UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended June 30,
2008





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:  1-6663





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)





973-427-8224


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  x                      No   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer      ̈
              Accelerated
      filer                   
       ̈Non-accelerated
      filer        ̈
              Smaller
      reporting company   x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes   ̈                      No  x





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 August 1, 2008Common
      Stock, $.05 par value per share
            
            4,654,953
      sharesConvertible
      Preferred Stock, $.05 par value per share
            
            450,077
      shares













COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES





CONTENTS





PART
      I.
              
              FINANCIAL
      INFORMATIONItem
      1.
              
              
              Financial Statements
              PageCondensed Consolidated Balance Sheets as of June 30, 2008
      (Unaudited) and December 31, 2007
              1Condensed Consolidated Statements of Operations (Unaudited)
      for the Three Months and Six Months Ended June 30, 2008 and
      2007
              2Condensed Consolidated Statements of Cash Flows (Unaudited)
      for the Six Months Ended June 30, 2008 and 2007
              3Notes to Condensed Consolidated Financial Statements
      (Unaudited)
              4Item
      2.
              
              
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              16Item
      3.
              
              
              Quantitative and Qualitative Disclosures About Market
      Risk
              24Item
      4.
              
              
              Controls and Procedures
              24PART
      II.
              
              OTHER
      INFORMATIONItem
      1.
              
              
              Legal Proceedings
              24Item
      4.
              
              
              Submission of Matters to a Vote of Security
      Holders
              25Item
      6.
              
              
              Exhibits
              25





Table of Contents





PART I.  FINANCIAL
INFORMATION




Item
1.  Financial Statements





COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets





June
      30,
              2008
            
            
            December
      31,
              2007(unaudited)AssetsCurrent
      assets:Cash
            
            $
            883,812
            
            
            $
            622,723Accounts
      receivable, net of allowance for doubtful accounts of $424,664 in 2008 and
      $478,857 in 2007
            
            
            11,156,564
            
            
            
            11,364,038Inventory
            
            
            16,857,403
            
            
            
            17,282,661Prepaid
      expenses and other current assets
            
            
            1,101,550
            
            
            
            1,107,623Deferred
      tax asset - current portion
            
            
            489,100
            
            
            
            532,500Total
      current assets
            
            
            30,488,429
            
            
            
            30,909,545Property
      and equipment
            
            
            1,796,342
            
            
            
            1,799,689Goodwill
            
            
            1,628,133
            
            
            
            1,628,133Other
      intangibles
            
            
            348,153
            
            
            
            366,376Other
      assets - noncurrent
            
            
            196,310
            
            
            
            227,478Deferred
      tax asset - noncurrent
            
            
            1,219,400
            
            
            
            1,176,000$
            35,676,767
            
            
            $
            36,107,221Liabilities
      and Stockholders' EquityCurrent
      liabilities:Trade
      payables
            
            $
            8,519,859
            
            
            $
            7,774,988Accrued
      liabilities
            
            
            1,903,972
            
            
            
            1,970,396Income
      taxes payable
            
            
            -
            
            
            
            2,576Borrowings
      under credit facility - revolving credit
            
            
            17,595,205
            
            
            
            18,027,055Convertible
      notes payable, includes related party notes of $262,500 in 2008 and
      $62,500 in 2007
            
            
            337,500
            
            
            
            137,500Notes
      payable - current portion; includes related party notes of $780,000 in
      2008 and $30,000 in 2007
            
            
            1,257,108
            
            
            
            158,827Total
      current liabilities
            
            
            29,613,644
            
            
            
            28,071,342Convertible
      notes payable, includes related party notes of $0 in 2008 and $262,500 in
      2007
            
            
            -
            
            
            
            337,500Notes
      payable, excluding current portion; includes related party notes of $0 in
      2008 and $750,000 in 2007
            
            
            140,400
            
            
            
            929,814Total
      liabilities
            
            
            29,754,044
            
            
            
            29,338,656Commitments
      and contingenciesStockholders'
      equity:Redeemable
      convertible preferred stock, $.05 par value, 2,500,000 shares authorized,
      450,077 shares issued and outstanding in 2008 and 467,500 in 2007,
      liquidation preference of $2,250,385 in 2008 and $2,337,500 in
      2007
            
            
            22,504
            
            
            
            23,375Common
      stock, $.05 par value, 20,000,000 shares authorized, 4,654,953 shares
      issued and outstanding in 2008 and 4,637,530 in 2007
            
            
            232,747
            
            
            
            231,876Additional
      paid-in capital
            
            
            10,786,804
            
            
            
            10,773,451Accumulated
      deficit
            
            
            (5,119,332
            )
            
            
            (4,260,137
            )Total
      stockholders' equity
            
            
            5,922,723
            
            
            
            6,768,565$
            35,676,767
            
            
            $
            36,107,221








The
accompanying notes are an integral part of these condensed consolidated
financial statements.





1
 Table of Contents





COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES


Condensed
Consolidated Statements of Operations


(Unaudited)





For
      The Three Months Ended June 30,
            
            
            For
      The Six Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Sales
            
            $
            24,023,185
            
            
            $
            22,128,569
            
            
            $
            42,244,313
            
            
            $
            38,170,801Cost
      of sales
            
            
            17,079,572
            
            
            
            16,025,133
            
            
            
            29,945,114
            
            
            
            27,195,863Gross
      profit
            
            
            6,943,613
            
            
            
            6,103,436
            
            
            
            12,299,199
            
            
            
            10,974,938Selling,
      general and administrative expenses, net
            
            
            6,076,443
            
            
            
            5,364,444
            
            
            
            12,633,447
            
            
            
            10,353,050Operating
      income (loss)
            
            
            867,170
            
            
            
            738,992
            
            
            
            (334,248
            )
            
            
            621,888Other
      income
            
            
            73,813
            
            
            
            78,479
            
            
            
            158,598
            
            
            
            143,077Interest
      expense, net; includes related party interest of $18,571 and $25,767 for
      the three months ended June 30, 2008 and 2007, respectively, and $40,123
      and $51,737 for the six months ended June 30, 2008 and 2007,
      respectively.
            
            
            (282,119
            )
            
            
            (361,254
            )
            
            
            (661,268
            )
            
            
            (695,296
            )Income
      (loss) before income tax expense
            
            
            658,864
            
            
            
            456,217
            
            
            
            (836,918
            )
            
            
            69,669Income
      tax expense
            
            
            18,389
            
            
            
            49,222
            
            
            
            22,277
            
            
            
            52,613Net
      income (loss)
            
            $
            640,475
            
            
            $
            406,995
            
            
            $
            (859,195
            )
            
            $
            17,056Income
      (loss) per common share:Basic
            
            $
            0.13
            
            
            $
            0.08
            
            
            $
            (0.19
            )
            
            $
            0.00Diluted
            
            $
            0.12
            
            
            $
            0.08
            
            
            $
            (0.19
            )
            
            $
            0.00Weighted
      average shares outstanding:Basic
            
            
            5,079,400
            
            
            
            5,113,180
            
            
            
            4,631,128
            
            
            
            5,112,893Diluted
            
            
            5,239,364
            
            
            
            5,306,768
            
            
            
            4,631,128
            
            
            
            5,131,934








The
accompanying notes are an integral part of these condensed consolidated
financial statements.





