023,669   382,132 (3,339,486)  6,221,179

Conversion of  119,475  shares of
     preferred stock to common
     stock                          (1,195)  1,195            -         -          -           -
Net income                               -       -            -         -    547,675     547,675
Net unrealized gain on investment
   security                              -       -            -   378,071          -     378,071
                                   ------- -------    ---------   ------- ----------   ---------
Balances at December 31, 1996     $ 85,997  68,867    9,023,669   760,203 (2,791,811)  7,146,925
                                   ======= =======    =========   ======= ==========   =========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>  14
<TABLE>
<CAPTION>
                      COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

                         Consolidated Statements of Cash Flows

                     Years ended December 31, 1996, 1995 and 1994

                                                               1996         1995        1994
                                                               ----         ----        ----
<S>                                                       <C>           <C>         <C>    
Reconciliation  of net  income  to net  
   cash  provided  by (used  in)  operating
   activities:
     Net income                                           $   547,675       875,259    293,115
     Adjustments to reconcile net income to
       cash provided by (used in) operating activities,  
       net of effects from the purchase of Atlantic 
       Hardware & Supply Corporation:
         Deferred tax benefit                                       -     (206,356)          -
         Gain on disposal of fixed assets                           -      (11,201)          -
         Gain on sale of land                                (258,651)    (744,936)   (930,145)
         Provision for allowance for doubtful accounts        232,600      137,650           -
         Write-off of investment in CRF Funding                     -            -      18,424                
         Depreciation                                          68,930       34,099       2,693
         Amortization of excess of acquired net assets 
            over cost                                        (115,774)     (63,035)          -
         Changes in assets and liabilities:
            Accounts receivable                            (1,722,423)  (1,292,750)          -
            Inventory                                        (404,292)     474,394           -
            Prepaid expenses and other assets                  74,068       16,399      56,282
            Accounts payable                                  612,534      588,590      55,536
            Accrued liabilities                               164,322       57,610           -
            Income taxes payable                              (69,356)     206,356           -
            Other                                               5,801        9,888           -
                                                           ----------   ----------    --------
               Net cash provided by (used in)
                  operating activities                       (864,566)      81,967    (504,095)
                                                           ----------   ----------    --------
Cash flows from investing activities:
   Payment for purchase of Atlantic Hardware and
     Supply Corporation, net of cash acquired                       -   (3,788,395)          -
   Proceeds from (purchase of) investment securities                -    2,600,000  (1,220,442)
   Proceeds from sale of land                                 336,088      422,500   2,282,185
   Payments received on notes receivable                      512,500      129,036     109,036
   Deed of trust received on land sale                              -            -     146,481
   Additions to property and equipment                        (86,602)     (34,836)          -
                                                           ----------   ----------   ---------
               Net cash provided by (used in)
                   investing activities                       761,986     (671,695)  1,317,260
                                                           ----------   ----------   ---------
Cash flows from financing activities:
   Payments on notes payable                                 (494,210)    (519,341)   (548,592)
   Borrowing from short-term bank loan                              -    1,800,000           -
   Repayment of short-term bank loan                                -   (1,800,000)          -
   Net borrowing under line of credit                          63,315    2,159,815           -
                                                           ----------   ----------   ---------
               Net cash provided by (used in)
                   financing activities                      (430,895)   1,640,474    (548,592)
                                                           ----------   ----------   ---------
Increase (decrease) in cash and cash equivalents             (533,475)   1,050,746     264,573

Cash and cash equivalents - beginning of period             1,856,008      805,262     540,689
                                                           ----------   ----------   ---------
Cash and cash equivalents - end of period                 $ 1,322,533    1,856,008     805,262
                                                           ==========   ==========   =========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 15



                     COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

                     Notes to Consolidated Financial Statements

                          December 31, 1996, 1995 and 1994



(1) Summary of Significant Accounting Policies and Practices
    --------------------------------------------------------

    (a) Description of Business
        -----------------------

    Colonial Commercial  Corp. and  subsidiaries  (the Company) had been engaged
        in  consumer  financing  activities,  equipment  leasing and collections
        through 1993 and currently hold certain assets for investment  purposes.
        As  a  result  of  an  acquisition  in  1995(note  2),  the  Company  is
        principally a distributor of door  hardware,  doors and door frames used
        in new building  construction,  buildings being rehabilitated,  interior
        tenant  buildouts  and building  maintenance.  The Company  services the
        contract hardware market, usually as a material supplier only, on a wide
        range  of  commercial,   residential  and   institutional   construction
        projects.  The  Company's  customers  are  located  in the  United  
        States, primarily in New York, New Jersey, Georgia, Illinois and 
        Pennsylvania.

