**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 ý
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                  EXCHANGE ACT OF 1934For
                  the quarterly period ended **September 30,
                  2007**ORo
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                  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
x                                           No  o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 Large
                    accelerated filer o
                Accelerated
                    filer  x
                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 November 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**
  CONTENTS
 
 PART
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              
              Financial
                  Statements
              PageCondensed
                  Consolidated Balance Sheets as of September 30,
                  2007 (Unaudited) and December 31, 2006
              1Condensed
                  Consolidated Statements of Operations (Unaudited)
                  for the Three Months and Nine Months Ended September 30, 2007 and
                  2006
              2Condensed
                  Consolidated Statements of Cash Flows
                  (Unaudited) for the Nine Months Ended September 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
              16Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              28Item
                  4.
              
              Controls
                  and Procedures
              29PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              
              Legal
                  Proceedings
              29Item
                  6.
              
              Exhibits
              29
  ***Table
            of Contents***
  **PART
        I.  FINANCIAL INFORMATION**
 Item
        1.  Financial Statements
 
 COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Condensed
        Consolidated Balance Sheets
 
 September
                  30,
              
              
              December
                  31,2007
              
              
              2006(Unaudited)AssetsCurrent
                  assets:Cash
              
              $
              587,416
              
              
              $
              482,251Accounts
                  receivable, net of allowance for doubtful accounts of $254,913
                  in 2007 and
                  $212,043 in 2006
              
              
              11,249,619
              
              
              
              9,069,301Inventory
              
              
              17,730,758
              
              
              
              12,854,317Prepaid
                  expenses and other current assets
              
              
              1,273,521
              
              
              
              1,057,099Deferred
                  tax asset - current portion
              
              
              557,500
              
              
              
              420,000Total
                  current assets
              
              
              31,398,814
              
              
              
              23,882,968Property
                  and equipment
              
              
              1,846,003
              
              
              
              1,512,666Goodwill
              
              
              2,044,745
              
              
              
              1,628,133Other
                  intangibles
              
              
              12,000
              
              
              
              3,500Other
                  assets - noncurrent
              
              
              144,072
              
              
              
              202,177Deferred
                  tax asset - noncurrent
              
              
              1,151,000
              
              
              
              1,288,500$
              36,596,634
              
              
              $
              28,517,944Liabilities
                  and Stockholders' EquityCurrent
                  liabilities:Trade
                  payables
              
              $
              7,594,038
              
              
              $
              4,719,160Accrued
                  liabilities
              
              
              1,991,811
              
              
              
              1,975,175Income
                  taxes payable
              
              
              20,443
              
              
              
              1,630Borrowings
                  under credit facility - revolving credit
              
              
              18,394,155
              
              
              
              13,615,696Notes
                  payable - current portion; includes related party notes of $30,000
                  in 2007
                  and 2006
              
              
              230,745
              
              
              
              136,539Total
                  current liabilities
              
              
              28,231,192
              
              
              
              20,448,200Convertible
                  notes payable, includes related party notes of $325,000 in 2007
                  and
                  2006
              
              
              525,000
              
              
              
              525,000Notes
                  payable, excluding current portion; includes related party notes
                  of
                  $711,250 in 2007 and $703,750 in 2006
              
              
              900,504
              
              
              
              792,394Total
                  liabilities
              
              
              29,656,696
              
              
              
              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 and4,593,680
                  in 2006 shares issued and outstanding
              
              
              232,284
              
              
              
              229,684Additional
                  paid-in capital
              
              
              10,741,879
              
              
              
              10,707,791Accumulated
                  deficit
              
              
              (4,057,600
              )
              
              
              (4,208,500
              )Total
                  stockholders' equity
              
              
              6,939,938
              
              
              
              6,752,350$
              36,596,634
              
              
              $
              28,517,944
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  1
 ***Table
            of Contents***
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Condensed
        Consolidated Statements of Operations
 (Unaudited)
 
 For
                  The Three Months Ended
              
              
              For
                  The Nine Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006(Restated)
              
              
              
              
              
              (Restated)Net
                  sales
              
              $
              20,522,208
              
              
              $
              19,217,556
              
              
              $
              58,693,009
              
              
              $
              52,257,581Cost
                  of sales
              
              
              14,541,045
              
              
              
              13,558,135
              
              
              
              41,736,908
              
              
              
              36,475,368Gross
                  profit
              
              
              5,981,163
              
              
              
              5,659,421
              
              
              
              16,956,101
              
              
              
              15,782,213Selling,
                  general and administrative expenses
              
              
              5,506,431
              
              
              
              4,857,533
              
              
              
              15,859,481
              
              
              
              14,407,601Operating
                  income
              
              
              474,732
              
              
              
              801,888
              
              
              
              1,096,620
              
              
              
              1,374,612Other
                  income
              
              
              74,116
              
              
              
              63,707
              
              
              
              217,193
              
              
              
              192,963Interest
                  expense, net; includes related party interest of $25,632 and
                  $26,448 for the three months ended September 30, 2007 and 2006,
                  respectively, and $77,366 and $77,858 for nine months ended September
                  30,
                  2007 and 2006, respectively
              
              
              (385,766
              )
              
              
              (359,214
              )
              
              
              (1,081,063
              )
              
              
              (995,116
              )Income
                  before income taxes
              
              
              163,082
              
              
              
