**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 1934For
                the quarterly period ended **June 30, 2007**ORo
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES
                  EXCHANGE ACT OF 1934For
                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
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            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
o                      No  x





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


Large
                accelerated filer o
            Accelerated
                filer  o
            Non-accelerated
                filer  x





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


Yes
o                      No  x





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, 2007Common
                Stock, $.05 par value per share
            
            4,645,680
                sharesConvertible
                Preferred Stock, $.05 par value per share
            
            467,500
                shares










**COLONIAL
                COMMERCIAL CORP. AND
                SUBSIDIARIES**CONTENTSPART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            
            Financial
                Statements
            
            PageCondensed
                Consolidated Balance Sheets as of June 30, 2007
                (Unaudited) and December 31, 2006
            
            1Condensed
                Consolidated Statements of Operations (Unaudited)
                for the Three Months and Six Months Ended June 30, 2007 and
                2006
            
            2Condensed
                Consolidated Statements of Cash Flows (Unaudited)
                for the Six Months Ended June 30, 2007 and 2006
            
            3Notes
                to Condensed Consolidated Financial Statements
                (Unaudited)
            
            4Item
                2.
            
            Management's
                Discussion and Analysis of Financial Condition
                and Results of Operations
            
            13Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            
            21Item
                4.
            
            Controls
                and Procedures
            
            21PART
                II.
            OTHER
                INFORMATIONItem
                1.
            
            Legal
                Proceedings
            
            22Item
                4.
            
            Submission
                of Matters to a Vote of Security
                Holders
            
            22Item
                6.
            
            Exhibits
            
            23




***Contents***





**PART
      I.  FINANCIAL INFORMATION**





**Item
      1.  Financial Statements**





COLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIES


Condensed
      Consolidated Balance Sheets





June
                30,
              2007
            
            
            December 31,
              2006(Unaudited)AssetsCurrent
                assets:Cash
            
            $
            1,104,993
            
            
            $
            482,251Accounts
                receivable, net of allowance for doubtful accounts of $237,744 in
                2007
                and$212,043
                in 2006
            
            
            10,467,946
            
            
            
            9,069,301Inventory
            
            
            14,322,144
            
            
            
            12,854,317Prepaid
                expenses and other current assets
            
            
            1,231,169
            
            
            
            1,057,099Deferred
                tax asset - current portion
            
            
            420,000
            
            
            
            420,000Total
                current assets
            
            
            27,546,252
            
            
            
            23,882,968Property
                and equipment
            
            
            1,507,904
            
            
            
            1,512,666Goodwill
            
            
            1,628,133
            
            
            
            1,628,133Other
                intangibles
            
            
            2,500
            
            
            
            3,500Other
                assets - noncurrent
            
            
            179,268
            
            
            
            202,177Deferred
                tax asset - noncurrent
            
            
            1,288,500
            
            
            
            1,288,500$
            32,152,557
            
            
            $
            28,517,944Liabilities
                and Stockholders' EquityCurrent
                liabilities:Trade
                payables
            
            $
            7,715,616
            
            
            $
            4,719,160Accrued
                liabilities
            
            
            1,748,260
            
            
            
            1,975,175Income
                taxes payable
            
            
            15,127
            
            
            
            1,630Borrowings
                under credit facility - revolving credit
            
            
            14,439,983
            
            
            
            13,615,696Notes
                payable - current portion; includes related party notes of $30,000
                in 2007
                and 2006
            
            
            135,051
            
            
            
            136,539Total
                current liabilities
            
            
            24,054,037
            
            
            
            20,448,200Convertible
                notes payable, includes related party notes of $325,000 in 2007 and
                2006
            
            
            525,000
            
            
            
            525,000Other
                notes payable, excluding current portion; includes related party
                notes of
                $701,875 in 2007 and $703,750 in 2006
            
            
            774,102
            
            
            
            792,394Total
                liabilities
            
            
            25,353,139
            
            
            
            21,765,594Commitments
                and contingenciesStockholders'
                equity:Redeemable
                convertible preferred stock, $.05 par value, 2,500,000 shares
                authorized,467,500 shares issued and outstanding in 2007 and
                2006,  liquidation preference of $2,337,500 in 2007 and
                2006
            
            
            23,375
            
            
            
            23,375Common
                stock, $.05 par value, 20,000,000 shares authorized, 4,645,680 in
                2007 and
                4,593,680 in 2006 shares issued and outstanding
            
            
            232,284
            
            
            
            229,684Additional
                paid-in capital
            
            
            10,735,203
            
            
            
            10,707,791Accumulated
                deficit
            
            
            (4,191,444
            )
            
            
            (4,208,500
            )Total
                stockholders' equity
            
            
            6,799,418
            
            
            
            6,752,350$
            32,152,557
            
            
            $
            28,517,944


See
      accompanying notes to unaudited condensed consolidated financial
      statements.





1
 ***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
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006(Restated)
            
            
            
            
            
            (Restated)Net
                sales
            
            $
            22,128,569
            
            
            $
            18,155,812
            
            
            $
            38,170,801
            
            
            $
            33,040,025Cost
                of sales
            
            
            16,025,133
            
            
            
            12,718,347
            
            
            
            27,195,863
            
            
            
            22,917,233Gross
                profit
            
            
            6,103,436
            
            
            
            5,437,465
            
            
            
            10,974,938
            
            
            
            10,122,792Selling,
                general and administrative expenses
            
            
            5,364,444
            
            
            
            4,793,206
            
            
            
            10,353,050
            
            
            
            9,550,068Operating
                income
            
            
            738,992
            
            
            
            644,259
            
            
            
            621,888
            
            
            
            572,724Other
                income
            
            
            78,479
            
            
            
            63,467
            
            
            
            143,077
            
            
            
            129,256Interest
                expense, net; includes related party interest of $25,767 and $25,765
                for
                the three months ended June 30, 2007 and 2006, respectively, and
                $51,734and $51,393 for the six months ended June 30, 2007and 2006,
                respectively
            
            
            (361,254
            )
            
            
            (336,240
            )
            
            
            (695,296
            )
            
            
            (635,902
            )Income
                before income taxes
            
            
            456,217
            
            
            
            371,486
            
            
            
            69,669
            
            
            
            66,078Income
                tax expense
            
            
            49,222
            
            
            
            33,121
            
            
            
            52,613
            
            
            
            52,242Net
                Income
            
            $
            406,995
            
            
            $
            338,365
            
            
            $
            17,056
            
            
            $
            13,836Income
                per common share:Basic
            
            $
            0.09
            
            
            $
            0.07
            
            
            $
            0.00
            
            
            $
            0.00Diluted
            
            $
            0.08
            
            
            $
            0.06
            
            
            $
            0.00
            
            
            $
            0.00Weighted
                average shares outstanding:Basic
            
            
            4,645,680
            
            
            
            4,579,846
            
            
            
            4,645,393
            
            
            
            4,578,606Diluted
            
            
            5,306,768
            
            
            
            5,127,026
            
            
            
            5,131,934
            
            
            
            5,138,556





See
      accompanying notes to unaudited condensed consolidated financial
      statements.