2
 Table of Contents





COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


(Unaudited)








For
      The Six Months Ended June 30,2008
            
            
            2007Cash
      flows from operating activities:Net
      (loss) income
            
            $
            (859,195
            )
            
            $
            17,056Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Stock-based
      compensation
            
            
            13,353
            
            
            
            17,012Provision
      for doubtful accounts
            
            
            406,640
            
            
            
            153,195Depreciation
            
            
            320,605
            
            
            
            247,737Amortization
      of intangibles
            
            
            18,223
            
            
            
            1,000Accretion
      of debt discount
            
            
            28,846
            
            
            
            18,750Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            (199,166
            )
            
            
            (1,551,840
            )Inventory
            
            
            425,258
            
            
            
            (1,467,827
            )Prepaid
      expenses and other current assets
            
            
            6,073
            
            
            
            (174,070
            )Other
      assets - noncurrent
            
            
            31,168
            
            
            
            22,909Trade
      payables
            
            
            1,091,053
            
            
            
            2,996,456Accrued
      liabilities
            
            
            (66,424
            )
            
            
            (226,915
            )Income
      taxes payable
            
            
            (2,576
            )
            
            
            13,497Net
      cash provided by operating activities
            
            
            1,213,858
            
            
            
            66,960Cash
      flows from investing activities:Additions
      to property and equipment
            
            
            (301,501
            )
            
            
            (242,975
            )Net
      cash used in investing activities
            
            
            (301,501
            )
            
            
            (242,975
            )Cash
      flows from financing activities:Issuance
      of common stock and exercise of stock options
            
            
            -
            
            
            
            13,000Repayments
      of notes payable: includes related party repayments of $62,500 in 2008,
      and $0 in 2007
            
            
            (219,418
            )
            
            
            (38,530
            )(Repayments)
      borrowings under credit facility - revolving credit, net
            
            
            (431,850
            )
            
            
            824,287Net
      cash (used in) provided by financing activities
            
            
            (651,268
            )
            
            
            798,757Increase
      in cash
            
            
            261,089
            
            
            
            622,742Cash
      - beginning of period
            
            
            622,723
            
            
            
            482,251Cash
      - end of period
            
            $
            883,812
            
            
            $
            1,104,993








The
accompanying notes are an integral part of these condensed consolidated
financial statements.





3
 Table of Contents





COLONIAL COMMERCIALCORP. AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2008


(Unaudited)





1.
            Summary of Significant
      Accounting Policies and Practices and Basis of
      Presentation





The
condensed consolidated financial statements of Colonial Commercial Corp. and
subsidiaries (the "Company") included herein have been prepared by the Company
and are unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the opinion
of management, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the interim periods to which the
report relates.  The results of operations for the period ended June
30, 2008 is not necessarily indicative of the operating results that may be
achieved for the full year.





The
financial statements have been prepared on a going concern
basis.  While the Company incurred a net loss of $859,195 for the six
months ended June 30, 2008 and a net loss of $51,637 for the year ended December
31, 2007, the Company had net income of $640,475 for the quarter ended June 30,
2008.  The Company’s credit facility provides that financial covenants
are to be determined on an annual basis by agreement between the Company and its
lender. The Company and its lender have agreed on financial covenants for the
period through December 31, 2008, and the Company is in compliance with these
covenants as of June 30, 2008. The continuation of the
credit agreement for 2009 and later years is conditioned on the Company and the
lender reaching agreement on financial covenants for these
years.  While the Company and the lender have reached mutually
agreeable covenants in the past, there can be no assurance that they will be
able to do so in the future.  If these agreements are not reached, the
Company may be unable to continue as a going concern.  The
accompanying financial statements do not include any adjustments that might be
necessary if such agreements are not reached.





Certain
information and footnote disclosures, normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted as
permitted by the interim reporting requirements of the Securities and Exchange
Commission.  It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 2007.





We have
one operating segment – wholesale distribution of heating, ventilation, air
conditioning equipment, plumbing and electrical fixtures, appliances, and
related accessories.





Inventory
is comprised of finished goods.





4
 Table of Contents





2.
            Stock
      Options





The
Company accounts for its stock option and stock-based awards in accordance with
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.





On
September 29, 2006, the Company adopted the Colonial Commercial Corp. 2006 Stock
Plan, (the “2006 Plan”).  The 2006 Plan enables the Company to grant
equity and equity-linked awards to our Directors, officers, employees and other
persons who provide services to the Company.  The 2006 Plan is
intended to allow us to provide incentives that will (1) strengthen the desire
of highly competent persons to provide services to us and (2) further stimulate
their efforts on our behalf.





The
following table summarizes information about stock options at June 30,
2008:




Options
      Outstanding and ExercisableRange
      of
                Exercise Prices
              
              
              Shares
              
              
              Weighted
      Average
                Remaining
                Contractual Life
              
              
              Weighted
      Average
                Exercise Price
              
              
              Aggregate
                Intrinsic Value$
              .25
              
              
              
              22,000
              
              
              
              0.97
              
              
              $
              .25$
              1.85
              
              
              
              45,000
              
              
              
              8.44
              
              
              $
              1.8567,000
              
              
              
              
              
              
              $
              1.32
              
              
              $
              22,000Options
      Outstanding and Non-exercisable$
              1.85
              
              
              
              30,000
              
              
              
              8.44
              
              
              $
              1.85
              
              
              $
              0





For the
each of the quarters ended June 30, 2008 and 2007, the amount of stock based
compensation was $6,676.  For the six months ended June 30, 2008 and
2007, the amount of stock based compensation was $13,353 and $17,012,
respectively.





3.
            Equity
      Transactions





On June
27, 2008, William Pagano, Chief Executive Officer of the Company, acquired 998
shares of convertible preferred stock at market price and on June 30, 2008, Mr.
Pagano converted these 998 shares of convertible preferred stock into 998 shares
of common stock.





During
the quarter and six months ended June 30, 2008, holders of a total 17,423 shares
of redeemable preferred stock converted these shares into 17,423 shares of
common stock, which includes the 998 shares converted by Mr.
Pagano.  During the quarter and six months ended June 30, 2007, no
shares of redeemable preferred stock were converted into common
stock.





No stock
options were exercised during the quarters ended June 30, 2008 and
2007.  No stock options were exercised during the six months ended
June 30, 2008.  The Company issued 52,000 shares of common stock
pursuant to the exercise of stock options during the six months ended June 30,
2007.





5
 Table of Contents





4.
            Supplemental Cash Flow
      Information





The
following is supplemental information relating to the consolidated statements of
cash flows:





For
      the Six Months EndedJune 30, 2008
            
            
            June 30, 2007Cash
      paid during the period for:Interest
            
            $
            656,237
            
            
            $
            681,012Income
      taxes
            
            $
            6,004
            
            
            $
            20,410





Accounts
payable due to Fedders Corporation has been converted into a note payable in the
amount of $346,182 due on September 13, 2008.





