**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, 2006**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 incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**275
                  Wagaraw Road, Hawthorne, New Jersey**
              
              **07506**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
  **973-427-8224**
 (Registrant’s
        telephone number, including area code)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 Yes x    No o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 Large
                    accelerated filero
                Accelerated
                    filero
                Non-accelerated
                    filerx
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o    No x
 
 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, 2006Common
                  Stock, $.05 par value per share
              
              4,593,579
                  sharesConvertible
                  Preferred Stock, $.05 par value per share
              
              467,601
                  shares
  
 
  **COLONIAL
                    COMMERCIAL CORP. AND
                    SUBSIDIARIES**CONTENTSPART
                    I.
                FINANCIAL
                    INFORMATIONItem
                    1.
                
                Financial
                    Statements
                
                PageCondensed
                    Consolidated Balance Sheets as of September 30, 2006
                    (Unaudited) and December 31, 2005
                
                1Condensed
                    Consolidated Statements of Operations (Unaudited)
                    for the Three Months Ended September 30, 2006 and 2005
                
                2Condensed
                    Consolidated Statements of Operations (Unaudited)
                    for the Nine Months Ended September 30, 2006 and 2005
                
                3Condensed
                    Consolidated Statements of Cash Flows (Unaudited)
                    for the Nine Months Ended September 30, 2006 and 2005
                
                4Notes
                    to Condensed Consolidated Financial Statements
                    (Unaudited)
                
                5Item
                    2.
                
                Management's
                    Discussion and Analysis of Financial Condition and
                    Results of Operations
                
                13Item
                    3.
                
                Quantitative
                    and Qualitative Disclosures About Market
                    Risk
                
                18Item
                    4.
                
                Controls
                    and Procedures
                
                18PART
                    II.
                OTHER
                    INFORMATIONItem
                    1.
                
                Legal
                    Proceedings
                
                19Item
                    4.
                
                Submission
                    of Matters to a Vote of Security
                    Holders
                
                19Item
                    6.
                
                Exhibits
                
                20
  *Contents*
 
 **PART
                  I. FINANCIAL INFORMATION****Item
                  1. Financial Statements**COLONIAL
                  COMMERCIAL CORP. AND SUBSIDIARIESCondensed
                  Consolidated Balance SheetsSeptember
                  30,
                2006
              
              December
                  31,
                2005(Unaudited)AssetsCurrent
                  assets:Cash
              
              $
              790,174
              
              $
              613,456Accounts
                  receivable, net of allowance for doubtful accounts of $215,757
                  in 2006 and
                  $185,971 in 2005
              
              
              9,379,331
              
              
              8,489,717Inventory
              
              
              14,123,645
              
              
              12,214,261Prepaid
                  expenses and other current assets
              
              
              1,256,986
              
              
              1,066,658Deferred
                  tax asset - current portion
              
              
              637,500
              
              
              637,500Total
                  current assets
              
              
              26,187,636
              
              
              23,021,592Property
                  and equipment
              
              
              1,598,782
              
              
              1,669,484Goodwill
              
              
              1,628,133
              
              
              1,628,133Other
                  intangibles
              
              
              4,000
              
              
              11,334Other
                  assets - noncurrent
              
              
              118,052
              
              
              135,832Deferred
                  tax asset - noncurrent
              
              
              1,071,000
              
              
              1,071,000Total
                  assets
              
              $
              30,607,603
              
              $
              27,537,375Liabilities
                  and Stockholders' EquityCurrent
                  liabilities:Trade
                  payables
              
              $
              6,723,810
              
              $
              5,991,946Accrued
                  liabilities
              
              
              2,005,860
              
              
              2,047,159Income
                  taxes payable
              
              
              12,666
              
              
              12,772Borrowings
                  under credit facility - revolving credit
              
              
              13,712,099
              
              
              11,183,008Borrowings
                  under credit facility - term loan/overadvance
              
              
              -
              
              
              562,977Notes
                  payable - current portion; includes related party notes of $30,000
                  in 2006
                  and $60,389 in 2005
              
              
              136,594
              
              
              165,112Total
                  current liabilities
              
              
              22,591,029
              
              
              19,962,974Notes
                  payable, excluding current portion; includes related party notes
                  of
                  $1,028,750 in 2006 and $1,000,625 in 2005
              