2
 ***Contents***





COLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIES


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)





For
                The Six Months Ended June 30,2007
            
            
            2006(Restated)Cash
                flows from operating activities:Net
                income
            
            $
            17,056
            
            
            $
            13,836Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Stock-based
                compensation
            
            
            17,012
            
            
            
            -Provision
                for doubtful accounts
            
            
            153,195
            
            
            
            84,310Depreciation
            
            
            247,737
            
            
            
            222,472Amortization
                of intangibles
            
            
            1,000
            
            
            
            6,834Accretion
                of debt discount
            
            
            18,750
            
            
            
            18,750Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (1,551,840
            )
            
            
            (717,287
            )Inventory
            
            
            (1,467,827
            )
            
            
            (1,547,010
            )Prepaid
                expenses and other current assets
            
            
            (174,070
            )
            
            
            73,548Other
                assets - noncurrent
            
            
            22,909
            
            
            
            3,153Trade
                payables
            
            
            2,996,456
            
            
            
            97,153Accrued
                liabilities
            
            
            (226,915
            )
            
            
            (26,782
            )Income
                taxes payable
            
            
            13,497
            
            
            
            (11,801
            )Net
                cash provided by (used in) operating activities
            
            
            66,960
            
            
            
            (1,782,824
            )Cash
                flows from investing activities:Additions
                to property and equipment
            
            
            (242,975
            )
            
            
            (195,959
            )Net
                cash used in investing activities
            
            
            (242,975
            )
            
            
            (195,959
            )Cash
                flows from financing activities:Issuance
                of common stock and exercise of stock options
            
            
            13,000
            
            
            
            8,000Repayments
                of notes payable: includes related party repayments of $0 in 2007,
                and
                $30,289 in 2006.
            
            
            (38,530
            )
            
            
            (64,922
            )Issuance
                of notes payable
            
            
            -
            
            
            
            13,073Borrowings
                under credit facility - term loan/overadvance
            
            
            -
            
            
            
            250,000Borrowings
                under credit facility - revolving credit
            
            
            824,287
            
            
            
            2,129,188Net
                cash provided by financing activities
            
            
            798,757
            
            
            
            2,335,339Increase
                in cash
            
            
            622,742
            
            
            
            356,556Cash
                - beginning of period
            
            
            482,251
            
            
            
            613,456Cash
                - end of period
            
            $
            1,104,993
            
            
            $
            970,012





See
      accompanying notes to unaudited condensed consolidated financial
      statements.





3
 ***Contents***





**COLONIAL
      COMMERCIAL CORP. AND SUBSIDIARIES**




Notes
      To
      Condensed Consolidated Financial Statements




June
      30,
      2007




(Unaudited)




1.
            Summary
                of Significant Accounting Policies and
                Practices





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, 2007 is not necessarily indicative
      of
      the operating results that may be achieved for the full year.





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.  It is suggested that these
      consolidated financial statements be read in conjunction with the consolidated
      financial statements and notes thereto included in the Company's Form 10-K/A
      for
      the year ended December 31, 2006.





We
      have one industry segment –
wholesale distribution of heating, ventilation, air conditioning equipment,
      plumbing fixtures and appliances.





Inventory
      is comprised of finished
      goods.





2.
            Stock
                Options





The
      Company uses the modified
      prospective application method of SFAS No. 123(R), “Share-Based Payment”, which
      establishes standards for transactions in which an entity exchanges its equity
      instruments for goods or services. This standard requires an entity to measure
      the cost of employee services received in exchange for an award of equity
      instruments based on the grant date fair value of the award.





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.





4
 ***Contents***





The
      following table summarizes information about stock options at June 30,
      2007:





Options
                Outstanding and ExercisableRange
                of
              Exercise
                Prices
            
            
            Shares
            
            
            Weighted
                Average
              Remaining
              Contractual
                Life
            
            
            Weighted
                Average
              Exercise
                Price
            
            
            Aggregate
              Intrinsic
                Value$
            .25
            
            
            
            22,000
            
            
            
            1.98
            
            
            $
            .25$
            1.85
            
            
            
            30,000
            
            
            
            9.44
            
            
            $
            1.8552,000
            
            
            
            
            
            
            $
            1.17
            
            
            $
            27,500Options
                Outstanding and Non-exercisable$
            1.85
            
            
            
            45,000
            
            
            
            9.44
            
            
            $
            1.85
            
            
            $
            0





For
      the quarters ended June 30, 2007
      and 2006, the amount of stock based compensation was $6,676 and $0,
      respectively.  For the six months ended June 30, 2007 and 2006, the
      amount of stock based compensation was $17,011 and $0,
      respectively.  The aggregate intrinsic value of options exercised
      during the six months ended June 30, 2007 was $85,800.  No stock
      options were exercised during the quarter ended June 30, 2007.





3.
            Equity
                Transactions





During
      the quarter ended June 30, 2007,
      no shares of redeemable preferred stock were converted into common
      stock.  During the quarter ended June 30, 2006, holders of a total
      6,642 shares of redeemable preferred stock converted these shares into 6,642
      shares of common stock.





During
      the six months ended June 30,
      2007, no shares of redeemable preferred stock were converted into common
      stock.  During the six months ended June 30, 2006, holders of a total
      15,797 shares of redeemable preferred stock converted these shares into 15,797
      shares of common stock.