              506,381
              
              
              
              232,750
              
              
              
              572,459Income
                  tax expense
              
              
              29,237
              
              
              
              30,839
              
              
              
              81,850
              
              
              
              83,081Net
                  Income
              
              $
              133,845
              
              
              $
              475,542
              
              
              $
              150,900
              
              
              $
              489,378Income
                  per common share:Basic
              
              $
              0.03
              
              
              $
              0.10
              
              
              $
              0.03
              
              
              $
              0.11Diluted
              
              $
              0.03
              
              
              $
              0.09
              
              
              $
              0.03
              
              
              $
              0.10Weighted
                  average shares outstanding:Basic
              
              
              4,645,680
              
              
              
              4,592,968
              
              
              
              4,645,490
              
              
              
              4,574,227Diluted
              
              
              5,131,371
              
              
              
              5,301,782
              
              
              
              5,131,748
              
              
              
              5,125,467
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  2
 ***Table
            of Contents***
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Condensed
        Consolidated Statements of Cash Flows
 (Unaudited)
 
 For
                  The Nine Months Ended2007
              
              
              2006(Restated)Cash
                  flows from operating activities:Net
                  income
              
              $
              150,900
              
              
              $
              489,378Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activities:Stock-based
                  compensation
              
              
              23,688
              
              
              
              -Provision
                  for doubtful accounts
              
              
              260,292
              
              
              
              116,035Depreciation
              
              
              387,642
              
              
              
              340,216Amortization
                  of intangibles
              
              
              1,500
              
              
              
              7,334Accretion
                  of debt discount
              
              
              28,125
              
              
              
              28,125Changes
                  in operating assets and liabilities, net of effects of purchase
                  acquisitionAccounts
                  receivable
              
              
              (919,418
              )
              
              
              (1,005,649
              )Inventory
              
              
              (1,312,503
              )
              
              
              (1,950,571
              )Prepaid
                  expenses and other current assets
              
              
              (200,731
              )
              
              
              (190,328
              )Other
                  assets - noncurrent
              
              
              58,105
              
              
              
              17,780Trade
                  payables
              
              
              1,927,201
              
              
              
              731,864Accrued
                  liabilities
              
              
              (2,248
              )
              
              
              (41,299
              )Income
                  taxes payable
              
              
              18,813
              
              
              
              (106
              )Net
                  cash provided by (used in) operating activities
              
              
              421,366
              
              
              
              (1,457,221
              )Cash
                  flows from investing activities:Cash
                  payments for acquisition of S&A Supply Inc., net of cash
                  acquired
              
              
              (4,703,375
              )Additions
                  to property and equipment
              
              
              (339,461
              )
              
              
              (269,514
              )Net
                  cash used in investing activities
              
              
              (5,042,836
              )
              
              
              (269,514
              )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 $0.00 in
                  2007 and
                  $30,289 in 2006
              
              
              (64,824
              )
              
              
              (83,734
              )Issuance
                  of notes payable
              
              
              -
              
              
              
              13,073Borrowings
                  under credit facility - term loan/overadvance
              
              
              -
              
              
              
              (562,977
              )Borrowings
                  under credit facility - revolving credit, net
              
              
              4,778,459
              
              
              
              2,529,091Net
                  cash provided by financing activities
              
              
              4,726,635
              
              
              
              1,903,453Increase
                  in cash
              
              
              105,165
              
              
              
              176,718Cash
                  - beginning of period
              
              
              482,251
              
              
              
              613,456Cash
                  - end of period
              
              $
              587,416
              
              
              $
              790,174
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  3
 ***Table
            of Contents***
  **COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES**
 Notes
        to
        Condensed Consolidated Financial Statements
 September
        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 September 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 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/A (Amendment Number 2) for the year ended
        December 31, 2006.
  We
        have one industry segment –
wholesale distribution of heating, ventilation, air conditioning equipment,
        plumbing and electrical fixtures, appliances, and related
        accessories.
  Inventory
        is comprised of finished
        goods.
  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.
  4
 ***Table
            of Contents***
  The
        following table summarizes information about stock options at September 30,
        2007:
  Options
                    Outstanding and ExercisableWeighted AverageRange of
                
                
                
                
                
                Remaining
                
                
                Weighted Average
                
                
                AggregateExercise Prices
                
                
                Shares
                
                
                Contractual
                    Life
                
                
                Exercise
                    Price
                
                
                Intrinsic Value$
                .25
                
                
                
                22,000
                
                
                
                1.72
                
                
                $
                .25$
                1.85
                
                
                
                30,000
                
                
                
                9.19
                
                
                $
                1.8552,000
                
                
                
                
                
                
                $
                1.17
                
                
                $
                24,200Options
                    Outstanding and Non-exercisable$
                1.85
                
                
                
                45,000
                
                
                