5.
            Net Income (Loss) Per
      Common Share





For
      the Quarter Ended
              June
      30,
            
            
            For
      the Six Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income (loss) (numerator for basic income per share)
            
            $
            640,475
            
            
            $
            406,995
            
            
            $
            (859,195
            )
            
            $
            17,056Interest
      expense on convertible notes (net of tax)
            
            $
            11,713
            
            
            $
            12,879
            
            
            
            -
            
            
            
            -Adjusted
      net income (loss) (numerator for diluted income per share)
            
            $
            652,188
            
            
            $
            419,874
            
            
            $
            (859,195
            )
            
            $
            17,056Weighted
      average common shares outstanding
            
            
            4,624,726
            
            
            
            4,645,680
            
            
            
            4,631,128
            
            
            
            4,645,393Effect
      of participating securities-convertible preferred stock
            
            
            454,674
            
            
            
            467,500
            
            
            
            -
            
            
            
            467,500Weighted
      average common shares and participating securities outstanding
      (denominator for basic income per share)
            
            
            5,079,400
            
            
            
            5,113,180
            
            
            
            4,631,128
            
            
            
            5,112,893Effect
      of dilutive securities:Convertible
      notes
            
            
            143,294
            
            
            
            175,000
            
            
            
            -
            
            
            
            -Stock
      options
            
            
            16,670
            
            
            
            18,588
            
            
            
            -
            
            
            
            19,041Weighted
      average common and potential common shares outstanding (denominator for
      diluted income per share)
            
            
            5,239,364
            
            
            
            5,306,768
            
            
            
            4,631,128
            
            
            
            5,131,934Basic
      net income (loss) per share
            
            $
            0.13
            
            
            $
            0.08
            
            
            $
            (0.19
            )
            
            $
            0.00Diluted
      net income (loss) per share
            
            $
            0.12
            
            
            $
            0.08
            
            
            $
            (0.19
            )
            
            $
            0.00





6
 Table of Contents





Basic
income per share reflects the amount of earnings for the period available to
common shareholders and holders of participating securities and is based upon
the weighted average number of common shares and participating securities
outstanding during the period.  Diluted earnings per share reflects,
in periods in which they have a dilutive effect, the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock and is computed using the treasury
stock method and if-converted method, where applicable.





Convertible
preferred stock is a participating security and therefore is included in
weighted average shares outstanding for purposes of the basic income per share
calculation, when applicable.  For the quarter and six months ended
June 30, 2007, the weighted average shares outstanding for purposes of the basic
income per share calculation includes the effect of the convertible preferred
stock.





For the
six months ended June 30, 2008, preferred stock convertible into 461,087 shares
of common stock, notes convertible into 150,813 shares of common stock, and
17,833 stock options were not included in the basic and diluted net loss per
share calculation because their effect would have been
anti-dilutive.





For the
six months ended June 30, 2007, notes convertible into 175,000 shares of common
stock are not assumed to be converted for purposes of computing diluted net
income per share since the effect would be antidilutive.





6.
            Financing
      Arrangements





In
connection with a September 10, 2007 acquisition of S&A Supply, Inc., the
Company amended its secured credit facility (“Agreement”) with Wells Fargo Bank,
National Association (“Wells”) to increase the Company’s facility from $15
million to $25 million and extended the maturity of the facility from August 1,
2010 to August 1, 2012.  The $25 million facility includes a $1
million structural sublimit, as defined in the Agreement, payable in 24 equal
monthly installments, and up to $500,000 of seasonal
over-advances.  The initial interest rate on the term loan is prime
minus 0.25%, but the interest rate on up to 75% of the loan’s outstanding
balance can be converted by the Company to 21⁄2% over LIBOR.





The
revolving credit line bears interest at 0.25% below prime.  At June
30, 2008, the Company had a standby letter of credit, which expires on August
31, 2009.  The standby letter of credit reduces the availability of
the credit facility by $300,000 and additional reserves determined by the bank
further reduce the availability of the credit facility by
$170,000.  Borrowings under the credit facility are secured by the
available assets of the Company, as defined in the
Agreement.  Availability under the revolving credit line was $285,493
as of June 30, 2008 and is determined by a percentage of available assets as
defined in the Agreement, less letters of credit and reserves.  The
balance outstanding under the revolving line of credit was $17,595,205 as of
June 30, 2008.  The interest rate on the revolving credit facility as
of June 30, 2008 was 4.75%.





7
 Table of Contents





The
credit facility provides that financial covenants are to be determined by
agreement between Wells and the Company on an annual basis.  While the
Company and Wells have reached mutually agreeable covenants for the period
through December 31, 2008, there can be no assurance that the Company and Wells
will be able to reach an agreement on covenants in the future.  In the
event the Company and Wells are unable in the future to agree upon these annual
covenants, the credit facility would be in default, and Wells could demand
immediate payment.  The business of the Company would be materially
and adversely affected if the Company is unable to obtain alternate
financing.  The Company is in compliance with all of its financial
loan covenants as of June 30, 2008.





7.
            Litigation





Universal Supply Group,
Inc.





Universal
Supply Group, Inc., a wholly owned subsidiary of the Company, is a New York
corporation (“Universal”).  On June 25, 1999, Universal acquired
substantially all of the assets of Universal Supply Group, Inc., a New Jersey
corporation, including its name, pursuant to the terms of a purchase
agreement.  The Company filed a copy of the purchase agreement with
the Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g) on
Form 10KSB, and the Company filed a copy of an amendment to the purchase
agreement on July 9, 1999 as Exhibit 10(a)(ii) on Form
8-K.  Subsequent to the sale, Universal Supply Group, Inc. (the
selling corporation) formerly known as Universal Engineering Co., Inc., changed
its name to Hilco, Inc.  Hilco, Inc. acquired the assets of Amber
Supply Co., Inc., formerly known as Amber Oil Burner Supply Co., Inc., in 1998,
prior to Hilco’s sale of assets to Universal.  Hilco, Inc. is
hereinafter referred to as the “Predecessor.”  The majority
shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
Hildebrandt.





The
Company understands that Predecessor and many other companies have been sued in
the Superior Court of New Jersey (Middlesex County) by plaintiffs filing
lawsuits alleging injury due to asbestos. As of June 30, 2008, there exist 75
plaintiffs in these lawsuits relating to alleged sales of asbestos products, or
products containing asbestos, by the Predecessor.  Subsequent to June
30, 2008, a voluntary withdrawal of a Notice of Appeal by the Predecessor in the
Rhodes matter, as further
described below, has resulted in 74 remaining plaintiffs in these
lawsuits.  The Company never sold any asbestos related
products.





Of the
existing plaintiffs as of June 30, 2008, 15 filed actions in 2007, 7 filed
actions in 2006, 8 filed actions in 2005, 29 filed actions in 2004, 15 filed
actions in 2003, and 1 filed actions in 2002. There are 136 other plaintiffs
that have had their actions dismissed and 13 other plaintiffs that have settled
as of June 30, 2008 for a total of $3,358,500. There has been no judgment
against the Predecessor.