4.
            Supplemental
                Cash Flow Information





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





For
                the Six Months EndedJune
                30, 2007
            
            
            June
                30, 2006Cash
                paid during the period for:Interest
            
            $
            681,012
            
            
            $
            598,810Income
                taxes
            
            $
            20.410
            
            
            $
            65,179





5
 ***Contents***





5.
            Net
                Income Per Common Share




For the Quarter Ended
              June
                30,
            
            
            For the Six Months Ended
              June
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006(Restated)
            
            
            
            
            
            (Restated)Net
                Income (numerator for basic income per share)
            
            $
            406,995
            
            
            $
            338,365
            
            
            $
            17,056
            
            
            $
            13,836Interest
                expense on convertible notes (net of tax)
            
            $
            12,879
            
            
            
            -
            (1)
            
            
            -
            (1)
            
            
            -
            (1)Adjusted
                Net Income (numerator for diluted income per share)
            
            $
            419,874
            
            
            $
            338,365
            
            
            $
            17,056
            
            
            $
            13,836Weighted
                average common shares(denominator
                for basic income per share)
            
            
            4,645,680
            
            
            
            4,579,846
            
            
            
            4,645,393
            
            
            
            4,578,606Effect
                of dilutive securities:Convertible
                preferred stock
            
            
            467,500
            
            
            
            474,267
            
            
            
            467,500
            
            
            
            477,018Convertible
                notes
            
            
            175,000
            
            
            
            -
            (1)
            
            
            -
            (1)
            
            
            -
            (1)Stock
                options
            
            
            18,588
            
            
            
            72,913
            
            
            
            19,041
            
            
            
            82,932Weighted
                average common and potential common sharesoutstanding
                (denominator for diluted income per share)
            
            
            5,306,768
            
            
            
            5,127,026
            
            
            
            5,131,934
            
            
            
            5,138,556Basic
                net income per share
            
            $
            0.09
            
            
            $
            0.07
            
            
            $
            0.00
            
            
            $
            0.00Diluted
                net income per share
            
            $
            0.08
            
            
            $
            0.07
            
            
            $
            0.00
            
            
            $
            0.00





(1)
      Convertible notes are not assumed to be converted for purposes of computing
      diluted net income per share if the effect would be antidilutive.





6.
            Financing
                Arrangements




At
      June
      30, 2007, the amount outstanding under the Company’s credit facility with Wells
      Fargo Business Credit, Inc. (“Wells”) was $14,439,983, and the Company had a
      standby letter of credit, which expires on July 31, 2008.  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 $100,000.  Availability under the revolving
      credit line was $160,017 as of June 30, 2007 and is determined by a percentage
      of available assets as defined in the Agreement, less letters of credit and
      reserves.  The interest rate on the revolving credit facility as of
      June 30, 2007 was 8.0%.





6
 ***Contents***





The
      facility contains covenants
      relating to the financial condition of the Company, its business operations,
      and
      restricts the payment of dividends, subordinated debt, purchase of securities
      and capital expenditures.  The Company is in compliance with all of
      its financial loan covenants.





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. Currently, there exist 102 plaintiffs in these lawsuits relating
      to
      alleged sales of asbestos products, or products containing asbestos, by the
      Predecessor. The Company never sold any asbestos related products.





Of
      the existing plaintiffs, 15 filed
      actions in 2007, seven filed actions in 2006, 15 filed actions in 2005, 42
      filed
      actions in 2004, 20 filed actions in 2003, and three filed actions in 2002.
      There are 113 other plaintiffs that have had their actions dismissed and nine
      other plaintiffs that have settled as of June 30, 2007 for a total of
      $3,325,500. There has been no judgment against the Predecessor.





Our
      Universal subsidiary was named by
      36 plaintiffs; of these, 11 filed actions in 2007, six filed actions in 2006,
      11
      filed actions in 2005, five filed actions in 2001, one filed an action in 2000,
      and two filed actions in 1999.  Six plaintiffs naming Universal have
      had their actions dismissed and, of the total $3,325,500 of settled actions,
      two
      plaintiffs naming Universal have settled for $26,500.  No money was
      paid by Universal in connection with any settlement.  Following these
      dismissed and settled actions, there currently exist 28 plaintiffs that name
      Universal.





As
      set forth in more detail below, the
      Company has been indemnified against asbestos-based claims, and insurance
      companies are defending the interests of the Predecessor and the Company in
      these cases.





7
 ***Contents***





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, 2007 is material, and that the only
      material litigation that was brought against Predecessor through that date
      was
      Rhodes v. A.O. Smith Corporation, filed on April 26, 2004 in the Superior Court
      of New Jersey, Law Division, Middlesex County, Docket Number MID-L-2979-04AS.
      The Company was advised that the Rhodes case was settled for $3,250,000
      (“Settlement”) under an agreement reached in connection with a $10,000,000 jury
      verdict that was rendered on August 5, 2005. The Company was not a defendant
      in
      the Rhodes case.





On
      April
      29, 2005, prior to the Rhodes case trial, the Predecessor filed a third party
      complaint against Sid Harvey Industries (“Third Party Complaint”) in an action
      demanding contributor payment in connection with the Settlement. Sid Harvey
      Industries moved successfully for summary judgment.  The Predecessor
      filed an appeal as to the dismissal of Predecessor’s Third Party
      Complaint.  In a decision dated December 29, 2006, the Superior Court
      of New Jersey, Appellate Division, reversed the dismissal of Predecessor’s Third
      Party Complaint and remanded the matter for further proceedings as to
      Predecessor’s claim for contribution.





The
      Company believes that Rhodes
      differed from the other lawsuits in that plaintiff established that he
      contracted mesothelioma as a result of his occupational exposure to asbestos
      dust and fibers and that a predecessor of the Company was a major supplier
      of
      the asbestos containing products that allegedly caused his disease.





Indemnification





John
      A. Hildebrandt, Paul Hildebrandt
      and the Predecessor have jointly and severally agreed to indemnify our Universal
      subsidiary from and against any and all damages, liabilities and claims due
      to
      exposure to asbestos at any time prior to the June 25, 1999 closing of the
      purchase agreement referred to earlier.  These agreements are set
      forth in the purchase agreement. Paul Hildebrandt, one of the indemnitors,
      was a
      Director of the Company from September 29, 2004 to January 28,
      2005.