              
              1,386,816
              
              
              1,400,834Total
                  liabilities
              
              
              23,977,845
              
              
              21,363,808Commitments
                  and contingenciesStockholders'
                  equity:Redeemable
                  convertible preferred stock, $.05 par value, 2,500,000 shares authorized,
                  467,601 in 2006 and 484,721 in 2005 shares issued and outstanding,
                  liquidationpreference of $2,338,005 in 2006 and $2,423,605 in 2005
              
              
              23,380
              
              
              24,236Common
                  stock, $.05 par value, 20,000,000 shares authorized, 4,593,579
                  in 2006
                  and4,544,459 in 2005 shares issued and outstanding
              
              
              229,679
              
              
              227,223Additional
                  paid-in capital
              
              
              10,633,259
              
              
              10,626,859Accumulated
                  deficit
              
              
              (4,256,560
              )
              
              (4,704,751
              )Total
                  stockholders' equity
              
              
              6,629,758
              
              
              6,173,567Total
                  liabilities and stockholders’equity
              
              $
              30,607,603
              
              $
              27,537,375
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  1
 *Contents*
  COLONIAL
                  COMMERCIAL CORP. AND SUBSIDIARIESCondensed
                  Consolidated Statements of Operations(Unaudited)For
                  The Three Months Ended
                September
                  30,2006
              
              2005Sales
              
              $
              19,217,556
              
              $
              17,377,655Cost
                  of sales
              
              
              13,504,230
              
              
              12,285,200Gross
                  profit
              
              
              5,713,326
              
              
              5,092,455Selling,
                  general and administrative expenses, net
              
              
              4,857,533
              
              
              4,449,626Operating
                  income
              
              
              855,793
              
              
              642,829Other
                  income
              
              
              63,707
              
              
              63,546Interest
                  expense, net; includes related party interest of $26,431 in 2006
                  and
                  $23,684 in 2005
              
              
              (359,214
              )
              
              (269,897
              )Income
                  before income taxes
              
              
              560,286
              
              
              436,478Income
                  tax expense (benefit)
              
              
              30,839
              
              
              (582,141
              )Net
                  Income
              
              $
              529,447
              
              $
              1,018,619Income
                  per common share:Basic
              
              $
              0.12
              
              $
              0.24Diluted
              
              $
              0.10
              
              $
              0.19Weighted
                  average shares outstanding:Basic
              
              
              4,592,968
              
              
              4,300,270Diluted
              
              
              5,301,782
              
              
              5,296,133
  See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  2
 *Contents*
  COLONIAL
          COMMERCIAL CORP. AND SUBSIDIARIES
 Condensed
          Consolidated Statements of Operations
 (Unaudited)
  For
                    The Nine Months Ended
                  September
                    30,2006
                
                2005Sales
                
                $
                52,257,581
                
                $
                48,226,815Cost
                    of sales
                
                
                36,516,555
                
                
                33,749,170Gross
                    profit
                
                
                15,741,026
                
                
                14,477,645Selling,
                    general and administrative expenses, net
                
                
                14,407,601
                
                
                13,068,688Operating
                    income
                
                
                1,333,425
                
                
                1,408,957Other
                    income
                
                
                192,963
                
                
                213,282Interest
                    expense, net; includes related party interest of $77,825 in 2006
                    and
                    $68,225 in 2005
                
                
                (995,116
                )
                
                (763,788
                )Income
                    before income taxes
                
                
                531,272
                
                
                858,451Income
                    tax expense (benefit)
                
                
                83,081
                
                
                (481,417
                )Net
                    income
                
                $
                448,191
                
                $
                1,339,868Income
                    per common share:Basic
                
                $
                0.10
                
                $
                0.32Diluted
                
                $
                0.08
                
                $
                0.25Weighted
                    average shares outstanding:Basic
                
                
                4,574,227
                
                
                4,217,250Diluted
                
                
                5,300,467
                
                
                5,290,507
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  3
 *Contents*
  COLONIAL
                  COMMERCIAL CORP. AND SUBSIDIARIESCondensed
                  Consolidated Statements of Cash Flows(Unaudited)For
                  The Nine Months Ended
                September
                  30,2006
              
              2005Cash
                  flows from operating activities:Net
                  income
              