    (b) Principles of Consolidation
        ---------------------------

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

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

    Cash equivalents of $700,000 at December 31, 1995 consist of certificates of
        deposit with an initial term of less than three months.  For purposes of
        the  statements of cash flows,  the Company  considers all highly liquid
        investment instruments with an original maturity of three months or less
        to be cash  equivalents.  There were no cash equivalents at December 31,
        1996.

    (d) Inventory
        ---------

    Inventory is stated at the lower of cost or market  and  consists  solely of
        finished goods. Cost is determined using the first-in, first-out method.

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

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

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

    The Company  adopted the  provisions  of Statement  of Financial  Accounting
        Standards No.115, "Accounting for Certain Investments in Debt and Equity
        Securities", (Statement 115) at January 1, 1994. The impact of adopting
        the provisions of Statement 115 was immaterial in 1994.  Under Statement
        115, the Company  classifies  its investment in Monroc,  Inc.,  (Monroc)
        (note 4), as an available-for-sale security. Unrealized holding gains 
        and losses, net of the related tax effect, on available-for-sale 
        securities are excluded from  earnings and are reported as a separate  
        component of stockholders  equity until realized.  Dividend income is 
        recognized when earned.

                                  (Continued)





<PAGE> 16


                                         2

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

    (g) Property and Equipment
        ----------------------

    Property and equipment are stated at cost. Depreciation is calculated on the
        straight-line  method over the estimated useful lives of the assets. The
        useful lives of the assets are estimated to range between three and five
        years for all asset categories.

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

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

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

    Prior to January 1, 1996, the Company accounted for its stock option plan in
        accordance with the provisions of Accounting Principles  Board ("APB")
        Opinion No. 25, "Accounting for Stock Issued to Employees", and related
        interpretations.  As such, compensation expense would be recorded on the
        date of grant only if and to the extent that the current market price of
        the underlying  stock exceeded the exercise  price.  On January 1, 1996,
        the Company adopted Statement of Financial Accounting Standards No. 123,
        "Accounting for Stock-Based Compensation" (Statement 123), which permits
        entities to recognize as expense over the vesting  period the fair value
        of all stock-based awards on the date of grant. Alternatively, Statement
        123 also allows  entities to  continue  to apply the  provisions  of APB
        Opinion No. 25 and  provide pro forma net income and pro forma  earnings
        per share  disclosures for employee stock option grants made in 1995 and
        future years as if the fair-value-based  method defined in Statement 123
        had been  applied.  The  Company  has  elected to  continue to apply the
        provisions  of APB Opinion  No. 25 and provide the pro forma  disclosure
        provisions of Statement 123.

    (j) Income Taxes
        ------------

    Income taxes  are  accounted  for under  the  asset  and  liability  method.
        Deferred tax assets and  liabilities  are  recognized for the future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax bases and operating loss and tax credit carryforwards.  Deferred tax
        assets and  liabilities are measured using enacted tax rates expected to
        apply  to  taxable  income  in  the  years  in  which  those   temporary
        differences  are  expected to be  recovered  or  settled.  The effect on
        deferred  tax  assets  and  liabilities  of a  change  in tax  rates  is
        recognized in income in the period that includes the enactment date.

    (k) Income Per Common and Preferred Share
        -------------------------------------

    Net income per common and  preferred  share is based upon net income and the
        number of common and preferred  shares  outstanding for the period.  For
        purposes  of  this  calculation,  the  convertible  preferred  stock  is
        considered  to be  outstanding  common  stock,  due  to the  nature  and
        conversion  feature of the preferred  stock.  The stock options (note 9)
        have  not been  included  in the  calculation  because  they are  either
        antidilutive  or dilute  income per common and  preferred  share by less
        than 3%.

    (l) Impairment of Long-Lived  Assets and Long-Lived Assets to Be Disposed Of
        -----------------------------------------------------------------------
    The Company  adopted the  provisions  of Statement  of Financial  Accounting
        Standards No. 121, "Accounting for the  Impairment of Long-Lived  Assets
        and for Long-Lived  Assets to Be Disposed Of" (Statement  121) on
        January 1, 1996. This Statement requires that long-lived 

                                  (Continued)


<PAGE> 17
                                       3

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

   assets  and  certain  identifiable  intangibles  be reviewed  for  impairment
   whenever events or changes in circumstances indicate that the carrying amount
   of an asset may not be recoverable.  Recoverability  of assets to be held and
   used is measured by a comparison of the carrying amount of an asset to future
   net cash flows  expected  to be  generated  by the asset.  If such assets are
   considered to be impaired, the impairment to be recognized is measured by the
   amount by which the  carrying  amount of the assets  exceed the fair value of
   the  assets.  Assets  to be  disposed  of are  reported  at the  lower of the
   carrying amount of fair value less costs to sell.  Adoption of this Statement
   did not have a material impact on the Companys financial position, results of
   operations, or liquidity.