Our
Universal subsidiary was named by 36 plaintiffs; of these, 11 filed actions in
2007, 6 filed actions in 2006, 11 filed actions in 2005, 5 filed actions in
2001, 1 filed an action in 2000, and 2 filed actions in 1999.  Twelve
plaintiffs naming Universal have had their actions dismissed and, of the total
$3,358,500 of settled actions, 2 plaintiffs naming Universal have settled for
$26,500.  No money was paid by Universal in connection with any
settlement.  Following these dismissed and settled actions there
exists 22 plaintiffs that name Universal, as of June 30, 2008.





8
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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 June 30, 2008 is
material, and that the only material litigation that was brought against
Predecessor through that date was Rhodes v. A.O. Smith Corporation, filed on
April 26, 2004 in the Superior Court of New Jersey, Law Division, Middlesex
County, Docket Number MID-L-2979-04AS. The Company was advised that the Rhodes case was settled for $3,250,000
(“Settlement”) under an agreement reached in connection with a $10,000,000 jury
verdict that was rendered on August 5, 2005. The Company was not a defendant in
the Rhodes case.





On April
29, 2005, prior to the Rhodes
case trial, the Predecessor filed a third party complaint against Sid Harvey
Industries (“Third Party Complaint”) in an action demanding contributor payment
in connection with the Settlement. Sid Harvey Industries moved successfully for
summary judgment.  The Predecessor filed an appeal as to the dismissal
of Predecessor’s Third Party Complaint.  In a decision dated December
29, 2006, the Superior Court of New Jersey, Appellate Division, reversed the
dismissal of Predecessor’s Third Party Complaint and remanded the matter to the
trial court for further proceedings as to Predecessor’s claim for
contribution.  On July 31, 2008, the Company was informed that
Predecessor’s Third Party Complaint was once again dismissed by the trial court
on April 25, 2008.  The Predecessor filed a Notice of Appeal as to
that dismissal; however, Predecessor has since voluntarily withdrawn the Appeal
on July 7, 2008.  Thus, the Rhodes matter is no
longer an active matter.





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.





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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.  The Company cannot be
certain that the indemnitors have the financial wherewithal to meet their
obligations to indemnify the Company.





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.  As of June 30, 2008, no insurance company has claimed any
contribution for a gap in coverage except for a claim for $160 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, as of June 30, 2008, defended us and the Predecessor, and have
paid all settlement amounts and defense costs.  Except for $160
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.





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Since we
regard as remote the potential payment of any asbestos-based claim, we have not
accrued any balance for any period relating to asbestos claims, and we have not
recorded any amount for asbestos claims for any period in any of our financial
statements.





Other
Litigation





The
Company is periodically involved in other litigation in the ordinary course of
business.  The Company vigorously defends all matters in which the
Company or its subsidiaries are named defendants and, for insurable losses,
maintains significant levels of insurance to protect against adverse judgments,
claims or assessments.  Although the adequacy of existing insurance
coverage or the outcome of any legal proceedings cannot be predicted with
certainty, the Company does not believe the ultimate liability associated with
any claims or litigation will have a material impact to its financial condition
or results of operations.





8.
            New Accounting
      Pronouncements





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements, (“SFAS 157”).  This Standard defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  The adoption of SFAS 157 on January 1, 2008 did
not have a material impact on the Company’s financial position, results of
operations or cash flows.





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159,The Fair Value Option for
Financial Assets and Financial Liabilities, (“FASB 159”).  This
standard permits an entity to choose to measure many financial instruments and
certain other items at fair value.  The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently with having to apply complex accounting
provisions.  SFAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007.  The adoption of SFAS
159 on January 1, 2008 did not have a material impact on the Company’s financial
position.





In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, Use of a
Simplified Method in Developing Expected Term of Share Options (“SAB
110”).  SAB 110 expresses the current view of the staff that it will
accept a company’s election to use the simplified method discussed in Staff
Accounting Bulletin 107, Share
Based Payment, (“SAB 107”), for estimating the expected term of “plain
vanilla” share options regardless of whether the company has sufficient
information to make more refined estimates.  SAB 110 became effective
for the Company on January 1, 2008.  The adoption of SAB 110 on
January 1, 2008 did not have a material impact on the Company’s financial
position.





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In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (revised 2007), Business
Combinations, (“FASB 141R”).  This standard requires that
entities recognize the assets acquired, liabilities assumed, contractual
contingencies and contingent consideration measured at their fair value at the
acquisition date for any business combination consummated after the effective
date.  It further requires that acquisition-related costs are to be
recognized separately from the acquisition and expensed as
incurred.  FASB 141R is effective for fiscal years beginning after
December 15, 2008.  The adoption of FASB 141R is not expected to have
a material impact on the Company’s financial position.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements–an amendment of ARB No.
51.  SFAS No. 160 requires that the ownership interests in
subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, in the amount of consolidated net income attributable to the
parent and to the noncontrolling interest on the face of the consolidated
statement of income, and that entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners.  SFAS No. 160 is effective for
fiscal years, beginning on or after December 15, 2008 and cannot be applied
earlier.  The adoption of SFAS No. 160 is not expected to have a
material impact on the Company’s financial position.





In April
2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142,Goodwill and
Other Intangible Assets(“SFAS 142”). The intent of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141(R) and other applicable accounting literature.
FSP FAS 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of FSP FAS 142-3 is not expected to have a material impact on
the Company’s financial position.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized because it
is directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the same
level of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The Board believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. The adoption of SFAS 162 is not expected
to have a material impact on the Company’s financial position.





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In May
2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP 14-1"), which clarifies the accounting for convertible
debt instruments that may be settled in cash (including partial cash settlement)
upon conversion. FSP 14-1 requires issuers to account separately for the
liability and equity components of certain convertible debt instruments in a
manner that reflects the issuer's nonconvertible debt (unsecured debt) borrowing
rate when interest cost is recognized. FSP 14-1 is effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
potential impact of FSP 14-1 on its consolidated financial
statements.





9.
            Related Party
      Transactions





(a)
            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 $59,131 and $57,150 during the
      quarters ended June 30, 2008 and 2007, respectively.  The
      Company paid Mr. Hildebrandt’s company $120,806 and $116,710 during the
      six months ended June 30, 2008 and 2007,
  respectively.





Pursuant
to the terms of an unsecured note held by Mr. Hildebrandt, on June 1, 2008 Mr.
Hildebrandt received payment of $25,000, representing payment of 50% of the
note.  The Company currently owes Mr. Hildebrandt $55,000 pursuant to
two notes: (a) a subordinated note in the amount of $150,000, paid $30,000
annually commencing December 31, 2004 and (b) the $25,000 remaining amount of
the unsecured note due on June 1, 2009.  William Salek, the Company’s
Chief Financial Officer, is the son-in-law of Mr. Hildebrandt.





(b)
            The
      Company owes Goldman Associates of New York, Inc. (“Goldman Associates”),
      a private company controlled by Michael Goldman, $750,000 pursuant to a
      secured note which is subordinate to the borrowings under the credit
      facility. The note bears interest at the prime rate and is due on January
      1, 2009.  Michael Goldman is Chairman of the Board of the
      Company.