The
      indemnitors may use their own
      counsel to defend these claims. The indemnitors are not liable for any
      settlement effected without their consent. The indemnitors may settle and pay
      money claims without the consent of the Company. There is no indemnification
      unless claims aggregate $50,000; once this trigger point is reached,
      indemnification is required for all claims, including the first $50,000, but
      excluding claims of less than $10,000. The indemnification requirement survives
      at least until 30 days after the running of any relevant statutes of
      limitation.





The
      obligation of the indemnitors is
      joint and several, so that the Company can have recourse against any one or
      more
      of these indemnitors, whether or not any other indemnitor has previously
      defaulted on its obligation to us. There are no other limitations to our rights
      to indemnification.





8
 ***Contents***





Insurance





The
      assets that the Predecessor sold to
      us included its insurance policies and other agreements and contracts. The
      policies provide coverage for liability accruing during the periods for which
      premiums were paid.  The Predecessor was formed in 1940. Copies of
      policies are available for each year beginning in 1970 and ending with the
      closing under the purchase agreement in 1999. Copies of policies for the period
      from 1940 to 1969 are not available.





Insurance
      companies acknowledge
      coverage for potential asbestos claims under certain of these
      policies.  Insurance companies under additional policies have reserved
      their right to deny coverage but have continued to defend and indemnify the
      Predecessor and the Company under the contested policies.





There
      are periods during the years from
      1940 to 1999 in which our Predecessor did not have coverage for potential
      asbestos claims.  Subject to litigation, insurance companies may
      maintain that the existence of these periods’ results in coverage for only a
      portion of a particular injury that varies with the period during which there
      was asbestos coverage relating to the injury, and that the balance of any
      settlement or judgment is to be paid by the insured.  As of June 30,
      2007, no insurance company has claimed any contribution for a gap in coverage
      except for a claim for $159.64 made by one insurance company to the Predecessor
      in 1995.  The Predecessor asserted that it had no obligation to pay
      this amount and did not make any payment.





Insurance
      companies have, as of June
      30, 2007, defended us and the Predecessor, and have paid all settlement amounts
      and defense costs.  Except for $159.64 referred to above, the
      insurance companies have not requested any payments from us or from the
      Predecessor.





Our
      Universal subsidiary has not
      engaged in the sale of asbestos products since its formation in 1997. Its
      product liability policies for all years since 1998 exclude asbestos
      claims.





General





Regardless
      of indemnification and
      insurance coverage, we do not in any event consider our Company to be liable
      for
      the asbestos-based lawsuits that name us or for any other claim that arises
      as a
      result of actions or omissions by Predecessor companies. We expressly disclaimed
      the assumption of any liabilities when we purchased the assets of the
      Predecessor. It is our opinion that the existing asbestos litigation will not
      have a material adverse effect on the Company.  Nevertheless, we could
      be materially and adversely affected if we are held liable for substantial
      asbestos claims or if the Company incurs substantial legal or settlement costs.
      This material and adverse effect would occur if indemnitors fail to honor their
      indemnification agreements and insurance is not available either because policy
      limits are exceeded, or because insurance companies successfully claim
      limitations on their liabilities by reason of gaps in coverage or
      otherwise.





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





9
 ***Contents***





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 is not expected to 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.  The adoption of SFAS 159 is not expected to
      have a material impact on the Company’s financial position.





9.
            Income
                Tax Expense





The
      Company’s income tax expense for
      the quarter ended June 30, 2007 was $49,222 compared to $33,121 for the same
      period in 2006.  The Company records state income tax expense based on
      year-to-date profit of the Company’s 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, 2007 was $52,613 compared to $52,242 for the
      same
      period in 2006.  The Company records state income tax expense based on
      year-to-date profit of the Company’s subsidiaries and records federal
      alternative minimum tax expense as the Company utilizes its net operating loss
      carryforwards to offset any federal taxes due.





10.
            Related
                Party Transactions





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.





10
 ***Contents***





William
      Pagano has a 55% interest in Pioneer and each of Rita Folger and Jeffrey Folger
      has an 8% interest in Pioneer Realty Partners I, LLC, which has a 40% interest
      in Pioneer.  The Company paid Pioneer Realty Holdings, LLC $31,625 and
      $33,376 in rent during the quarters ended June 30, 2007 and 2006,
      respectively.  The Company paid Pioneer Realty Holdings, LLC $62,725
      and $66,751 in rent during the six months ended June 30, 2007 and 2006,
      respectively.





Oscar
      and Jeffrey Folger acted as legal
      counsel for the Company through April 20, 2005.  Oscar and Jeffrey
      Folger acted as legal consultants for the Company from April 21, 2005 through
      December 31, 2005 and each became an employee of the Company as Vice
      President-Chief Legal Counsel and Assistant Vice President-Legal, respectively,
      on January 1, 2006 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.  Mrs. Folger is the wife
      of Oscar Folger and the mother of Jeffrey Folger.  Professional fees
      paid to Oscar Folger’s law firm for the quarters ended June 30, 2007 and 2006,
      respectively, was $27,025 and $57,126.  Professional fees paid to
      Oscar Folger’s law firm for the six months ended June 30, 2007 and 2006,
      respectively, was $51,425 and $59,901.  Additionally, $0 and $3,000
      was paid to each of Oscar and Jeffrey Folger as part time employees of the
      Company for the quarters ended June 30, 2007 and 2006, respectively, and $3,000
      and $6,000 was paid to each of Oscar and Jeffrey Folger as part time employees
      of the Company for the six month ended June 30, 2007 and 2006,
      respectively.





11.
            Restatement





The
      Company has arrangements with
      several vendors that provide rebates payable when the Company achieves any
      of a
      number of measures, generally related to volume level of
      purchases.  The Company accounts for such rebates as a reduction of
      inventory until sale of the product, at which time such rebates are reflected
      as
      a reduction of cost of sales in the consolidated statements of
      income.  Throughout the year, the Company estimates the amount of
      rebate based on estimates of purchases to date relative to the purchase levels
      that mark the progress toward earning the rebate.  The Company
      continually revises these estimates of earned vendor rebates based on actual
      purchase levels.





The
      Company restated its Annual Report
      on Form 10-K/A for the year ended December 31, 2006 on May 21, 2007 to correct
      previously improper accounting for vendor rebates.  Due to the
      adjustment, 2007 10-Q filings will be compared to 2006 figures with the
      described vendor rebate adjustment and therefore will not be consistent with
      the
      2006 quarterly information previously presented in the Company’s 10-Q filings
      for the fiscal year ended 2006.