    (m) Use of Estimates
        ----------------

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

    (2) Business Acquisition
        --------------------

    On  May 19,  1995,  the  Company  purchased  the  capital  stock of Atlantic
        Hardware and Supply Corporation (Atlantic) for $3,827,895, financed with
        a $1,800,000  short-term  loan and a  $2,000,000  borrowing on Atlantics
        line of credit (note 6). The acquisition was accounted for as a purchase
        and,  accordingly,  the cost of the acquisition was allocated to the net
        assets  acquired,  based upon their  estimated fair values.  The Company
        elected  to treat  the  acquisition  as a  purchase  of  assets  for tax
        purposes,  which  resulted in the Company  recording a net  deferred tax
        liability  of  $206,356  as of  the  acquisition  date  (note  10).  The
        resultant excess of the fair value of net assets acquired over the cost,
        amounting to $1,129,284,  is being  amortized on a  straight-line  basis
        over a ten-year period. In connection with the acquisition,  liabilities
        were assumed as follows:
<TABLE>
<CAPTION>

                    <S>                                 <C>        
                    Fair value of assets acquired       $ 7,616,874
                    Cash paid for the capital stock       3,827,895
                                                          ---------
                    Fair value of liabilities assumed   $ 3,788,979
                                                          =========
</TABLE>

    The results of operations of Atlantic have been included in the accompanying
        consolidated statements of income from the date of acquisition.

    The following  unaudited  pro  forma  summary  incorporates  the  historical
        results of operations of the purchased business adjusted for interest on
        acquisition  financing  and  amortization  of the  excess of net  assets
        acquired over the cost, as if the acquisition had taken place on January
        1,  1994.  The pro  forma  results  of  operations  are not  necessarily
        indicative  of the  actual  results  that would  have  occurred  had the
        purchase been made at the  beginning of the period,  or results that may
        occur in the future.  

<TABLE>
<CAPTION>
                                            Years ended December 31, 
                                               1995          1994  
                                               ----          ----
                                                  (Unaudited)
                 <S>                      <C>             <C>        
                 Total revenues           $ 20,533,163    19,063,780 
                                            ==========    ========== 
                 Net income               $    814,294       988,396  
                                               =======       ======= 
                 Net income per share              .05           .06 
                                                   ===           ===
Common and preferred shares outstanding     15,486,385    15,486,385
                                            ==========    ==========
</TABLE>
                                  (Continued)


<PAGE> 18

                                         4

                             COLONIAL COMMERCIAL CORP.

               Notes to Consolidated Financial Statements, Continued

(3) Notes Receivable
    ----------------

    Notes receivable consist of the following at December 31:
<TABLE>
<CAPTION>

                                                                  1996         1995
                                                                  ----         ----
<S>                                                             <C>              <C>      
              Note receivable (a)                               $  1,000,000     1,000,000
              Subordinated note (b)                                  418,750       553,750
              Note receivable arising from land sale,
                secured, due October 31, 1996,
                interest at 8%                                            -        377,500
                                                                  ---------     ----------
                         Total notes receivable                   1,418,750      1,931,250
              Less current portion                                  105,000        659,500
                                                                  ---------     ---------- 
                         Total notes receivable,
                           less current portion                $  1,313,750      1,271,750
                                                                  =========      =========
</TABLE>

(a) This note was not paid in accordance with the contractual  terms of the note
    agreement,  which  required  payment to be made on  December  31,  1995 and,
    accordingly,  the Company made a demand for payment.  The debtors instituted
    an action  against  the Company and a director of the Company to declare the
    note unenforceable and for $3,000,000 in punitive damages.  In January 1996,
    the Company  instituted an action against the debtors for a summary judgment
    to enforce payment of the note. Both actions were pending as the Company and
    the debtors  negotiated to restructure  the terms of the note in March 1996.
    The  restructured  terms of the note  were to  provide  for  collateral  and
    scheduled principal payments to begin in April 1996. The parties were unable
    to agree to the terms of a restructured note and as such the Company pursued
    its legal  action to obtain  summary  judgment. In June 1996, the Company's
    motion for summary judgment was denied and the action was consolidated  with
    that of the debtors (the  consolidated  action).  On September 26, 1996, the
    Company  filed an  appeal  of the  decision  denying  summary  judgment  and
    proceeded with the consolidated action.