For
calendar years beginning 2008, the Company began paying the premiums for Michael
Goldman's COBRA health insurance.  In January 2008, the Company paid
$13,221 for this premium for 2008.





(c)
            Oscar
      and Jeffrey Folger were each an employee of the Company as Vice
      President-Chief Legal Counsel and Assistant Vice President-Legal,
      respectively, until March 31, 2007.  As of April 1, 2007, Oscar
      and Jeffrey Folger ceased to act as employees of the Company, but Oscar
      Folger’s law firm remains as counsel to the Company.  Rita
      Folger, a more than 5% shareholder of the Company, is the wife of Oscar
      Folger and the mother of Jeffrey Folger.  Professional fees paid
      to Oscar Folger’s law firm for the quarters ended June 30, 2008 and 2007,
      respectively, were $19,950 and $27,025.  Professional fees paid
      to Oscar Folger’s law firm for the six months ended June 30, 2008 and
      2007, respectively, were $23,687 and
$51,425.





No money
was paid to either Oscar or Jeffrey Folger as part time employees of the Company
for the quarters ended June 30, 2008 and 2007, and $0 and $3,000 was paid to
each of Oscar and Jeffrey Folger as part time employees of the Company for the
six months ended June 30, 2008 and 2007, respectively.





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(d)
            Pioneer
      Realty Holdings, LLC, a New York limited liability company (“Pioneer”), is
      the owner of the premises located at 836 Route 9, Fishkill, New York,
      formerly known as 2213 Route 9, Fishkill, New York that is leased to a
      subsidiary of the Company under a lease that expires on March 31, 2017,
      subject to two five-year renewal
options.





William
Pagano, Chief Executive Officer and Director of the Company, has a 55% interest
in Pioneer and each of Mrs. Folger and Jeffrey Folger has an 8% interest in
Pioneer Realty Partners I, LLC, which has a 40% interest in
Pioneer.  The Company paid Pioneer Realty Holdings, LLC $61,461 and
$31,625 in rent during the quarters ended June 30, 2008 and 2007,
respectively.  The Company paid Pioneer Realty Holdings, LLC $122,922
and $62,725 in rent during the six months ended June 30, 2008 and 2007,
respectively.





(e)
            Mr.
      Pagano and Mrs. Folger are each holders of convertible unsecured notes in
      the amount of $100,000, issued pursuant to the terms of a private
      placement made on July 29, 2004.  Mr. Salek and the wife of
      Michael Goldman were holders of convertible unsecured notes in the amounts
      of $50,000 and $25,000, respectively, issued pursuant to the terms of a
      private placement made on July 29, 2004.  Pursuant to the terms
      of the unsecured notes, on June 1, 2008, Mr. Salek and the wife of Michael
      Goldman received payment of $25,000 and $12,500, respectively,
      representing payment of 50% of their notes.  The remaining
      amounts of the notes held by Mr. Salek and the wife of Michael Goldman are
      $25,000 and $12,500, respectively.





Interest
expense on the notes held by Mr. Pagano and Mrs. Folger amounted to $2,750 for
each of the quarters ended June 30, 2008 and 2007, paid to each Mr. Pagano and
Mrs. Folger, and $5,500 for each of the six months ended June 30, 2008 and 2007,
paid to each Mr. Pagano and Mrs. Folger.





Interest
expense on the note held by Mr. Salek amounted to $1,146 and $1,375 for the
quarters ended June 30, 2008 and 2007, respectively, and $2,521 and $2,750 for
the six months ended June 30, 2008 and 2007, respectively.





Interest
expense on the note held by the wife of Michael Goldman amounted to $573 and
$688 for the quarters ended June 30, 2008 and 2007, respectively, and $1,261 and
$1,375 for the six months ended June 30, 2008 and 2007,
respectively.





10.
            Income Tax
      Expense





The
Company’s income tax expense for the quarter ended June 30, 2008 was $18,389
compared to $49,222 for the same period in 2007.  The Company records
state income tax expense based on year-to-date profit of the Company and its
subsidiaries and records federal alternative minimum tax expense as the Company
utilizes its net operating loss carryforwards to offset any federal taxes
due.





The
Company’s income tax expense for the six months ended June 30, 2008 was $22,277
compared to $52,613 for the same period in 2008.  The Company records
state income tax expense based on year-to-date profit of the Company and its
subsidiaries and records federal alternative minimum tax expense as the Company
utilizes its net operating loss carryforwards to offset any federal taxes
due.





Comparison
of the Company’s effective tax rate from period to period may not be consistent,
as state taxes vary with the profit of the Company and its subsidiaries, while
federal taxes are based upon the consolidation of the Company and its
subsidiaries.





14
 Table of Contents





11.
            Acquisition





On
September 10, 2007, the Company, through a wholly owned subsidiary, purchased
from S&A Supply, Inc., a Massachusetts corporation, (“S&A Supply”) and
affiliates of S&A Supply, all of their tangible and intangible assets,
including accounts receivable, inventory, fixed assets, but excluding certain
accounts receivable and other specifically excluded assets, and assumed certain
liabilities, including trade accounts payable and motor vehicle
loans.  S&A Supply is a distributor of heating, electrical, and
plumbing supplies in the western Massachusetts area.





Presented
below are the unaudited pro forma financial results prepared under the
assumption that the September 10, 2007 acquisition of S&A Supply, Inc. had
been completed at the beginning of the period presented:





Pro Forma Condensed
Consolidated Operating Data


(Unaudited)





For the Three Months Ended
              June 30, 2007
            
            
            For the Six Months Ended
              June 30, 2007Net
      sales
            
            $
            25,912,195
            
            
            $
            44,653,059Operating
      income
            
            
            744,389
            
            
            
            365,884Net
      income (loss)
            
            $
            341,435
            
            
            $
            (383,639
            )Income
      (loss) per common share:Basic:
            
            $
            0.07
            
            
            $
            (0.08
            )Diluted:
            
            $
            0.06
            
            
            $
            (0.08
            )





12.
            Subsequent
      Event





On August
7, 2008, the Company announced that on or about September 1, 2008 it plans
to make a tender offer at $1.25 per share for all shares of its convertible
preferred stock that are owned in odd lots of fewer than 100 shares on the
record date for the offer. Colonial estimates that approximately 14,000
convertible preferred shares are owned in odd lots.





This
announcement is not an offer to purchase any shares of convertible preferred
stock, and Colonial is not committed to make any offer. Any offer will
be on terms including price per share that are set forth in an offer
to purchase and accompanying documents that Colonial places on its website and
mails to the holders of shares of convertible preferred stock that are subject
to the offer.





The purpose
of this offer is to enable our convertible preferred shareholders owning odd
lots to receive cash for their shares without incurring brokerage fees and to
reduce the cost of required mailings to odd-lot shareholders and maintaining
shareholder lists for persons who own only a small number of convertible
preferred shares.





The
Company will acquire these shares utilizing its normal operating
funds.





A copy of
the news release was filed on Form 8-K with the Securities and Exchange
Commission on August 7, 2008.