                9.19
                
                
                $
                1.85
                
                
                $
                0
  For
        the quarters ended September 30,
        2007 and 2006, the amount of stock based compensation was $6,676 and $0,
        respectively.  For the nine months ended September 30, 2007 and 2006,
        the amount of stock based compensation was $23,688 and $0,
        respectively.  The aggregate intrinsic value of options exercised
        during the nine months ended September 30, 2007 was $85,800.  No stock
        options were exercised during the quarter ended September 30, 2007.
  3.        
            Equity Transactions
  During
        the quarter ended September 30,
        2007, no shares of redeemable preferred stock were converted into common
        stock.  During the quarter ended September 30, 2006, a total of 1,323
        shares of redeemable preferred stock were converted into 1,323 shares of
        common
        stock.
  During
        the nine months ended September
        30, 2007, no shares of redeemable preferred stock were converted into common
        stock.  During the nine months ended September 30, 2006, a total of
        17,120 shares of redeemable preferred stock were converted into 17,120 shares
        of
        common stock.
  4. 
        Supplemental Cash Flow Information
  The
        following is supplemental
        information relating to the consolidated statements of cash flows:
  For
                  the Nine Months EndedSeptember 30,
                  2007
              
              
              September 30,
                  2006Cash
                  paid during the period for:Interest
              
              $
              1,034,762
              
              
              $
              946,646Income
                  taxes
              
              $
              43,207
              
              
              $
              81,954
  5
 ***Table
            of Contents***
  5.          
          Net Income Per Common Share
  For
                  the Quarter Ended
                September
                  30,
              
              
              For
                  the Nine Months Ended
                September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006(Restated)
              
              
              
              
              
              (Restated)Net
                  Income (numerator for basic income per share)
              
              $
              133,845
              
              
              $
              475,542
              
              
              $
              150,900
              
              
              $
              489,378Interest
                  expense on convertible notes (net of tax)
              
              
              -
              (1)
              
              
              13,558
              
              
              
              -
              (1)
              
              
              -
              (1)Adjusted
                  Net Income (numerator for diluted income per share)
              
              $
              133,845
              
              
              $
              489,100
              
              
              $
              150,900
              
              
              $
              489,378Weighted
                  average common shares(denominator
                  for basic income per share)
              
              
              4,645,680
              
              
              
              4,592,968
              
              
              
              4,645,490
              
              
              
              4,574,227Effect
                  of dilutive securities:Convertible
                  preferred stock
              
              
              467,500
              
              
              
              468,212
              
              
              
              467,500
              
              
              
              474,083Convertible
                  notes
              
              
              -
              (1)
              
              
              175,000
              
              
              
              -
              (1)
              
              
              -
              (1)Stock
                  options
              
              
              18,191
              
              
              
              65,602
              
              
              
              18,758
              
              
              
              77,157Weighted
                  average common and potential common sharesoutstanding
                  (denominator for diluted income per share)
              
              
              5,131,371
              
              
              
              5,301,782
              
              
              
              5,131,748
              
              
              
              5,125,467Basic
                  net income per share
              
              $
              0.03
              
              
              $
              0.10
              
              
              $
              0.03
              
              
              $
              0.11Diluted
                  net income per share
              
              $
              0.03
              
              
              $
              0.09
              
              
              $
              0.03
              
              
              $
              0.10
  (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
  On
        September 10, 2007, the Company,
        through S&A Purchasing Corp., 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.  The transaction was effected pursuant to an Asset Purchase
        Agreement dated as of September 10, 2007 (the “APA”).
  6
 ***Table
            of Contents***
  In
        connection with this acquisition,
        the Company amended its credit facility 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 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
        interest rate will be reduced to prime minus 0.50%, or LIBOR plus 21⁄4%, if the
        Company reports net income (as defined) of more than $1 million for the fiscal
        year ending December 31, 2007.  The acquisition of S&A Supply will
        impact the outstanding amount under the Company’s credit facility and its
        working capital.
  At
        September 30, 2007, the amount outstanding under the Company’s credit facility
        with Wells was $18,394,155, 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 $1,101,400
        as of September 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 September 30, 2007 was
        7.5%.
  The
        facility contains covenants that
        are determined annually and relate to the Company’s monthly and quarterly net
        income, quarterly cash flows, quarterly tangible net worth, and annual capital
        expenditures.  The facility also restricts the payment of dividends,
        subordinated debt and purchase of securities.  The continuation of the
        credit facility is conditioned upon the Company and Wells reaching agreement
        on
        the covenants.  While the Company and Wells have reached mutually
        agreeable covenants in the past, there is no assurance that they will be
        able to
        do so in the future.  As of September 30, 2007, the Company was in
        default of its quarterly minimum cash flow and net income covenants; however,
        Wells has waived this event of default.
  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.
  7
 ***Table
            of Contents***
  The
        Company understands that
        Predecessor and many other companies have been sued in the Superior Court
        of New
        Jersey (Middlesex County) by plaintiffs filing lawsuits alleging injury due
        to
        asbestos. Currently, there exist 92 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, 38
        filed
        actions in 2004, 15 filed actions in 2003, and two filed actions in 2002.
        There
        are 121 other plaintiffs that have had their actions dismissed and 11 other
        plaintiffs that have settled as of September 30, 2007 for a total of $3,327,500.
        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 $3,327,500 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.
  Based
        on advice of counsel, the Company
        believes that none of the litigation that was brought against the Company’s
        Universal subsidiary through September 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.
  8
 ***Table
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  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. 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 September
        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
        September 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.
  9
 ***Table
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  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 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 is not expected to have
        a material impact on the Company’s financial position, results of operations or
        cash flows.
  10
 ***Table
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  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 September 30, 2007 was $29,237 compared to $30,839 for
        the
        same period in 2006.  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 nine months ended September 30, 2007 was $81,850 compared to $83,081
        for the
        same period in 2006.  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.
  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.
  William
        Pagano, Chief Executive Officer and Director of the Company, 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 $52,370 and
        $35,711 in rent during the quarters ended September 30, 2007 and 2006,
        respectively.  The Company paid Pioneer Realty Holdings, LLC $115,095
        and $102,462 in rent during the nine months ended September 30, 2007 and
        2006,
        respectively.
  11
 ***Table
            of Contents***
  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, 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 September 30, 2007 and 2006, respectively, was $45,125
        and
        $13,775.  Professional fees paid to Oscar Folger’s law firm for the
        nine months ended September 30, 2007 and 2006, respectively, was $96,550
        and
        $73,676.  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
        September 30, 2007 and 2006, respectively, and $3,000 and $9,000 was paid
        to
        each of Oscar and Jeffrey Folger as part time employees of the Company for
        the
        nine months ended September 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.  Throughout the year, the Company estimates the amount of
        rebates 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 and again
        restated its Annual Report on Form 10-K/A (Amendment Number 2) for the year
        ended December 31, 2006 on August 27, 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
        September 30, 2006 included a decrease in gross profit of $53,905 from
        $5,713,326 to a restated gross profit of $5,659,421, which resulted in a
        net
        income adjustment from $529,447 to a restated net income of
        $475,542.  Earnings per share, basic and diluted, were restated to
        $0.10 and $0.09 per common share from $0.12 and $0.10 per common
        share.
  The
        adjustment for the nine months
        ended September 30, 2006 included an increase in gross profit of $41,187
        from
        $15,741,026 to a restated gross profit of $15,782,213, which resulted in
        a net
        income of $489,378 from a net income of $448,191.  Earnings per common
        share, basic and diluted, were restated to $0.11 and $0.10 per common share
        from
        $0.10 and $0.08 per common share.  The adjustment reduced the carrying
        value of inventory at September 30, 2006 by $278,335.
  12
 ***Table
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  The
        following tables isolate each of
        the restated amounts in the Company’s consolidated statement of operations for
        the quarter and nine months ended September 30, 2006 and consolidated statement
        of cash flows for the nine months ended September 30, 2006.
  Consolidated
                  Statement of Operations(Unaudited)For
                  The Three Months Ended
              