    The impact of the final resolution of this matter on the Company's results 
    of operations or liquidity in a  particular reporting  period  cannot  be
    estimated. Management is of the opinion, however, that there are meritorious
    defenses to the claim made by the debtors and that the  ultimate  outcome of
    this  matter  will  not  have a  material  adverse  effect  on the Company's
    consolidated  financial position.  The Company has not recorded an allowance
    against this note at December 31, 1996 as  management is of the opinion that
    the result of the litigation  will be favorable and that the Company will be
    paid  pursuant  to the note or will  obtain  assets in a  judgment,  and the
    expected  future  cash flows from the sale of such  assets  will be at least
    equal to the  amount of the note.  However,  any  amount  the  Company  will
    ultimately  realize  upon the final  resolution  of this matter could differ
    materially  in the near term from the amount  recorded  on the  accompanying
    consolidated balance sheet due to the outcome of the Company's appeal of the
    decision denying summary judgment,  the outcome of the consolidated  action,
    and availability of assets if awarded in a judgment  against the debtor,  as
    well as the cash  flows  obtained  upon the sale of such  assets.  The final
    outcome of this matter could have a material effect on results of operations
    for a particular quarter or year in which the matter is ultimately resolved.
    The maximum  loss on this  matter  could  include  both the loss of the note
    receivable,  plus punitive  damages.  The note receivable is classified as a
    long-term asset as of December 31, 1996 on the  accompanying  balance sheet,
    due to the uncertainty as to when the matter will be resolved.

(b) The  Company  has a  subordinated  note  due  from  Monroc  (note 4) bearing
    interest  at the prime rate,  which was 8.25% and 8.5% at December  31, 1996
    and 1995,  respectively.  Under the  terms of the  subordination  agreement,
    Monroc made  principal  payments of $135,000  and  $120,000  during 1996 and
    1995,  respectively,  and is to make future  payments  of $120,000  per year
    provided  that it is in  compliance  with the  terms  of its line of  credit
    agreement.

                                           (Continued)
<PAGE> 19

                                        5
                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued

    (4) Investment in Monroc, Inc. 
        --------------------------

    The Company owns 378,071  shares of Monroc common stock which was classified
        as an  available-for-sale  security at December  31, 1996 and 1995.  The
        Company's  interest in Monroc  constituted 8.5% of the total outstanding
        shares at December 31, 1996 and 1995.  The fair value of the  investment
        security was  $2,410,203  and  $2,032,132 at December 31, 1996 and 1995,
        respectively  , which is comprised of a cost basis of  $1,650,000  and a
        gross  unrealized  holding gain of $760,203 and $382,132 at December 31,
        1996 and 1995,  respectively,  which is recorded as a separate component
        of stockholders' equity.

    During 1995, the Company  entered into a voting rights  agreement with a 37%
        investor  in Monroc.  The  agreement  requires  the  Company to vote its
        shares in Monroc in favor of the directors  proposed for election by the
        investor for a period of ten years, or until the investor owns less than
        25% of the outstanding common shares of Monroc.

    During 1995,  the Company  entered into a consulting  agreement with Monroc.
        Under the terms of the agreement,  the Company is to receive $15,000 per
        year for a period of four  years,  or until the  Company  owns less than
        189,035 shares.

    (5) Property and Equipment
        ----------------------

        Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                     <S>                                    <C>         <C>  
                     Computer hardware                      $  142,465   74,928
                     Office and warehouse equipment             20,465    5,747
                     Furniture and fixtures                     37,109   32,762
                     Automobiles                                51,863   51,863
                                                               -------   ------
                                                               251,902  165,300

                     Less accumulated depreciation             124,930   56,000
                                                               -------  -------
                                                            $  126,972  109,300
                                                               =======  =======
</TABLE>

    (6) Financing Arrangements
        ----------------------

    At  December 31, 1996 and 1995,  the Company had  available a line of credit
        with a financial  institution for $2,500,000.  Amounts outstanding under
        the line of credit were  $2,273,130  and $2,209,815 at December 31, 1996
        and  1995,  respectively.  Borrowings  under  the  line of  credit  bear
        interest at prime plus 2%,  which was 10.25% and 10.5% at  December  31,
        1996 and 1995, respectively. The line of credit agreement expires on May
        18, 1997.

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

    The maximum month-end amount outstanding under the line of credit during the
        year ended December 31, 1996 and 1995 were $2,374,624 and 2,209,815. For
        the year ended December 31, 1996, average borrowings under the line were
        $2,023,249 and the weighted  average  interest rate was 10.3%.  From the
        date of the  acquisition  of Atlantic  through  the end of December  31,
        1995,  average  borrowings  were  $1,789,352  and the  weighted  average
        interest rate was 10.8%.