The
      adjustment for the quarter ended
      June 30, 2006 included a decrease in gross profit of $3,468 from $5,440,933
      to a
      restated gross profit of $5,437,465, which resulted in a net income adjustment
      from $341,833 to a restated net income of $338,365.  Earnings per
      common share remained unchanged at $0.07 basic and $0.06 diluted per common
      share.





11
 ***Contents***





The
      adjustment for the six months ended
      June 30, 2006 included an increase in gross profit of $95,092 from $10,027,700
      to a restated gross profit of $10,122,792, which resulted in a net income of
      $13,836 from a net loss of $81,256.  Earnings per common share, basic
      and diluted, were restated to $0.00 per common share from $(0.02) per common
      share.  The adjustment reduced the carrying value of inventory at June
      30, 2006 by $224,430.





The
      following tables isolate each of
      the restated amounts in the Company’s consolidated statement of operations for
      the quarter and six months ended June 30, 2006 and consolidated statement of
      cash flows for the six months ended June 30, 2006.





Consolidated
      Statement of Operations


(Unaudited)





For The Three Months Ended
            
            
            For the Six Months EndedJune
                30,
            
            
            June
                30Restated
            
            
            As
                Previously
              Reported
            
            
            Restated
            
            
            As
                Previously
              Reported2006
            
            
            2006
            
            
            2006
            
            
            2006Cost
                of Sales
            
            $
            12,718,347
            
            
            $
            12,714,879
            
            
            $
            22,917,233
            
            
            $
            23,012,325Gross
                Profit
            
            
            5,437,465
            
            
            
            5,440,933
            
            
            
            10,122,792
            
            
            
            10,027,700Operating
                income
            
            
            644,259
            
            
            
            647,727
            
            
            
            572,724
            
            
            
            477,632Income
                (loss) before income taxes
            
            
            371,486
            
            
            
            374,954
            
            
            
            66,078
            
            
            
            (29,014
            )Net
                income (loss)
            
            $
            338,365
            
            
            $
            341,833
            
            
            $
            13,836
            
            
            $
            (81,256
            )Income
                (loss) per common share:Basic:
            
            $
            0.07
            
            
            $
            0.07
            
            
            $
            0.00
            
            
            $
            (0.02
            )Diluted:
            
            $
            0.06
            
            
            $
            0.06
            
            
            $
            0.00
            
            
            $
            (0.02
            )Weighted
                average shares outstanding:Basic:
            
            
            4,579,846
            
            
            
            4,579,846
            
            
            
            4,578,606
            
            
            
            4,578,606Diluted:
            
            
            5,127,026
            
            
            
            5,302,026
            
            
            
            5,138,556
            
            
            
            4,578,606


12
 ***Contents***




Consolidated
      Statement of Cash Flows


(Unaudited)




For The Six Months EndedRestated
            
            
            As
                Previously
              Reported2006
            
            
            2006Net
                income (loss)
            
            $
            13,836
            
            
            $
            (81,256
            )Inventory
            
            
            (1,547,010
            )
            
            
            (1,451,918
            )





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




The
      Company




Colonial
      Commercial Corp. (“Colonial”)
      is a New York corporation, which was incorporated on October 28, 1964. Unless
      otherwise indicated, the term “Company” refers to Colonial Commercial Corp. and
      its consolidated subsidiaries. The Company’s operations are conducted through
      its wholly-owned subsidiaries, Universal Supply Group, Inc. (“Universal”), The
      RAL Supply Group, Inc. (“RAL”) and American/Universal Supply, Inc.
      (“American”).





Forward-Looking
      Statements





This
      report on Form 10-Q contains
      forward-looking statements relating to such matters as anticipated financial
      performance and business prospects.  When used in this report, the
      words, “anticipates,” “expects,” “believes,” “may,” “intends,” and similar
      expressions are intended to be among the statements that identify
      forward-looking statements.   From time to time, the Company may
      also publish forward-looking statements.  The Private Securities
      Litigation Reform Act of 1995 provides a safe harbor for forward-looking
      statements.  Forward-looking statements involve risks and
      uncertainties, including, but not limited to, the consummation of certain events
      referred to in this report, 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.





13
 ***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.





In
      addition, we are periodically faced
      with uncertainties, the outcomes of which are not within our control and will
      not be known for prolonged periods of time.





We
      believe the following to be critical
      accounting policies that affect the most significant estimates and judgments
      used in the preparation of our consolidated financial statements:





*Principles
      of Consolidation*





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





*Revenue
      Recognition*





Revenue
      for the Company primarily consists of sales of heating, ventilation and air
      conditioning equipment, climate control systems, plumbing fixtures and supplies
      and appliances. The Company recognizes revenue after shipment of products has
      occurred in accordance with the shipping terms.  There are no further
      obligations on the part of the Company subsequent to revenue recognition, except
      for returns of defective products from the Company’s customers, which are
      covered under the manufacturer’s warranty.  The Company will receive a
      vendor credit from the manufacturer related to the warranted product in
      question, at which time credits are issued to the customer.  The
      Company does not provide a warranty on products sold; rather the warranty is
      provided by the manufacturer.





14
 ***Contents***





*Accounts
      Receivable*





Accounts
      receivable consist of trade
      receivables recorded at original invoice amount, less an estimated allowance
      for
      uncollectible accounts. Trade credit is generally extended on a short-term
      basis; thus trade receivables generally do not bear interest. However, a service
      charge may be applied to receivables that are past due. These service charges
      are not recognized until collected, and are then included in other
      income.  Trade receivables are periodically evaluated for
      collectibility based on past credit history with customers and their current
      financial condition. Changes in the estimated collectibility of trade
      receivables are recorded in the results of operations for the period in which
      the estimate is revised. Trade receivables that are deemed uncollectible are
      offset against the allowance for uncollectible accounts. The Company generally
      does not require collateral for trade receivables.





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.  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.





*Inventory*





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





Distribution
      costs of incoming freight,
      purchasing, receiving, inspection, warehousing and handling costs are included
      in selling, general and administrative expenses.  Such costs were
      $131,238 and $87,368 for the quarter ended June 30, 2007 and 2006, respectively
      and $255,753 and $191,307 for the six months ended June 30, 2007 and 2006,
      respectively.