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              
              September
                  30As
                  Previously
              
              
              
              
              
              As
                  PreviouslyRestated
              
              
              Reported
              
              
              Restated
              
              
              Reported2006
              
              
              2006
              
              
              2006
              
              
              2006Cost
                  of Sales
              
              $
              13,558,135
              
              
              $
              13,504,230
              
              
              $
              36,475,368
              
              
              $
              36,516,555Gross
                  Profit
              
              
              5,659,421
              
              
              
              5,713,326
              
              
              
              15,782,213
              
              
              
              15,741,026Operating
                  income
              
              
              801,888
              
              
              
              855,793
              
              
              
              1,374,612
              
              
              
              1,333,425Income
                  before income taxes
              
              
              506,381
              
              
              
              560,286
              
              
              
              572,459
              
              
              
              531,272Net
                  income
              
              $
              475,542
              
              
              $
              529,447
              
              
              $
              489,378
              
              
              $
              448,191Income
                  per common share:Basic:
              
              $
              0.10
              
              
              $
              0.12
              
              
              $
              0.11
              
              
              $
              0.10Diluted:
              
              $
              0.09
              
              
              $
              0.10
              
              
              $
              0.10
              
              
              $
              0.08Weighted
                  average shares outstanding:Basic:
              
              
              4,592,968
              
              
              
              4,592,968
              
              
              
              4,574,227
              
              
              
              4,574,227Diluted:
              
              
              5,301,782
              
              
              
              5,301,782
              
              
              
              5,125,467
              
              
              
              5,300,467
 
 Consolidated
                  Statement of Cash Flows(Unaudited)For
                  The Nine Months EndedSeptember
                  30,As
                  PreviouslyRestated
              
              
              Reported2006
              
              
              2006Net
                  income
              
              $
              489,378
              
              
              $
              448,191Inventory
              
              
              (1,950,571
              )
              