                                                  (Continued)


<PAGE> 20

                                         6

                     COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

    Notes to Consolidated Financial Statements, Continued 

    (7) Notes Payable
        -------------
    Notes payable of $916,445  and  $1,410,655  at  December  31, 1996 and 1995,
        respectively,  are due to creditors,  pursuant to a 1983  reorganization
        plan. In accordance with the plan the notes were  established to include
        interest,  at 6% per annum  through  maturity,  and  therefore  interest
        expense is not reflected in the accompanying  consolidated statements of
        income. Included in accrued liabilities at December 31, 1996 and 1995 is
        approximately $545,355 and $486,628, respectively, of unclaimed payments
        on the notes payable.

    The aggregate annual maturities of the notes payable,  at December 31, 1996,
    are as follows:


                                  1997         $   469,082
                                  1998             447,363
                                                 ---------
                                               $   916,445
                                               ===========

    (8) 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, by the
        Company, at $1.50 per share.

    The voting rights of the common stockholders and preferred  stockholders are
        based  upon  the  number  of  shares  of  convertible   preferred  stock
        outstanding.  If more  than  6,250,000  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 3,000,000 but less than 6,250,000 preferred shares are outstanding,
        six of the nine directors are elected by common stockholders. A majority
        of the directors elected by preferred stockholders and a majority of the
        directors  elected by the common  stockholders  are  required to approve
        certain transactions,  including,  but not limited to, incurring certain
        indebtedness,  merger,  consolidation or liquidation of the Company, and
        the redemption of common stock.  Preferred and common  stockholders vote
        together on all other matters.

    At  December 31, 1996 there were 10,327,196  shares of common stock reserved
        for conversion of preferred  stock and for the exercise of stock options
        (note 9).

    (9) Stock Options
        -------------

    In  June 1996,  the  Company  adopted  the 1996 stock  option plan (the 1996
        Plan) pursuant to which the Company's Board of Directors may grant up to
        1,000,000  options to key employees and other persons who render service
        to the Company until December 31, 2005. Under the 1996 Plan, the options
        can be either incentive or  nonqualified.  The rate at which the options
        are  exercisable  is to be  determined  by the Board of Directors at the
        time of grant. The exercise price of the incentive stock options may not
        be less than the fair market value of the Company's  common stock on the
        date of grant. The exercise price of the nonqualified  stock options may
        not be less than 85% of the fair  market  value of the Company's  common
        stock on the date of grant.  No options  were  granted in 1996 under the
        1996 Plan.

    In  May 1995, nonqualified options to purchase 50,000 shares of common stock
        were granted to a key employee at $0.38 per share which equaled the fair
        market  value of the  shares at the date of grant  under the 1986  stock
        option plan (1986 Plan).  The 1986 Plan,  which  expired on December 31,
        1995, had similar provisions to that of the 1996 Plan.


                                             (Continued)

<PAGE> 21
                                       7

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES


             Notes to Consolidated Financial Statements, Continued

    The per share  weighted  average  fair  value of the stock  options  granted
        during  1995 was  $0.35 on the date of grant  using  the  Black  Scholes
        option-pricing  model with the following  weighted average  assumptions:
        expected  dividend  yield 0%,  expected  volatility  of 100%,  risk-free
        interest rate of 6.4% and an expected life of 10 years.

    The Company  applies  APB  Opinion  No. 25 in  accounting  for its Plan and,
        accordingly,  no  compensation  cost has been  recognized  for its stock
        options in the consolidated  financial  statements On a pro forma basis,
        had the Company  determined  compensation cost based upon the fair value
        at the  grant  date for its  stock  options  under  Statement  123,  the
        Company's  net income would have been  reduced by  approximately $17,500
        with no impact to earnings per share.

Changes in options outstanding are as follows:
<TABLE>
<CAPTION>
                                                     Shares Subject       Weighted Average
                                                        to Option          Exercise Price
                                                      ------------         --------------
    <S>                                                  <C>              <C>      
    Balance at December 31, 1993                         677,500          $     .28
    Granted                                                    -                  -
                                                        --------    
    Balance at December 31, 1994                         677,500                .28
    Granted                                               50,000                .38
                                                        --------
    Balance at December 31, 1995                         727,500                .29
    Granted                                                    -                  -
                                                        --------
    Balance at December 31, 1996                         727,500          $     .29
</TABLE>

    At  December  31,  1996,  1995 and 1994,  all shares  subject to option were
        exercisable.  At December  31,  1996,  the range of exercise  prices and
        weighted average remaining  contractual life of outstanding  options was
        $.25-$.38 per share and six years, respectively.