15
 Table of Contents





Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of
Operations





We begin
Management’s Discussion and Analysis of Financial Condition and Results of
Operations of Colonial Commercial Corp. and subsidiaries with a discussion of
our business, and other business considerations, to provide a context for
understanding.  This is followed by a discussion of the “Critical
Accounting Policies” that we believe are important to understanding the
assumptions and judgments incorporated into our reported financial results which
we discuss under “Results of Operations.”  Within “Results of
Operations,” the term “same-store locations” is defined as the portion of the
Company’s operations that conducted business throughout each of the quarters and
six month periods ended June 30, 2008 and June 30, 2007.  We then
provide an analysis of cash flows, and discuss our financial commitments under
“Liquidity and Capital Resources.” It is suggested that Management’s Discussion
and Analysis of Financial Condition and Results of Operations be read in
conjunction with the consolidated financial statements and notes included in the
Company's Form 10-K for the year ended December 31, 2007.





Forward-Looking
Statements





This
report on Form 10-Q contains forward-looking statements including estimates,
projections, statements relating to our business plans, objectives, and expected
operating results, and the assumptions upon which those statements are based,
are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements generally are identified by the words “believe,” “project,” “expect,”
“anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,”
“would,” “will be,” “will continue,” “will likely result,” and similar
expressions.  Forward-looking statements involve risks and
uncertainties, including, but not limited to, the consummation of certain events
referred to in this report, technological changes, competitive factors,
maintaining customer and vendor relationships, inventory obsolescence and
availability, and other risks detailed in the Company's periodic filings with
the Securities and Exchange Commission, which could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking
statements.  We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events, or otherwise.





Company
Overview





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 S&A Supply, Inc. (“S&A”).  We
distribute heating, ventilating and air conditioning equipment (HVAC), parts and
accessories, climate control systems, appliances, and plumbing and electrical
fixtures and supplies, primarily in New Jersey, New York, Massachusetts and
portions of eastern Pennsylvania, Connecticut and Vermont.





16
 Table of Contents





We supply
the Amana air conditioning and heating equipment line in New Jersey (exclusive
of Cape May and Cumberland counties) and lower portions of New York
State.  We are also the non-exclusive supplier of the Goodman line of
heating and air conditioning equipment in substantially the same trading
area.  We distribute these products through eight locations in New
Jersey, seven locations in New York State, two locations in Massachusetts and
one location in Willow Grove, Pennsylvania.  Of these locations, two
are used for warehousing purposes only.  In addition, we distribute
American Standard heating and air conditioning equipment, as well as other
heating and air conditioning accessories, in Elmsford and Hicksville, New
York.  We utilize showrooms for the display and sale of kitchen,
bathroom and electrical fixtures and accessories at our locations in Fishkill,
Middletown, New Windsor and Suffern, New York and Great Barrington and
Pittsfield, Massachusetts.





We have
developed a specialty in the design and sale of energy conservation control
systems and the fabrication of customized UL listed control
panels.  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.





We
distribute appliances, such as washers and dryers, to appliance dealers
primarily in New York, New Jersey, and portions of Connecticut, Delaware and
Pennsylvania.





On
September 10, 2007, the Company, through a wholly owned subsidiary, purchased
from S&A Supply, Inc., a Massachusetts corporation, (“S&A Supply”) and
affiliates of S&A Supply, all of their tangible and intangible assets,
including accounts receivable, inventory, fixed assets, but excluding certain
accounts receivable and other specifically excluded assets, and assumed certain
liabilities, including trade accounts payable and motor vehicle
loans.  S&A Supply is a distributor of heating, electrical, and
plumbing supplies in the Western Massachusetts area.





On
December 31, 2007, pursuant to a Plan of Merger dated December 11, 2007, the
Company’s subsidiaries American/Universal Supply, Inc. (“American”) and RAL were
merged.  RAL was the surviving company in the merger.  This
merger has no effect on the Company’s consolidated financial statements or the
daily operations of American and RAL.





Our
objective is to become the leading provider of building products, such as HVAC,
plumbing, and electrical equipment and accessories to the professional
contractor in the northeastern United States.  We intend to accomplish
this objective by increasing the number of locations convenient to our
customers, expanding our product offerings, and in seeking strategic
acquisitions.





Other Business
Considerations





Our
business is affected by significant outdoor temperature swings. Our sales
typically increase during peak heating and cooling demand
periods.  Demand related to the residential central air conditioning
replacement market is highest in the second and third quarters, while demand for
heating equipment is usually highest in the fourth quarter.  Our
business is also affected by general economic conditions in the residential
commercial construction industry.





17
 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 and electrical
fixtures and supplies. Revenue is recognized when the earnings process is
complete, which is generally upon shipment or delivery of products in accordance
with agreed-upon shipping terms and when title and risk of loss transfers to the
customer.  The Company has no further obligations subsequent to
shipment or delivery.  Customers have the right to return defective
products, which are substantially covered under the manufacturer’s
warranty.  The customer receives a credit from the Company for
defective products returned and the Company receives a corresponding credit
provided by the manufacturer.  The only warranty provided on products
sold is provided by the manufacturer.





The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company establishes and monitors the allowance for doubtful accounts based on
the credit risk of specific customers, customer concentrations, historical
trends and other information. The Company had accounts receivable of $11,156,564
and an allowance for doubtful accounts of $424,664 as of June 30,
2008.  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.





18
 Table of Contents





Under
Statement of Financial Accounting Standards No. 142, goodwill is reviewed at
least annually for impairment.  In assessing the recoverability of the
Company’s goodwill, the Company must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets and liabilities of the reporting unit.  Upon adoption and again
as a result of the Company’s annual impairment test, there was no indication of
impairment for goodwill acquired in prior business combinations.  If
the Company’s estimates or its related assumptions change in the future, the
Company may be required to record impairment charges related to its
goodwill.  Goodwill and other intangible assets amounting to
$1,628,133 and $348,153 at June 30, 2008, 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 June 30, 2008, the Company had a deferred tax
valuation allowance of approximately $6,800,000.





Results of
Operations





Results
of Operations For the Quarter Ended June 30, 2008 and 2007





Sales
increased by 8.6%, or $1,894,616, to $24,023,185 for the quarter ended June 30,
2008 from $22,128,569 for the same period in 2007.  The acquisition of
S&A Supply, Inc. on September 10, 2007 constituted new operations in the
quarter ended June 30, 2008.  Sales from this new operation were
$2,912,334 for the quarter ended June 30, 2008, while sales from same-store
locations declined by 4.6%, or $1,017,718, from $22,128,569 to
$21,110,851.  The decrease in sales from same-store locations is
attributed to the difficult economic environment, a significant reduction in new
construction, and the moderation of residential renovations, partially offset by
increased sales of replacement air conditioning equipment as a result of above
average temperatures in the month of June.





19
 Table of Contents





Gross
profit increased by 13.8%, or $840,177, to $6,943,613 for the quarter ended June
30, 2008 from $6,103,436 for the same period in 2007.  Gross profit
from the new operation was $878,027 for the quarter, while gross profit from
same-store locations declined by 0.6%, or $37,850, from $6,103,436 to
$6,065,586.  Gross profit expressed as a percentage of sales increased
by 1.3% to 28.9% in 2008 compared to 27.6% for the comparable period in
2007.  The increase in gross profit expressed as a percentage of sales
is primarily the result of a change in the sales mix to higher efficiency
heating and air conditioning systems, and benefits of improved purchasing
discounts.  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 $117,113 and $131,238 for the
quarters ended June 30, 2008 and 2007, respectively.