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.





*Vendor
      Rebates*





The
      Company has arrangements with
      several vendors that provide rebates payable when the Company achieves any
      of a
      number of measures, generally related to volume level of
      purchases.  The Company accounts for such rebates as a reduction of
      inventory until sale of the product, at which time such rebates are reflected
      as
      a reduction of cost of sales in the consolidated statements of
      income.  Throughout the year, the Company estimates the amount of
      rebate based on estimates of purchases to date relative to the purchase levels
      that mark the progress toward earning the rebate.  The Company
      continually revises these estimates of earned vendor rebates based on actual
      purchase levels.





15
 ***Contents***





The
      Company restated its Annual Report
      on Form 10-K/A for the year ended December 31, 2006 on May 21, 2007 to correct
      previously improper accounting for vendor rebates.  Due to the
      adjustment, 2007 10-Q filings will be compared to 2006 figures with the
      described vendor rebate adjustment and therefore will not be consistent with
      the
      2006 quarterly information previously presented in the Company’s 10-Q filings
      for the fiscal year ended 2006.





The
      adjustment for the quarter ended
      June 30, 2006 included a decrease in gross profit of $3,468 from $5,440,933
      to a
      restated gross profit of $5,437,465, which resulted in a net income adjustment
      from $341,833 to a restated net income of $338,365.  Earnings per
      common share remained unchanged at $0.07 basic and $0.06 diluted per common
      share.





The
      adjustment for the six months ended
      June 30, 2006 included an increase in gross profit of $95,092 from $10,027,700
      to a restated gross profit of $10,122,792, which resulted in a net income of
      $13,836 from a net loss of $81,256.  Earnings per common share, basic
      and diluted, were restated to $0.00 per common share from $(0.02) per common
      share.  The adjustment reduced the carrying value of inventory at June
      30, 2006 by $224,430.





*Property
      and Equipment*





Property and equipment are stated at cost.  Depreciation is calculated
      on the straight line method over the estimated useful lives of the assets as
      follows:





Computer
                hardware and software
            3-5
                yearsFurniture
                and fixtures
            5
                yearsAutomobiles
            3-5
                yearsShowroom
                fixtures and displays
            3
                years





Leasehold
      improvements are amortized
      over the shorter of the lease term or the estimated useful life of the
      asset.





*Income
      Taxes*





In
      June 2006, the FASB issued FASB
      Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*-an
      interpretation FASB No. 109 (“FIN 48”), which prescribes accounting for and
      disclosure of uncertainty in tax positions.  This interpretation
      defines the criteria that must be met for the benefits of a tax position to
      be
      recognized in the financial statements and the measurement of tax benefits
      recognized.  The provisions of FIN 48 are effective as of the
      beginning of the Company’s 2007 fiscal year, with the cumulative effect of the
      change in accounting principle recorded as an adjustment to opening retained
      earnings.





16
 ***Contents***





The
      Company adopted the provisions of
      FIN 48 on January 1, 2007.  Under FIN 48, tax positions must meet
      a “more-likely-than-not” recognition threshold at the effective date to be
      recognized upon the adoption of FIN 48 and in subsequent periods.  The
      adoption of FIN 48 had an immaterial impact on the Company’s consolidated
      financial position and did not result in unrecognized tax benefits being
      recorded.  Accordingly, no corresponding interest and penalties have
      been accrued.  The Company files income tax returns in the U.S.
      federal jurisdiction and various states. There are currently no federal or
      state
      income tax examinations underway for these jurisdictions.  The Company
      is no longer subject to U.S. federal income tax examinations by the Internal
      Revenue Service and state and local tax authorities for tax years before
      2002.  The Company does, however, have prior year net operating losses
      which remain open for examination.





*Deferred
      Income Tax Asset*





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.





*Goodwill
      and Other Intangible Assets*





Statement
      of Financial Accounting
      Standards (SFAS) 142, "Goodwill and Other Intangible Assets," requires that
      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.





Results
      of Operations For the Quarter Ended June 30, 2007 and 2006





Sales
      increased by 21.9%, or
      $3,972,757, to $22,128,569 for the quarter ended June 30, 2007 from $18,155,812
      for the same period in 2006.  The increase in sales is primarily a
      result of sales of appliances in 2007 that the Company was not offering until
      September 2006, increases in our commercial and residential air conditioning
      equipment sales, along with an increase in our commercial control systems
      business.





17
 ***Contents***





Gross
      profit increased by 12.2%, or
      $665,971, to $6,103,436 for the quarter ended June 30, 2007 from $5,437,465
      for
      the same period in 2006.  Gross profit expressed as a percentage of
      sales decreased by 2.3% to 27.6% in 2007 compared to 29.9% for the comparable
      period in 2006.  The decrease in the percentage of gross profit is
      primarily the result of a change in product mix, for example, selling more
      lower-margin high volume products such as residential air conditioning
      equipment, and the sale of appliances which the Company was not offering until
      September 2006, without a corresponding increase in sales of higher-margin
      products such as showroom plumbing and fixture sales. Cost of sales excludes
      the
      distribution costs of incoming freight, purchasing, receiving, inspection,
      warehousing and handling costs, as these costs are included in our selling,
      general and administrative expenses.  Our gross margins may not be
      comparable to those of other entities since some entities include these
      distribution costs in the cost of sales.  These distribution costs
      were $131,238 and $87,368 for the quarter ended June 30, 2007 and 2006,
      respectively.





Operating
      income increased by 14.7%, or
      $94,733, to $738,992 for the quarter ended June 30, 2007 from $644,259 for
      the
      same period in 2006.  This percentage increase in operating income
      reflects the effect of the difference between the increase in gross profit
      of
      12.2% compared to the increase in selling, general and administrative expenses
      of 11.9%.  The increase in selling, general and administrative
      expenses was $571,238, to $5,364,444 for the quarter ended June 30, 2007 from
      $4,793,206 for the same period in 2006. The increase in selling, general and
      administrative expense is primarily due to staffing, marketing and advertising
      expenses related to the sales of appliances in 2007 that the Company was not
      offering until September 2006 and an increase in the provision for doubtful
      accounts.  Additionally, the Company incurred additional expenses of
      $110,000 relating to its new branch located in the Albany, New York area which
      opened on April 10, 2007.