              
              (1,909,384
              )
  13
 ***Table
            of Contents***
  12.           Acquisition
  On
        September 10, 2007, the Company,
        through S&A Purchasing Corp., 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 leading distributor of heating,
        electrical, and plumbing supplies in the western Massachusetts
        area.  The transaction was effected pursuant to an Asset Purchase
        Agreement dated as of September 10, 2007 (the “APA”).
  This
        acquisition will be operated as a
        wholly owned subsidiary of the Company and under the name of S&A Supply,
        Inc.  The acquisition expands our geographic trading area and adds
        electrical equipment and supplies to our product offerings.
  The
        acquisition was accounted for using
        the purchase method of accounting.  The Company’s financials
        statements for the period ended September 30, 2007 include the activity of
        S&A Supply from September 10, 2007 through September 30,
        2007.  The purchase price for the assets is equal to their book value
        as adjusted, plus $315,000, less assumed liabilities as adjusted. Based on
        estimates of book value at closing, the Company paid $4,602,675 and assumed
        liabilities totaling $1,225,133 at closing.  Additionally, direct
        acquisition costs of approximately $100,000 were incurred by the
        Company.  The APA provides for adjusting payments to be made on or
        about January 18, 2008. The purchase was financed out of the Company’s credit
        facility.
  In
        connection with the acquisition, the
        Company, through S&A Purchasing Corp. as lessee, entered into three 5-year
        lease agreements with affiliates of S&A Supply for two locations in Great
        Barrington, Massachusetts and one location in Pittsfield, Massachusetts for
        aggregate annual rentals of $180,000, plus real estate taxes and
        maintenance.  The Company also assumed a $1,425 month-to-month tenancy
        with a non-related party for a location in North Adams,
        Massachusetts.
  The
        Company also entered into
        employment agreements with Brian Mead and Adam Mead, minority shareholders
        of
        S&A Supply and its affiliates, and a consulting agreement with Nancy Mead,
        the majority shareholder of S&A Supply and its affiliates for an annual
        aggregate commitment of approximately $170,000 for salary, automotive expenses
        and other benefits, plus additional incentives if certain levels of
        profitability are achieved.  Said agreements expire on December 31,
        2010.
  The
        Company is in the process of
        obtaining a third party valuation of certain assets (including acquired
        intangible assets), as well as performing its own internal assessment of
        certain
        other assets and liabilities; thus the preliminary allocation of the purchase
        price will change, but we do not anticipate a material change.  The
        Company expects to complete its purchase price allocation in the first quarter
        of fiscal 2008.
  14
 ***Table
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  The
        following is the initial estimated
        preliminary purchase price allocation of the S&A Supply
        acquisition:
  Inventory
              
              $
              3,600,000Accounts
                  receivable
              
              
              1,500,000Other
                  current assets
              
              
              15,000Property
                  and equipment, net
              
              
              375,000Goodwill
              
              
              400,000Covenant
                  not to compete
              
              
              10,000Total
                  tangible and intangible assets acquired
              
              
              5,900,000Less
                  liabilities assumed:Current
                  liabilities
              
              
              1,050,000Long-term
                  liabilities
              
              
              135,000Total
                  liabilities
              
              
              1,185,000Net
                  Assets Acquired
              
              
              4,715,000
  Presented
        below are the unaudited pro
        forma financial results prepared under the assumption that the S&A Supply
        acquisition had been completed at the beginning of the same period
        presented:
  Pro
                  Forma Condensed Consolidated Operating Data(Unaudited)For
                  The Three Months Ended
              
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              
              September
                  302007
              
              
              2006
              
              
              2007
              
              
              2006Net
                  Sales
              
              $
              23,367,520
              
              
              $
              23,042,751
              
              
              $
              68,020,579
              
              
              $
              63,079,260Operating
                  income
              
              
              442,434
              
              
              
              896,995
              
              
              
              808,120
              
              
              
              1,288,177Net
                  income (loss)
              
              $
              36,975
              
              
              $
              490,984
              
              
              $
              (357,435
              )
              
              $
              171,867Income
                  (loss) per common share:Basic:
              
              $
              0.01
              
              
              $
              0.11
              
              
              $
              (0.08
              )
              
              $
              0.04Diluted:
              
              $
              0.01
              
              
              $
              0.09
              
              
              $
              (0.08
              )
              