Selling,
general and administrative expenses increased by 13.3%, or $711,999, to
$6,076,443 for the quarter ended June 30, 2008 from $5,364,444 for the same
period in 2007.  Selling, general and administrative expenses from the
new operation were $891,359 for the quarter, while selling, general and
administrative expenses from same-store locations decreased by 3.3%, or
$179,360, from $5,364,444 to $5,185,084.  The decrease in selling,
general and administrative expense for same-store locations is primarily related
to a reduction of $225,729 in labor costs, partially offset by an increase in
hospitalization insurance in the amount of $37,161, an increase in gasoline
expense in the amount of $21,009, and an increase in bad debt expense in the
amount of $85,639.





Net
interest expense decreased by 21.9%, or $79,135, to $282,119 for the quarter
ended June 30, 2008 from $361,254 for the same period in 2007.  The
net interest expense decrease is primarily the result of a reduction in the
interest rate of the Company’s credit facility from an average rate of 8.0% for
the quarter ended June 30, 2007 to an average rate of 4.75% for the quarter
ended June 30, 2008.





The
Company’s income tax expense for the quarter ended June 30, 2008 was $18,389
compared to $49,222 for the same period in 2007.  The Company records
state income tax expense based on year-to-date profit of the Company and its
subsidiaries and records federal alternative minimum tax expense as the Company
utilizes its net operating loss carryforwards to offset any federal taxes
due.  Comparison of the Company’s effective tax rate from period to
period may not be consistent as the Company’s subsidiaries file separate state
tax returns and the Company files a consolidated federal
return.  State taxes vary with the profit of the Company and its
separate subsidiaries, while federal taxes are based upon the consolidation of
the Company and its subsidiaries.





The
Company’s net income increased by 57.4%, or $233,480, to $640,475 for the
quarter ended June 30, 2008, compared to a net income of $406,995 for the same
period in 2007.  The increase in net income is primarily the result of
operating cost reductions in our same-store locations and lower interest
costs.





20
 Table of Contents





Results
of Operations For the Six Months Ended June 30, 2008 and 2007





Sales
increased by 10.7%, or $4,073,512, to $42,244,313 for the six months ended June
30, 2008 from $38,170,801 for the same period in 2007.  The
acquisition of S&A Supply, Inc. on September 10, 2007 constituted new
operations in the six months ended June 30, 2008.  The new branch
opening in the Albany, New York area on April 10, 2007 constituted new
operations for a portion of the six months ended June 30, 2008.  Sales
from these new operations were $5,995,563 for the six months ended June 30,
2008, while sales from same-store locations declined by 5%, or $1,992,051, from
$38,170,801 to $36,248,750.  The decrease in sales from same-store
locations is attributed to the difficult economic environment, a significant
reduction in new construction, and the moderation of residential renovations,
partially offset by increased sales of replacement air conditioning equipment as
a result of above average temperatures in the month of June.





Gross
profit increased by 12.1%, or $1,324,261, to $12,299,199 for the six months
ended June 30, 2008 from $10,974,938 for the same period in
2007.  Gross profit from the new operations was $1,720,883 for the six
months, while gross profit from same-store locations declined by 3.6%, or
$396,622, from $10,974,938 to $10,578,316.  The decline in gross
profit from same-store locations was directly caused by lower
sales.  Gross profit expressed as a percentage of sales increased by
0.3% to 29.1% in 2008 compared to 28.8% for the comparable period in
2007.  The increase in gross profit expressed as a percentage of sales
is primarily the result of a change in the sales mix to higher efficiency
heating and air conditioning systems, and benefits of improved purchasing
discounts.  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 $262,510 and $255,753 for the
six months ended June 30, 2008 and 2007, respectively.





Selling,
general and administrative expenses increased by 22%, or $2,280,397, to
$12,633,447 for the six months ended June 30, 2008 from $10,353,050 for the same
period in 2007.  Selling, general and administrative expenses from the
new operations were $2,046,087 for the quarter, while selling, general and
administrative expenses from same-store locations increased by 2.3%, or
$234,310, from $10,353,050 to $10,587,360.  The increase in selling,
general and administrative expense for same-store locations is primarily related
to increases in bad debt expense in the amount of $217,708, hospitalization
insurance in the amount of $71,489 and gasoline expenses in the amount of
$41,664, partially offset by a decrease of $190,834 in labor costs.





Net
interest expense decreased by 4.9%, or $34,028, to $661,268 for the six months
ended June 30, 2008 from $695,296 for the same period in 2007.  The
net interest expense decrease is primarily the result of a reduction in the
interest rate of the Company’s credit facility from an average rate of 8.0% for
the six months ended June 30, 2007 to an average rate of 5.64% for the six
months ended June 30, 2008.





21
 Table of Contents





The
Company’s income tax expense for the six months ended June 30, 2008 was $22,277
compared to $52,613 for the same period in 2007.  The Company records
state income tax expense based on year-to-date profit of the Company and its
subsidiaries and records federal alternative minimum tax expense as the Company
utilizes its net operating loss carryforwards to offset any federal taxes
due.  Comparison of the Company’s effective tax rate from period to
period may not be consistent as the Company’s subsidiaries file separate state
tax returns and the Company files a consolidated federal
return.  State taxes vary with the profit of the Company and its
separate subsidiaries, while federal taxes are based upon the consolidation of
the Company and its subsidiaries.





The
Company’s net income decreased by $876,251, to a net loss of $859,195 for the
six months ended June 30, 2008, compared to a net income of $17,056 for the same
period in 2007.  The decrease in net income is primarily the result of
a decrease in gross margins from same-store locations in the amount of $396,622,
the effect of losses incurred from our new operations in the amount of $454,936,
plus an increase in reserves for bad debt, increased hospitalization insurance,
and an increase in other miscellaneous expenses, as stated above.





The
Company expects continued weakness in the construction industry for the
remainder of 2008 through 2010, which will affect the Company’s growth through
the same period.  The Company anticipates that it will obtain
additional revenues from new product offerings and realize benefits of a
continued cost reduction program.  The Company anticipates being
profitable for the year ended December 31, 2008.





The
following table summarizes information derived from the Company’s consolidated
statements of operations expressed as a percentage of sales for the quarter and
six months ended June 30, 2008 and 2007.