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

    The provision (benefit) for income taxes attributable to income is comprised
    of:
<TABLE>
<CAPTION>
                                     1996                       1995
                                     ----                       ----

                           State and                           State and
                 Federal     Local       Total       Federal     Local       Total
                 -------     ------      -----       -------     -----       -----
      <S>        <C>         <C>         <C>         <C>        <C>         <C>    
      Current    $ 4,569     181,804     186,373      43,989     266,640     310,269
      Deferred   $     -           -           -     (26,713)   (179,643)   (206,356)
                   -----     -------     -------     --------   ---------   ---------
                 $ 4,569     181,804     186,373      17,276      86,997     104,273
                   =====     =======     =======      ======      ======     =======
</TABLE>

    Income tax  expense  for 1996 and 1995  differed  from  amounts  computed by
        applying the U.S.  Federal  income tax rate of 34% to pre-tax income due
        to state and local  taxes,  net of Federal  income tax benefit and a net
        reduction  in  the  valuation   allowance  of  deferred  tax  assets  of
        $1,183,811  and  $858,475  for 1996 and 1995,  respectively.  Income tax
        expense for 1994 differed from the amounts computed by applying the U.S.
        Federal  income tax rate of 34% to pretax  income due to a reduction  in
        the valuation allowance of $99,659.

    In  connection  with the  acquisition  of  Atlantic,  the  Company  elected,
        pursuant to  Internal  Revenue  Code  Section  338(h)(10),  to treat the
        acquisition as a purchase of assets. Accordingly, the Company recorded a
        net deferred tax liability of $206,356 at the date of  acquisition.  The
        deferred tax  liability is net of a benefit  recorded for the tax effect
        of the expected utilization of the Company's operating loss 
        carryforwards in the  amount  of  $393,039,  as a result of the  
        acquisition.  The net deferred  tax  liability  of  $206,356  reversed 
        during  1995  and  was currently due at December 31, 1995.

                                       (Continued)

<PAGE> 22
                                        8

                     COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

               Notes to Consolidated Financial Statements, Continued

    The components of deferred  income tax benefit  attributable  to income from
        continuing operations are as follows:

<TABLE>
<CAPTION>
                                                                           1996          1995
                                                                           ----          ---- 
             <S>                                                       <C>              <C>      
             Deferred tax expense (exclusive of the effect
                 of the other components listed below)                     115,489      (212,698)
             Adjustment to deferred tax assets for expired
                 net operating loss carryforwards                        1,063,322       234,418
             Recording of deferred tax liability in
                 connection with acquisition                                     -       206,356
             Decrease in the valuation allowance for
                 deferred tax assets                                    (1,178,811)     (434,432)
                                                                         ---------      --------

                                                                       $         -      (206,356)
                                                                         =========      ========
</TABLE>

    The tax  effects  of  temporary  differences  that give rise to  significant
        portions of the  deferred  tax assets at December  31, 1996 and 1995 are
        presented below. 
<TABLE>
<CAPTION>
                                                             1996           1995
                                                             ----           ----
     <S>                                              <C>               <C>       
     Net operating loss carryforwards                 $ 12,917,942       14,264,144
     Accounts receivable due to allowance
         for doubtful accounts                             146,249           65,315
        Inventory due to valuation reserve                  85,283                -
     Alternative minimum tax credit carryforward            45,163           43,989
                                                       -----------       ----------

             Total gross deferred tax assets            13,194,637       14,373,448

              Less valuation allowance                 (13,194,637)     (14,378,448)
                                                        ----------      -----------
              Net deferred tax assets                 $          -                -
                                                        ==========      ===========
</TABLE>
    At December 31, 1996, the  Company has net operating loss  carryforwards for
        federal  income  tax  purposes  of  approximately  $38,000,000.  Varying
        amounts of the net operating  loss  carryforwards  will expire each year
        from 1997 through  2015.  Approximately  $1,933,000 of the net operating
        loss carryforwards will expire if not utilized during 1997. During 1996,
        the Company  utilized  approximately  $832,000 of its net operating loss
        carryforwards   and   $3,127,418   expired.   The  net  operating   loss
        carryforwards  have been  substantially  reduced  as a result of certain
        annual  limitations  and  they may be  further  limited  to  utilization
        against the future earnings of the subsidiary  which sustained the loss.
        If certain  substantial  changes in  ownership  occur,  there would be a
        further annual limitation on the amount of tax  carryforwards  which can
        be utilized in the future.