              $
              0.03
  15
 ***Table
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  13.           Subsequent
        Event
  On
        November 2, 2007, the Company
        terminated Standstill Agreements dated June 21, 2004 between the Company
        and
        each of Michael Goldman, William Pagano, Bernard Korn, Rita Folger and one
        additional investor.  Michael Goldman is Chairman of the Board of the
        Company.  William Pagano is the Chief Executive Officer and a Director
        of the Company.  Bernard Korn resigned as Chief Executive Officer and
        Chairman of the Board of the Company on April 17, 2006.  Rita Folger
        is a more than 5% shareholder of the Company.
  The
        termination of the Standstill
        Agreement provides that officers, directors, and more than 5% shareholders
        remain required to obtain prior approval from the Company’s Counsel for each and
        every transaction, as blackout restrictions may apply.  A form copy of
        said termination letter is filed as Exhibit 4.01 to the Company’s Form 8-K filed
        on November 5, 2007.
  **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.”  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/A (Amendment Number 2) for the year ended December 31, 2006.
  As
        more specifically described above in
        Item 1, Note 12 titled “Acquisition,” on September 10, 2007 a newly
        formed subsidiary of the Company acquired the assets of S&A Supply, Inc.,
        including its name.  These operations are included in the financial
        reports of the Company for the period beginning September 10, 2007 and ending
        September 30, 2007. This acquisition will be operated as a wholly owned
        subsidiary of the Company and under the name of S&A Supply,
        Inc.  The acquisition expands our geographic trading area and adds
        electrical equipment and supplies to our product offerings.
  16
 ***Table
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  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.
  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”), American/Universal Supply, Inc. (“American”) and
        S&A Supply, Inc. (“S&A Supply”). We distribute heating, ventilating and
        air conditioning equipment (HVAC), parts and accessories, climate control
        systems, appliances, and plumbing and electrical fixtures and supplies, in
        New
        Jersey, New York, western Massachusetts and portions of eastern
        Pennsylvania.
  We
        supply the Amana air conditioning
        and heating equipment line in New Jersey (exclusive of Cape May and Cumberland
        counties), lower portions of New York State and western
        Massachusetts.  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, eight locations in New York State, three 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 and
        bathroom 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, and we also supply indoor air quality
        components and systems.
  Our
        in-house staff provides technical
        assistance and training to customers.  In some cases, we also use
        vendors’ representatives and outside services. We do not install any equipment
        or systems.
  17
 ***Table
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  In
        September 2006 we began to
        distribute appliances, such as washers and dryers, to appliance dealers
        primarily in New York, New Jersey, and portions of Connecticut, Delaware
        and
        Pennsylvania.
  Our
        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.  This business
        expansion, coupled with increased efficiency in operations, should add to
        our
        profitability and increase shareholder value.
  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.
  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.
  18
 ***Table
            of Contents***
  *Revenue
        Recognition*
  Revenue
        for the Company primarily consists of sales of heating, ventilation and air
        conditioning equipment, climate control systems, plumbing and electrical
        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.
  *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
        $143,457 and $114,189 for the quarter ended September 30, 2007 and 2006,
        respectively and $399,211 and $305,496 for the nine months ended September
        30,
        2007 and 2006, respectively.
  19
 ***Table
            of Contents***
  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.  Throughout the year, the Company estimates the amount of
        rebates 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 and again
        restated its Annual Report on Form 10-K/A (Amendment Number 2) for the year
        ended December 31, 2006 on August 27, 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
        September 30, 2006 included a decrease in gross profit of $53,905 from
        $5,713,326 to a restated gross profit of $5,659,421, which resulted in a
        net
        income adjustment from $529,447 to a restated net income of
        $475,542.  Earnings per share, basic and diluted, were restated to
        $0.10 and $0.09 per common share from $0.12 and $0.10 per common
        share.
  The
        adjustment for the nine months
        ended September 30, 2006 included an increase in gross profit of $41,187
        from
        $15,741,026 to a restated gross profit of $15,782,213, which resulted in
        a net
        income of $489,378 from a net income of $448,191.  Earnings per common
        share, basic and diluted, were restated to $0.11 and $0.10 per common share
        from
        $0.10 and $0.08 per common share.  The adjustment reduced the carrying
        value of inventory at September 30, 2006 by $278,335.
  20
 ***Table
            of Contents***
  *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.
  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
        2003.  The Company does, however, have prior year net operating losses
        which remain open for examination.
  21
 ***Table
            of Contents***
  *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
  *Results
        of Operations For the Quarter Ended September 30, 2007 and
        2006*
  Sales
        increased by 6.8%, or $1,304,652,
        to $20,522,208 for the quarter ended September 30, 2007 from $19,217,556
        for the
        same period in 2006.  The commencement of the appliance business, new
        branch opening in the Albany, New York area on April 10, 2007 and the
        acquisition of S&A Supply, Inc. on September 10, 2007, constituted new
        operations in the quarter ended September 30, 2007, all of which we did not
        have
        in the same period 2006.  Sales from these new operations were
        $2,000,089 for the quarter ended September 30, 2007.  Sales from
        continuing operations declined by 3.6%, or $695,437, from $19,217,556 to
        $18,522,119.  This decline in sales is attributed to reduced sales of
        heating equipment and accessories, which was negatively impacted by warmer
        than
        usual weather conditions in the month of September, a slower economy in the
        residential construction business, and economic conditions relating to consumer
        mortgage borrowing.
  22
 ***Table
            of Contents***
  Gross
        profit increased by 5.7%, or
        $321,742, to $5,981,163 for the quarter ended September 30, 2007 from $5,659,421
        for the same period in 2006.  Gross profit expressed as a percentage
        of sales decreased by 0.3% to 29.1% in 2007 compared to 29.4% 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 $143,457 and $114,189 for the quarter ended September 30, 2007 and 2006,
        respectively.
  Operating
        income decreased by 40.8%, or
        $327,156, to $474,732 for the quarter ended September 30, 2007 from $801,888
        for