Pre-tax
      income increased by 22.8%, or
      $84,731, to $456,217 for the quarter ended June 30, 2007 from $371,486 for
      the
      same period in 2006.Net interest expense increased by 7.4%, or $25,014, to
      $361,254 for the quarter ended June 30, 2007 from $336,240 for the same period
      in 2006.  The net interest expense increase is primarily the result of
      higher average interest rates and increased borrowings under the credit
      line.  The Company used its increased borrowings both to access
      favorable payment terms with its vendors and to finance higher inventory levels
      and accounts receivable related to the increased sales of air conditioning
      products in the second quarter of 2007.





The
      Company’s income tax expense for
      the quarter ended June 30, 2007 was $49,222 compared to $33,121 for the same
      period in 2006.  The Company records state income tax expense based on
      year-to-date profit of the Company’s 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 net income increased by
      20.3%, or $68,630, to $406,995 for the quarter ended June 30, 2007, compared
      to
      net income of $338,365 for the same period in 2006. The increase in net income
      is primarily the result of the effect of increased sales and gross margin
      dollars offset by a lesser increase in selling, general and administrative
      expenses.





18
 ***Contents***





Results
      of Operations For the Six Months Ended June 30, 2007 and 2006





Sales
      increased by 15.5%, or
      $5,130,776, to $38,170,801 for the six months ended June 30, 2007 from
      $33,040,025 for the same period in 2006.  The increase in sales is
      primarily a result of sales of appliances in 2007 that the Company was not
      offering until September 2006, increases in our commercial and residential
      air
      conditioning equipment sales, along with an increase in our commercial control
      systems business, offset by reduced sales of our showroom plumbing
      fixtures.





Gross
      profit increased by 8.4%, or
      $852,146, to $10,974,938 for the six months ended June 30, 2007 from $10,122,792
      for the same period in 2006.  Gross profit expressed as a percentage
      of sales decreased by 1.8% to 28.8% in 2007 compared to 30.6% for the comparable
      period in 2006.  The decrease in the percentage of gross profit is
      primarily the result of a change in product mix, for example, selling more
      lower-margin high volume products such as residential air conditioning
      equipment, and the sale of appliances which the Company was not offering until
      September 2006, without a corresponding increase in sales of higher-margin
      products such as showroom plumbing and fixture sales. Cost of sales excludes
      the
      distribution costs of incoming freight, purchasing, receiving, inspection,
      warehousing and handling costs, as these costs are included in our selling,
      general and administrative expenses.  Our gross margins may not be
      comparable to those of other entities since some entities include these
      distribution costs in the cost of sales.  These distribution costs
      were $255,753 and $191,307 for the six months ended June 30, 2007 and 2006,
      respectively.





Operating
      income increased by 8.6%, or
      $49,164, to $621,888 for the six months ended June 30, 2007 from $572,724 for
      the same period in 2006.  This percentage increase in operating income
      reflects the effect of the difference between the increase in gross profit
      of
      $852,146 compared to the increase in selling, general and administrative
      expenses.  The increase in selling, general and administrative
      expenses was $802,982, to $10,353,050 for the six months ended June 30, 2007
      from $9,550,068 for the same period in 2006.  The increase in selling,
      general and administrative expense is primarily due to staffing, marketing
      and
      advertising expenses related to the sales of appliances in 2007 that the Company
      was not offering until September 2006.  Additionally, the Company
      incurred additional expenses of $115,000 relating to its new branch located
      in
      the Albany, New York area which opened on April 10, 2007.





Pre-tax
      income increased by 5.4%, or
      $3,591, to $69,669 for the six months ended June 30, 2007 from $66,078 for
      the
      same period in 2006.Net interest expense increased by 9.3%, or $59,394, to
      $695,296 for the six months ended June 30, 2007 from $635,902 for the same
      period in 2006.  The net interest expense increase is primarily the
      result of higher average interest rates and increased borrowings under the
      credit line.  The Company used its increased borrowings both to access
      favorable payment terms with its vendors and to finance higher inventory levels
      and accounts receivable related to increased appliance sales as well as
      increased air conditioning sales in the second quarter of 2007.





The
      Company’s income tax expense for
      the six months ended June 30, 2007 was $52,613 compared to $52,242 for the
      same
      period in 2006.  The Company records state income tax expense based on
      year-to-date profit of the Company’s subsidiaries and records federal
      alternative minimum tax expense as the Company utilizes its net operating loss
      carryforwards to offset any federal taxes due.





19
 ***Contents***





The
      Company’s net income increased by
      23.3%, or $3,220, to $17,056 for the six months ended June 30, 2007, compared
      to
      net income of $13,836 for the same period in 2006.  The increase in
      net income is primarily the result of the effect of increased sales and gross
      margin dollars offset by a lesser increase in selling, general and
      administrative expenses.





The
      following table summarizes
      information derived from the Company’s consolidated statements of income
      expressed as a percentage of sales for the quarter and six months ended June
      30,
      2007 and 2006.





For
                the Quarter
              Ended
                June 30,
            
            
            For
                the Six Months
              Ended
                June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006Sales
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Cost
                of sales
            
            
            72.4
            
            
            
            70.1
            
            
            
            71.2
            
            
            
            69.4Gross
                profit
            
            
            27.6
            
            
            
            29.9
            
            
            
            28.8
            
            
            
            30.6Selling,
                general and administrative expenses
            
            
            24.3
            
            
            
            26.3
            
            
            
            27.2
            
            
            
            28.9Operating
                income
            
            
            3.3
            
            
            
            3.6
            
            
            
            1.6
            
            
            
            1.7Other
                income
            
            
            0.4
            
            
            
            0.4
            
            
            
            0.4
            
            
            
            0.4Interest
                expense, net
            
            
            (1.6
            )
            
            
            (1.9
            )
            
            
            (1.8
            )
            
            
            (1.9
            )Income
                before taxes
            
            
            2.1
            
            
            
            2.1
            
            
            
            0.2
            
            
            
            0.2Income
                taxes
            
            
            (0.3
            )
            
            
            (0.2
            )
            
            
            (0.2
            )
            
            
            (0.2
            )Net
                income
            
            
            1.8
            %
            
            
            1.9
            %
            
            
            0.0
            %
            
            
            0.0
            %





Liquidity
      and Capital Resources





The
      Company has a total secured loan facility of $15,000,000 pursuant to a credit
      and security agreement (“Agreement”) with Wells Fargo Business Credit, Inc.
      (“Wells”) consisting of a revolving line of credit which expires August 1,
      2010.  The revolving credit line bears interest at .25% below
      prime.  At June 30, 2007, the Company had a standby letter of credit,
      which expires on July 31, 2008.  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
      $100,000.  Availability under the revolving credit line was $160,017
      as of June 30, 2007 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 $14,439,983 as of
      June 30, 2007.  The interest rate on the revolving credit facility as
      of June 30, 2007 was 8.0%.