For
      the Quarter Ended
              June
      30,
            
            
            For
      the Six Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Sales
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of sales
            
            
            71.1
            
            
            
            72.4
            
            
            
            70.9
            
            
            
            71.2Gross
      profit
            
            
            28.9
            
            
            
            27.6
            
            
            
            29.1
            
            
            
            28.8Selling,
      general and administrative expenses
            
            
            25.3
            
            
            
            24.3
            
            
            
            29.9
            
            
            
            27.2Operating
      income (loss)
            
            
            3.6
            
            
            
            3.3
            
            
            
            (0.8
            )
            
            
            1.6Other
      income
            
            
            0.3
            
            
            
            0.4
            
            
            
            0.4
            
            
            
            0.4Interest
      expense, net
            
            
            (1.2
            )
            
            
            (1.6
            )
            
            
            (1.6
            )
            
            
            (1.8
            )Income
      (loss) before taxes
            
            
            2.7
            
            
            
            2.1
            
            
            
            (2.0
            )
            
            
            0.2Income
      taxes
            
            
            (0.1
            )
            
            
            (0.3
            )
            
            
            (0.1
            )
            
            
            (0.2
            )Net
      income (loss)
            
            
            2.6
            %
            
            
            1.8
            %
            
            
            (2.1
            )
      %
            
            
            0.0
            %





22
 Table of Contents





Liquidity and Capital
Resources





In
connection with the September 10, 2007 acquisition of S&A Supply, Inc., the
Company amended its secured credit facility (“Agreement”) with Wells Fargo Bank,
National Association (“Wells”) to increase the Company’s facility from $15
million to $25 million and extended the maturity of the facility from August 1,
2010 to August 1, 2012.  The $25 million facility includes a $1
million structural sublimit, as defined in the Agreement, payable in 24 equal
monthly installments, and up to $500,000 of seasonal
over-advances.  The initial interest rate on the term loan is prime
minus 0.25%, but the interest rate on up to 75% of the loan’s outstanding
balance can be converted by the Company to 21⁄2% over LIBOR.





The
revolving credit line bears interest at 0.25% below prime.  At June
30, 2008, the Company had a standby letter of credit, which expires on August
31, 2009.  The standby letter of credit reduces the availability of
the credit facility by $300,000 and additional reserves determined by the bank
further reduce the availability of the credit facility by
$170,000.  Borrowings under the credit facility are secured by the
available assets of the Company, as defined in the
Agreement.  Availability under the revolving credit line was $285,493
as of June 30, 2008 and is determined by a percentage of available assets as
defined in the Agreement, less letters of credit and reserves.  The
balance outstanding under the revolving line of credit was $17,595,205 as of
June 30, 2008.  The interest rate on the revolving credit facility as
of June 30, 2008 was 4.75%.





The
Company believes that the credit facility with Wells is sufficient to finance
its current operating needs.  The credit facility provides that
financial covenants are to be determined by agreement between Wells and the
Company on an annual basis.  While the Company and Wells have reached
mutually agreeable covenants for the period through December 31, 2008, there can
be no assurance that the Company and Wells will be able to reach an agreement on
covenants in the future.  In the event the Company and Wells are
unable in the future to agree upon these annual covenants, the credit facility
would be in default, and Wells could demand immediate payment.  The
business of the Company would be materially and adversely affected if the
Company is unable to obtain alternate financing.  The Company is in
compliance with all of its financial loan covenants as of June 30,
2008.





As of
June 30, 2008, the Company had $883,812 in cash compared with $622,723 at
December 31, 2007.





Net cash
provided by operating activities was $1,213,858 for the six months ended June
30, 2008.  The net cash provided by operating activities for the 2008
period is primarily a result of cash provided by operating assets and
liabilities of $1,285,386 and non-cash charges of $787,667, offset by a net loss
of $859,195.  The increase in accounts payable of $744,871 is
primarily a result of the decrease in cash availability under the credit
facility, which is related to the decrease of assets available for
borrowing.





Cash
flows used in investing activities were $301,501 during the six months ended
June 30, 2008 due to purchases of equipment.





Cash
flows used in financing activities of $651,268 for the six months ended June 30,
2008 consisted of $431,850 in net repayments under the credit facility-revolving
credit, net and $219,418 for repayments of notes payable.





23
 Table of Contents





Item
3.  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 rates or equity
prices.





The
Company’s pre-tax earnings and cash flows are exposed to changes in interest
rates.  All borrowings under its credit facility bear interest based
on the prime rate less 0.25%, and a $750,000 note to Goldman Associates of New
York, Inc. bears interest at the prime rate.  A hypothetical 10%
adverse change in such rates would reduce the pre-tax earnings and cash flows by
approximately $87,327 over a one-year period, assuming the borrowing level
remains consistent with the outstanding borrowings as of June 30,
2008.  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 the 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
4.  Controlsand Procedures





Evaluation of Disclosure
Controls and Procedures





As of the
end of the period covered by this report, we performed an evaluation under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934 (the Exchange
Act)).  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by
this Quarterly Report, our disclosure controls and procedures were
effective.





Changes in Internal Control
Over Financial Reporting





There
have been no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the last
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.





PART II.  OTHER
INFORMATION





Item
1.  Legal Proceedings





The
Company’s Legal Proceedings are incorporated by reference from Part I Financial
Information, Item 1 Financial Statements,
Section 7 Litigation, of this
Report on Form 10-Q.





Items 1A, 2 and 3 are not
applicable and have been omitted.





24
 Table of Contents





Item
4.  Submissionof Matters to a Vote of Security
Holders





a.
            An
      Annual Meeting of Shareholders was held on June 16,
  2008.





b.
            On
      June 16, 2008, the common and preferred shareholders elected E. Bruce
      Fredrikson, Melissa Goldman-Williams, Michael Goldman, Stuart H. Lubow,
      Ronald H. Miller and William Pagano as Directors.  The common
      and preferred shareholders voted in favor of a resolution appointing
      Eisner LLP as the independent registered public accounting firm for the
      Company for the fiscal year ending December 31,
  2008.





PROPOSAL
            
            FOR
            
            
            AGAINST
            
            
            ABSTAINEDFor
      the common and preferred shareholders to elect  E. Bruce
      Fredrikson, Melissa Goldman-Williams, Michael Goldman, Stuart H. Lubow,
      Ronald H. Miller and William Pagano as Directors:E.
      Bruce Fredrikson
            
            
            3,705,316
            
            
            
            -
            
            
            
            13,179Melissa
      Goldman-Williams
            
            
            3,703,357
            
            
            
            -
            
            
            
            15,138Michael
      Goldman
            
            
            3,704,006
            
            
            
            -
            
            
            
            14,489Stuart
      H. Lubow
            
            
            3,546,864
            
            
            
            -
            
            
            
            171,631Ronald
      H. Miller
            
            
            3,704,948
            
            
            
            -
            
            
            
            13,547William
      Pagano
            
            
            3,703,399
            
            
            
            -
            
            
            
            15,096To
      ratify the selection of Eisner LLP as independent public accountants of
      the Company for the fiscal year ending December 31, 2008:
            
            
            3,643,357
            
            
            
            5,213
            
            
            
            69,924





Item 5 is not applicable and
has been omitted.





Item
6.  Exhibits





31.01
            
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.02
            
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.01
            
            Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.32.02
            
            Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.





25
 Table of Contents





SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.








Dated:  August
      8, 2008
            COLONIAL
      COMMERCIAL CORP./s/ William PaganoWilliam
      Pagano,Chief
      Executive Officer/s/ William SalekWilliam
      Salek,Chief
      Financial Officer






26