        the same period in 2006.  This percentage decrease in operating income
        reflects the effect of the difference between the increase in gross profit
        of
        5.7% compared to the increase in selling, general and administrative expenses
        of
        13.4%.  The increase in selling, general and administrative expenses
        was $648,898, to $5,506,431 for the quarter ended September 30, 2007 from
        $4,857,533 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, additional expenses relating to the new branch
        located in the Albany, New York area which opened on April 10, 2007, an increase
        in costs related to the operation of our newly acquired subsidiary, S&A
        Supply, Inc., commencing September 10, 2007, an increase in the provision
        for
        doubtful accounts, an increase in accounting and professional fees related
        to
        the implementation of Sarbanes Oxley controls and procedures and other
        accounting activities, and an increase in freight costs.
  The
        commencement of the appliance
        business, new branch opening in the Albany, New York area and the acquisition
        of
        S&A Supply, Inc. constituted new operations in the quarter ended September
        30, 2007 which we did not have in the same period of 2006 and accounted for
        $439,685 of the $648,898 total increase in selling, general and administrative
        expenses.  Expenses incurred for the implementation of the Sarbanes
        Oxley Act amounted to $105,000 of the selling, general and administrative
        expenses increase for the quarter.  The selling, general and
        administrative expenses for all continuing operations and activities
        increased****by 2.2%, or $104,213, from the same period in
        2006.
  23
 ***Table
            of Contents***
  Pre-tax
        income decreased by 67.8%, or
        $343,299, to $163,082 for the quarter ended September 30, 2007 from $506,381
        for
        the same period in 2006.Net interest expense increased by 7.4%, or $26,552,
        to
        $385,766 for the quarter ended September 30, 2007 from $359,214 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, to finance higher inventory levels
        and
        accounts receivable related to the increased sales of air conditioning products
        in the third quarter of 2007, and for funding our September 10, 2007 acquisition
        of the assets of S&A Supply, Inc.
  The
        Company’s income tax expense for
        the quarter ended September 30, 2007 was $29,237 compared to $30,839 for
        the
        same period in 2006.  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.
  The
        Company’s net income decreased by
        71.9%, or $341,697, to $133,845 for the quarter ended September 30, 2007,
        compared to net income of $475,542 for the same period in 2006. The decrease
        in
        net income is primarily the result of the effect of increased sales and gross
        margin dollars offset by a greater increase in selling, general and
        administrative expenses.
  *Results
        of Operations For the Nine Months Ended September 30, 2007 and
        2006*
  Sales
        increased by 12.3%, or
        $6,435,428, to $58,693,009 for the nine months ended September 30, 2007 from
        $52,257,581 for the same period in 2006.  The commencement of the
        appliance business, new branch opening in the Albany, New York area on April
        10,
        2007 and the acquisition of S&A Supply, Inc. on September 10, 2007,
        constituted new operations in the nine months ended September 30, 2007, all
        of
        which we did not have in the same period 2006.  Sales from these new
        operations were $4,344,824 for the nine months ended September 30,
        2007.  Sales from continuing operations increased by 4.0%, or
        $2,090,604, from $52,257,581 to $54,348,185.  This increase in sales
        from continuing operations is related to increase market penetration of sales
        of
        HVAC equipment as well as increased sales in our commercial controls systems
        business.
  24
 ***Table
            of Contents***
  Gross
        profit increased by 7.4%, or
        $1,173,888, to $16,956,101 for the nine months ended September 30, 2007 from
        $15,782,213 for the same period in 2006.  Gross profit expressed as a
        percentage of sales decreased by 1.3% to 28.9% in 2007 compared to 30.2%
        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 $399,211 and $305,496 for the nine months ended September 30, 2007 and
        2006, respectively.
  Operating
        income decreased by 20.2%, or
        $277,992, to $1,096,620 for the nine months ended September 30, 2007 from
        $1,374,612 for the same period in 2006.  This percentage decrease in
        operating income reflects the effect of the difference between the increase
        in
        gross profit of $1,173,888 compared to the increase in selling, general and
        administrative expenses.  The increase in selling, general and
        administrative expenses was $1,451,880, to $15,859,481 for the nine months
        ended
        September 30, 2007 from $14,407,601 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, additional
        expenses relating to the new branch located in the Albany, New York area
        which
        opened on April 10, 2007, an increase in costs related to the operation of
        our
        newly acquired subsidiary, S&A Supply, Inc., commencing September 10, 2007,
        an increase in the provision for doubtful accounts, an increase in accounting
        and professional fees related to the implementation of Sarbanes Oxley controls
        and procedures and other accounting activities, and an increase in freight
        costs.
  The
        commencement of the appliance
        business, new branch opening in the Albany, New York area and the acquisition
        of
        S&A Supply, Inc. constituted new operations in the nine months ended
        September 30, 2007 which we did not have in the same period of 2006 and
        accounted for $883,607 of the $1,451,880 total increase in selling, general
        and
        administrative expenses.  Expenses incurred for the implementation of
        the Sarbanes Oxley Act amounted to $144,000 of the selling, general and
        administrative expenses increase for the quarter.  The selling,
        general and administrative expenses for all continuing operations and activities
        increased by 3.0%, or $424,273, from the same period in 2006.
  25
 ***Table
            of Contents***
  Pre-tax
        income decreased by 59.3%, or
        $339,709, to $232,750 for the nine months ended September 30, 2007 from $572,459
        for the same period in 2006.  Net interest expense increased by 8.6%,
        or $85,947, to $1,081,063 for the nine months ended September 30, 2007 from
        $995,116 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, to finance
        higher inventory levels and accounts receivable related to increased appliance
        sales as well as increased air conditioning sales in the third quarter of
        2007,
        and for funding our September 10, 2007 acquisition of the assets of S&A
        Supply, Inc.
  The
        Company’s income tax expense for
        the nine months ended September 30, 2007 was $81,850 compared to $83,081
        for the
        same period in 2006.  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.
  The
        Company’s net income decreased by
        69.2%, or $338,478, to $150,900 for the nine months ended September 30, 2007,
        compared to net income of $489,378 for the same period in 2006.  The
        decrease in net income is primarily the result of the effect of increased
        sales
        and gross margin dollars offset by a greater 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 nine months ended
        September 30, 2007 and 2006.
  For
                  the Quarter
              