The
      Company believes that the credit
      facility is sufficient to finance its current operating
      needs.  However, the business of the Company would be materially and
      adversely affected if the bank demands payment of the loan and the Company
      is
      unable to refinance the loan.





As
      of
      June 30, 2007, the Company had $1,104,993 in cash compared with $482,251 at
      December 31, 2006.





20
 ***Contents***





Net
      cash
      provided by operating activities was $66,960 for the six months ended June
      30,
      2007.  The net cash provided by operating activities for the 2007 period is
      primarily a result of cash provided by net income of $17,056 and non-cash
      charges of $437,694, offset by operating assets and liabilities of $387,790.
       The increase in accounts receivable of $1,551,840 was primarily a result
      of increased sales during the second quarter.  Accounts payable
      increased due to additional inventory purchases to support increased
      sales.





Cash
      flows used in investing activities were $242,975 during the quarter ended June
      30, 2007 due to purchases of equipment.





Cash
      flows provided by financing activities of $798,757 consisted of $824,287 in
      borrowings under the credit facility-revolving credit and $13,000 received
      from
      the exercise of stock options.  Cash flows used in financing
      activities consisted of $38,530 for repayments of notes payable.





**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 .25% and a
      $750,000 note to Goldman Associates of NY, Inc. which bears interest at
      prime.  A hypothetical 10% adverse change in such rates would reduce
      the pre-tax earnings and cash flows by approximately $122,000 over a one-year
      period, assuming the borrowing level remains consistent with the outstanding
      borrowings as of June 30, 2007.  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.  Controls and
      Procedures**





a.
            Evaluation
                of Disclosure Controls and
                Procedures





Prior
      to March 31, 2007, an evaluation
      was carried out under the supervision and with the participation of our
      management, including our Chief Executive Officer and Chief Financial Officer,
      of the effectiveness of the design and the operation of our "disclosure controls
      and procedures" (as such term is defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934) as of March 31, 2007 (“Evaluation Date”). Based on this
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that, as of the Evaluation Date, the disclosure controls and procedures were
      reasonably designed and effective to ensure that (i) information required to
      be
      disclosed by us in the reports we file or submit under the Securities Exchange
      Act of 1934 was recorded, processed, summarized and reported within the time
      periods specified in the SEC's rules and forms, and (ii) such information was
      accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, as appropriate to allow timely decisions
      regarding required disclosure.





21
 ***Contents***





On
      May 21, 2007, following consultation
      with, and upon recommendation of the Company’s management and Audit Committee,
      the Board of Directors of the Company determined that certain vendor rebates
      should be recorded as an adjustment to the cost of the vendors’ product and
      included as a reduction of cost of sales when recognized in the income
      statement.  Previously, some vendor rebates were recognized as income,
      not as a reduction of costs when sold.  The Company adjusted certain
      vendor rebates using the cumulative effect transition method pursuant to the
      guidance contained in SAB 108.  Accordingly, the Company concluded
      that its disclosure controls and procedures in connection with the
      interpretation of accounting pronouncements were not effective as of March
      31,
      2007.





On
      July 23, 2007, the Audit Committee
      and management of the Company concluded that the Company had improperly applied
      the guidance in SAB 108, specifically, the effect on materiality of the
      incorrect treatment of vendor rebates on net income for
      2004.  Accordingly, the Company has again concluded that this is a
      result of material weaknesses in our internal controls over financial reporting
      and the Company’s controls and procedures in connection with the interpretation
      of accounting pronouncements were not effective as of June 30,
      2007.  In connection with the review of its accounting for vendor
      rebates, the Company’s management believed that it obtained the necessary
      understanding of the accounting and reporting for such
      transactions.  The Company continues to develop controls and
      procedures and plans to implement additional controls and procedures sufficient
      to accurately report our financial performance in the foreseeable
      future.  The Company has also augmented its finance and accounting
      staff by retaining an experienced independent consultant to enhance the
      Company’s financial accounting and reporting capabilities.





b.
            Changes
                in Internal Controls





Other
      than described above, there have
      been no significant changes in the Company’s internal controls or in other
      factors that could significantly affect internal controls subsequent to June
      30,
      2007.





**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.**





**Item
      4.  Submission of Matters to a Vote of Security
      Holders**





a.
            An
                Annual Meeting of Shareholders was held on June 12,
                2006.





b.
            On
                June 12 2006, 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,
                2007.





22
 ***Contents***




**PROPOSAL**
            
            **FOR**
            
            
            **AGAINST**
            
            
            **ABSTAINED**For
                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
            
            
            4,632,820
            
            
            
            -
            
            
            
            18,484Melissa
                Goldman-Williams
            
            
            4,575,737
            
            
            
            -
            
            
            
            75,567Michael
                Goldman
            
            
            4,576,883
            
            
            
            -
            
            
            
            74,421Stuart
                H. Lubow
            
            
            4,633,258
            
            
            
            -
            
            
            
            18,046Ronald
                H. Miller
            
            
            4,632,313
            
            
            
            
            
            
            
            18,991William
                Pagano
            
            
            4,576,664
            
            
            
            -
            
            
            
            74,640To
                ratify the selection of Eisner LLP as independent public accountants
                of
                the Company for the fiscal year ending December 31, 2007:
            
            
            4,584,417
            
            
            
            8,987
            
            
            
            57,900





**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.




23
 ***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
                14, 2007
            COLONIAL
                COMMERCIAL CORP./s/
                William PaganoWilliam
                Pagano,Chief
                Executive Officer/s/
                William SalekWilliam
                Salek,Chief
                Financial Officer