              $
              448,191
              
              $
              1,339,868Adjustments
                  to reconcile net income to net cash (used in) provided by operating
                  activities:Deferred
                  tax benefit
              
              
              -
              
              
              (641,500
              )Stock-based
                  compensation
              
              
              -
              
              
              (52,525
              )Provision
                  for doubtful accounts
              
              
              116,035
              
              
              29,343Depreciation
              
              
              340,216
              
              
              285,211Amortization
                  of intangibles
              
              
              7,334
              
              
              12,750Accretion
                  of debt discount
              
              
              28,125
              
              
              28,125Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (1,005,649
              )
              
              (395,053
              )Inventory
              
              
              (1,909,384
              )
              
              (139,892
              )Prepaid
                  expenses and other current assets
              
              
              (190,328
              )
              
              (293,483
              )Other
                  assets - noncurrent
              
              
              17,780
              
              
              40,529Trade
                  payables
              
              
              731,864
              
              
              876,375Accrued
                  liabilities
              
              
              (41,299
              )
              
              164,182Income
                  taxes payable
              
              
              (106
              )
              
              (29,018
              )Net
                  cash (used in) provided by operating activities
              
              
              (1,457,221
              )
              
              1,224,912Cash
                  flows from investing activities:Additions
                  to property and equipment
              
              
              (269,514
              )
              
              (305,359
              )Net
                  cash used in investing activities
              
              
              (269,514
              )
              
              (305,359
              )Cash
                  flows from financing activities:Issuance
                  of common stock and exercise of stock options
              
              
              8,000
              
              
              19,000Retirement
                  of preferred stock
              
              
              
              
              
              (15,400
              )Repayments
                  of notes payable: includes related party repayments of $30,389
                  in 2006,
                  and $0.00 in 2005
              
              
              (83,734
              )
              
              (48,919
              )Issuance
                  of notes payable
              
              
              13,073
              
              
              48,400Repayments
                  under credit facility - term loan/overadvance
              
              
              (562,977
              )
              
              (853,690
              )Borrowings
                  under credit facility - revolving credit
              
              
              2,529,091
              
              
              85,649Net
                  cash provided by (used in) financing activities
              
              
              1,903,453
              
              
              (764,960
              )Increase
                  in cash
              
              
              176,718
              
              
              154,593Cash
                  - beginning of period
              
              
              613,456
              
              
              310,659Cash
                  - end of period
              
              $
              790,174
              
              $
              465,252
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  4
 *Contents*




**COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES**
 Notes
        To
        Condensed Consolidated Financial Statements
 September
        30, 2006
 (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,
        2006 are not necessarily indicative of the operating results that may be
        achieved for the full year.
 
 Certain
        information and footnote disclosures, normally included in consolidated
        financial statements prepared in accordance with accounting principles generally
        accepted in the United States of America, have been condensed or omitted.
        It is
        suggested that these consolidated financial statements be read in conjunction
        with the consolidated financial statements and notes thereto included in
        the
        Company's Form 10-K for the year ended December 31, 2005.
 
 We
        have
        one continuing industry segment - wholesale distribution of heating,
        ventilation, air conditioning equipment and plumbing fixtures.
 
 Inventory
        is comprised of finished goods.
 
 2.
              Stock
                  Options
 
 The
        Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No.
        123(R)), which supersedes Accounting Principles Board (APB) Opinion No. 25,
        “Accounting for Stock Issued to Employees.” The revised statement addresses the
        accounting for share-based payment transactions with employees and other
        third
        parties, eliminates the ability to account for share-based transactions using
        APB No. 25 and requires that the compensation costs relating to such
        transactions be recognized in the consolidated financial statements. SFAS
        No.
        123(R) requires additional disclosures relating to the income tax and cash
        flow
        effects resulting from share-based payments. The Company has adopted the
        modified prospective application method of SFAS No.123(R), effective January
        1,
        2006, and the adoption of SFAS No. 123(R) has an immaterial impact on its
        consolidated results of operations and earnings per share.
 
 The
        Company recognized stock-based compensation related to option repricing for
        options previously awarded using the intrinsic-value method. For the quarter
        and
        nine months ended September 30, 2005, the amount of stock based compensation
        was
        $(26,785) and $(52,525), respectively. During
        the quarter and nine months ended September 30, 2006 and 2005, no stock options
        were granted and all
        outstanding options were fully vested.
 