              
              For
                  the Nine MonthsEnded
                  September 30,
              
              
              Ended
                  September 30,2007
              
              
              2006
              
              
              2007
              
              
              2006Sales
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
                  of sales
              
              
              70.9
              
              
              
              70.6
              
              
              
              71.1
              
              
              
              69.8Gross
                  profit
              
              
              29.1
              
              
              
              29.4
              
              
              
              28.9
              
              
              
              30.2Selling,
                  general and administrative expenses
              
              
              26.8
              
              
              
              25.2
              
              
              
              27.0
              
              
              
              27.6Operating
                  income
              
              
              2.3
              
              
              
              4.2
              
              
              
              1.9
              
              
              
              2.6Other
                  income
              
              
              0.4
              
              
              
              0.3
              
              
              
              0.4
              
              
              
              0.4Interest
                  expense, net
              
              
              (1.9
              )
              
              
              (1.9
              )
              
              
              (1.8
              )
              
              
              (1.9
              )Income
                  before taxes
              
              
              0.8
              
              
              
              2.6
              
              
              
              0.5
              
              
              
              1.1Income
                  taxes
              
              
              (0.1
              )
              
              
              (0.1
              )
              
              
              (0.2
              )
              
              
              (0.1
              )Net
                  income
              
              
              0.7
              %
              
              
              2.5
              %
              
              
              0.3
              %
              
              
              1.0
              %
  26
 ***Table
            of Contents***
  Liquidity
        and Capital Resources
  On
        September 10, 2007, the Company,
        through S&A Purchasing Corp., 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.  The transaction was effected pursuant to an Asset Purchase
        Agreement dated as of September 10, 2007 (the “APA”).
  In
        connection with this acquisition,
        the Company amended its 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 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 interest rate will be reduced to prime minus 0.50%, or
        LIBOR plus 21⁄4%, if the Company reports net income (as defined) of more than $1
        million for the fiscal year ending December 31, 2007.  The acquisition
        of S&A Supply will impact the outstanding amount under the Company’s credit
        facility and its working capital.
  The
        revolving credit line bears interest at .25% below prime.  At
        September 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 $1,101,400
        as of September 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 $18,394,155 as
        of
        September 30, 2007.  The interest rate on the revolving credit
        facility as of September 30, 2007 was 7.5%.
  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. The facility contains covenants that are determined annually and relate
        to
        the Company’s monthly and quarterly net income, quarterly cash flows, quarterly
        tangible net worth, and annual capital expenditures.  The facility
        also restricts the payment of dividends, subordinated debt and purchase of
        securities.  The continuation of the credit facility is conditioned
        upon the Company and Wells reaching agreement on the covenants.  While
        the Company and Wells have reached mutually agreeable covenants in the past,
        there is no assurance that they will be able to do so in the
        future.  As of September 30, 2007, the Company was in default of its
        quarterly minimum cash flow and net income covenants; however, Wells has
        waived
        this event of default.
  As
        of September 30, 2007, the Company
        had $587,416 in cash compared with $482,251 at December 31,
        2006.
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            of Contents***
  Net
        cash provided by operating
        activities was $421,366 for the nine months ended September 30, 2007.  The
        net cash provided by operating activities for the 2007 period is primarily
        a
        result of cash provided by net income of $150,900 and non-cash charges of
        $701,247 offset by changes in operating assets and liabilities of $430,781.
 The increase in accounts receivable of $919,418 was primarily a result of
        increased sales during the third quarter.  Accounts payable increased
        due to additional inventory purchases to support increased sales.
  Cash
        flows used in investing activities
        were $5,042,836 during the quarter ended September 30, 2007 due to $339,461
        of
        purchases of equipment and $4,703,375 cash payment for the acquisition of
        S&A Supply, net of cash acquired.
  Cash
        flows provided by financing
        activities of $4,726,635 consisted of $4,778,459 in net 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 $64,824 for
        repayments of notes payable.
  We
        anticipate S&A Supply to be a
        profitable subsidiary, therefore, cash flows provided by operating activities
        should more than offset future cash flows used in investing and financing
        activities, such as purchases of equipment and increased borrowing under
        the
        credit facility.  In addition, the seasonality of the S&A Supply’s
        business is similar to the Company’s seasonality, resulting in cash flow trends
        of a similar nature.
  **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. bears interest at
        prime.  A hypothetical 10% adverse change in such rates would reduce
        the pre-tax earnings and cash flows by approximately $144,000 over a one-year
        period, assuming the borrowing level remains consistent with the outstanding
        borrowings as of September 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.
  28
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            of Contents***
  **Item
        4.  Controls and Procedures**
  a.
              Evaluation
                  of Disclosure Controls and
                  Procedures
  As
        of the end of the period covered by
        this report, the Company carried out an evaluation under the supervision
        and
        with the participation of our management, including our Chief Executive Officer
        and Chief Financial Officer, of the effectiveness of the design and the
        operation of our "disclosure controls and procedures" (as such term is defined
        in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September
        30,
        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.****
  b.
              Changes
                  in Internal Controls
  As
        of the end of the period covered by
        this report, there has been no significant change in the Company’s internal
        controls or in other factors that could significantly affect internal controls
        as of September 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, 3, 4 and 5 are not applicable and have 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.
  29
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            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:  November
                  14, 2007
              COLONIAL
                  COMMERCIAL CORP./s/
                  William PaganoWilliam
                  Pagano,Chief
                  Executive Officer/s/
                  William SalekWilliam
                  Salek,Chief
                  Financial
                  Officer