                                  (Continued)



<PAGE> 23

                                         9
                     COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

               Notes to Consolidated Financial Statements, Continued

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

    Financial Accounting Standards Board Statement No.107, "Disclosure about 
        Fair Value of  Financial  Instruments," defines the fair value of a 
        financial instrument as the amount at which the instrument could be 
        exchanged in a current transaction  between willing parties.  The 
        carrying value of all financial  instruments  classified as current  
        assets or  liabilities is deemed  to  approximate  fair  value,  with 
        the  exception  of the notes receivable and notes payable, because of 
        the short  maturity of these instruments.

    It  was not  possible  to  estimate  the fair value of the  $1,000,000  note
        receivable due to the litigation  surrounding the  collectibility of the
        note (notes 3 (a) and 16 (a)).  The  remaining  notes  approximate  fair
        value as the interest rates are comparable to rates currently offered by
        local lending  institutions for loans of similar terms to companies with
        comparable credit risk.

    The notes  payable  carrying  amounts  of  $916,445  and  $1,410,655  in the
        accompanying  consolidated  balance sheets, have an estimated fair value
        of approximately  $874,950 and $1,163,000 at December 31, 1996 and 1995,
        respectively.  The fair values of the notes  payable  were  estimated by
        discounting  the future cash flows of the instrument at a rate currently
        offered to the  Company  for  similar  debt  instruments  of  comparable
        maturities by the Company's bankers.

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

    The following  is  supplemental  information  relating  to the  consolidated
        statements of cash flows:
<TABLE>
<CAPTION>
                                           1996      1995     1994
                                           ----      ----     ----
       <S>                              <C>         <C>          <C>
       Cash paid during the years for:
          Interest                      $  260,628  154,575      -
                                           =======  =======  =====
          Income taxes                  $  250,878  108,741      -
                                           =======  =======  =====
</TABLE>

    Non-cash transactions:

    In  1995,  the Company  issued a note  receivable for $377,500 in connection
        with the sale of land.

    As  of December  31,  1996 and 1995,  the  Company  recorded  an  unrealized
        holding gain relating to available-for-sale marketable equity securities
        of $378,071  and  $382,132 ,  respectively,  as a separate  component of
        stockholder's equity.

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

    The Company  has a  profit-sharing  plan  and a  401(k)  plan,  which  cover
        substantially all employees of Atlantic. Participants in the 401(k) plan
        may  contribute a percentage of  compensation,  but not in excess of the
        maximum  allowed under the Internal  Revenue Code.  The 401(k) plan does
        not provide for matching contributions,  however, the Board of Directors
        can authorize discretionary contributions to both the profit sharing and
        401(k)  plans.  In 1996 and  1995,  the  Board of  Directors  authorized
        $75,000 and $33,827, respectively of such discretionary contributions to
        the plans. Prior to 1995 the Company did not have these employee benefit
        plans.

                                                    (Continued)

<PAGE> 24

                                         10

                   COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

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

    Summarized  financial  information  for each of the  Company's  two business
        segments for 1996 and 1995 is as follows:

<TABLE>
<CAPTION>
                                                Door
                                              hardware,        Investing
                                               doors         activities and
      1996                               and door frames       corporate       Total
      ----                               ----------------     ------------     -----

      <S>                                   <C>               <C>             <C>       
      Revenues                              $25,051,282         143,055       25,194,337
      Operating income (loss)                 1,507,194        (768,007)         739,187
      Identifiable assets                    10,218,917       5,476,943 (a)   15,695,860
      Depreciation  expense                      63,298           5,632           68,930
      Capital expenditures                       84,104           2,498           86,602
                                                 ======           =====           ======

      1995
      ----

      Revenues                              $13,653,247         304,039      13,957,286
      Operating income (loss)                   928,575        (516,250)        412,325
      Identifiable assets                     8,477,432       5,876,851 (a)  14,354,283
      Depreciation expense                       31,406           2,693          34,099
      Capital expenditures                       31,499           3,338          34,837
                                                 ======           =====          ======
</TABLE>

    (a) Principally related to the Company's investing activities.

(15) Business and Credit Concentrations
     ----------------------------------

    During 1996, four customers accounted for approximately 23% of the Company's
        annual   sales  and  during  1995,   seven   customers   accounted   for
        approximately 30% of the Company's  annual sales.  At December 31, 1996,
        seven customers had accounts receivable balances, which in the aggregate
        represented  30% of the total net  receivable  and at December 31, 1995,
        six customers represented 27% of the total net receivables.  The Company
        estimates   an   allowance   for   doubtful   accounts   based   on  the
        creditworthiness   of  its   customers  as  well  as  general   economic
        conditions.  Consequently,  an  adverse  change in those  factors  could
        affect the Company's estimate of its bad debts.  The Company as a policy
        does not require collateral from its customers.

(16) Commitments and Contingencies
     -----------------------------

    a)  Legal Proceedings
        -----------------

    The Company was named in an action seeking $3,000,000 in punitive damages in
        connection with a $1,000,000 note receivable  (note 3(a)). The impact of
        the  final  resolution of  this  matter  on  the  Company's  results  of
        operations  or  liquidity  in a particular  reporting  period  cannot be
        estimated.  In the opinion of  management,  the ultimate  disposition of
        this  matter  will not have a material adverse  effect on the  Company's
        consolidated financial position.



                                                (Continued)

<PAGE> 25

                                       11

                    COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


    (b) Environmental Matters
        ---------------------

    The Company  owns a 50%  interest in a 10-acre  property  located in Murray,
        Utah,  which contains lead slag deposited by the former owner.  For this
        and adjoining properties,  the Environmental Protection Agency (EPA) has
        concluded that remedial  action should be taken and has been proposed by
        the EPA for listing on the National  Properties  List for cleanup of the
        lead slag.  Although  the Company  has not been a generator  of the slag
        material,  under the Comprehensive  Environmental  Response Compensation
        and  Liability  Act,  the current  owner of a property may be liable for
        response  costs.  Although  the  EPA  typically  pursues  the  generator
        responsible for delivering the material, a possible claim exists against
        the  property  owner.  In such case,  the Company  would  pursue a claim
        against former owners for its  respective  share of the cost of cleanup.
        The Company has not been designated a Potentially  Responsible  Party by
        the EPA with respect to cleanup of any waste at this site.

    The Company has been participating in a study group with the EPA, the former
        owner, Murray City, and other current land owners to develop a plan that
        would  result  in the  remediation  of the  property.  An  agreement  in
        principle  has been  reached  among all parties and upon  execution of a
        formal  understanding,  the EPA will begin the  process of  preparing  a
        consent agreement in 1997. Cleanup will take several years to accomplish
        and involves a  combination  of off-site  disposal,  development  of the
        area, including new road construction and on-site treatment. Development
        of the land for  commercial  purposes will be possible at the end of the
        process.  The remediation plan calls for the dedication of less than one
        acre of the Company's property for the  extension of a roadway in Murray
        City. If the consent  agreement is approved,  any cost to the Company is
        not  expected  to be  material.  However,  until  approval  of a consent
        agreement,  it is  difficult  to estimate  the  financial  impact to the
        Company, if any.

    (c) Employment Contracts
        --------------------

    The Company has employment contracts with two officers and various employees
        with  remaining  terms  ranging  from  one  to  four  years  at  amounts
        approximating  their  current  levels  of  compensation.  The  Company's
        remaining aggregate commitment at December 31, 1996 under such contracts
        is approximately $1,555,200.

    (d) Leases
        ------

    The Company  is  obligated  under  operating  leases for  warehouse,  office
        facilities and certain office equipment. Minimum annual rental payments,
        including  real  estate  taxes,  amounted  to  approximately   $291,600,
        $208,000 and $18,000 for the years ended  December  31,  1996,  1995 and
        1994, respectively.  At December 31, 1996, future minimum lease payments
        in the  aggregate  and for  each of the  five  succeeding  years  are as
        follows:


                         1997                         265,942
                         1998                         272,534
                         1999                         205,104
                         2000                          77,690
                         2001                          10,842
                                                      -------
                                                    $ 832,112
                                                      =======


<PAGE> 26



OFFICERS

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

SUBSIDIARY
Atlantic Hardware and Supply Corporation
  Paul Selden, President

DIRECTORS
Raphael M. Brackman
  Retired Corporate Executive

Gerald S. Deutsch
  Certified Public Accountant and Attorney

William Koon
  President - Lords Enterprises, grain merchants

Bernard Korn
  Chairman of the Board/President

Donald K. MacNeill
  Retired Corporate Executive

Ronald Miller
  Miller and Hearn, attorneys

Jack Rose
  Investor

James W. Stewart
  Executive Vice President/Treasurer/Secretary

Carl L. Sussman
  Investor

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

AUDITORS                                Common Stock
  KPMG Peat Marwick LLP                 Symbol = CCOM
  Jericho, New York

REGISTRAR AND TRANSFER AGENT          10-KSB AVAILABLE
  American Stock Transfer Co.         The Annual Report on Form 10-KSB
  New York, New York                  as filed with the Securities and
                                      Exchange Commission, is available
TRUSTEE OF 6% NOTES                   to stockholders without charge
  IBJ Schroder Bank & Trust Co.       upon written request to:
  New York, New York
                                      Secy., Colonial Commercial Corp.
 ANNUAL STOCKHOLDERS MEETING          3601 Hempstead Turnpike
  Wednesday, June 11,1997,10:30 AM    Levittown, New York 11756-1315