 In
        June
        1996, the Company adopted the 1996 Stock Option Plan (the “1996 Plan”) to grant
        options to key employees and other persons who render service (non-employee)
        to
        the Company. The 1996 Plan expired on December 31, 2005.
 
 At
        September 30, 2006, a total of 74,000 options were outstanding under the
        1996
        Plan. The outstanding options have expiration dates ranging from 2009 to
        2013.
  5
 *Contents*
  On
        September 29, 2006, the Company adopted the Colonial Commercial Corp. 2006
        Stock
        Plan, (the “2006 Plan”). The 2006 Plan enables the Company to grant equity and
        equity-linked awards to our Directors, officers, employees and other persons
        who
        provide services to the Company. The 2006 Plan is intended to allow us to
        provide incentives that will (1) strengthen the desire of highly competent
        persons to provide services to us and (2) further stimulate their efforts
        on our
        behalf.
 
 The
        following is a summary of certain provisions of the 2006 Plan. A copy of
        the
        2006 Plan is filed as Exhibit 10.01 to this Report.
 
 Shares
        Available. The
        maximum number of shares of common stock that may be delivered under the
        2006
        Plan is 1,000,000, subject to adjustment for certain specified changes to
        the
        Company's capital structure.
 
 Eligibility. All
        directors, officers and other employees and other persons who provide services
        to the Company are eligible to participate in the 2006 Plan.
 
 Administration .
        The
        administrator of the 2006 Plan will be the board or any other committee which
        the board designates to serve as the administrator of the 2006 Plan.
 
 Types
        of Awards. The
        types of awards that may be made under the 2006 Plan are stock options, stock
        appreciation rights, restricted stock awards, and stock units. The board
        or the
        committee that administers the 2006 Plan will fix the terms of each award,
        including, to the extent relevant, the following: (1) exercise price for
        options, base price for stock appreciation rights, and purchase price, if
        any,
        for restricted stock awards, (2) vesting requirements and other conditions
        to
        exercise, (3) term and termination, (4) effect, if any, of a change of control
        and (5) method of exercise and of any required payment by the recipient.
 
 Term
        of Plan. No award
        may be granted under the 2006 Plan after the close of business on the day
        immediately preceding the tenth anniversary of the adoption of the 2006 Plan.
        However, all awards made prior to such time will remain in effect in accordance
        with their terms.
 
 During
        the quarter and nine months ended September 30, 2006, no stock options were
        granted under the 2006 Plan.
 
 The
        following table summarizes information about stock options at September 30,
        2006:
  Options
                  Outstanding and ExercisableRange
                  ofExercise
                  Prices
              
              Shares
              
              Weighted
                  Average RemainingContractual Life
              
              Weighted
                  AverageExercise Price$
                  .25
              
              74,000
              
              5.29
              
              $
                  .25
  6
 *Contents*
  The
        following table illustrates the effect on income if the fair-value-based
        method
        had been applied to all outstanding awards in each period.
  For
                  the Quarter Ended September 30, 2005
              
              For
                  the Nine Months Ended September 30, 2005Net
                  income, as reported
              
              $
              1,018,619
              
              $
              1,339,868Add:
                  Stock-based compensation related to option repricing
              
              
              (26,785
              )
              
              (52,525
              )Pro
                  forma net income
              
              $
              991,834
              
              $
              1,287,343Basic
                  income per share, as reported
              
              
              0.24
              
              
              0.32Basic
                  income per share, pro forma
              
              
              0.23
              
              
              0.31Diluted
                  income per share, as reported
              
              
              0.19
              
              
              0.25Diluted
                  income per share, pro forma
              
              
              0.19
              
              
              0.24
  3.
              Equity
                  Transactions
 
 On
        April
        3, 2006, Ronald Miller obtained 12,000 shares of common stock, by exercising
        12,000 outstanding stock options. Mr. Miller is a Director of the
        Company.
 
 On
        April
        17, 2006, Jack Rose obtained 12,000 shares of common stock, by exercising
        12,000
        outstanding stock options. Mr. Rose was a Director of the Company at the
        time of
        the transaction.
 
 On
        May
        16, 2006, a non-executive employee of the Company obtained 4,000 shares of
        common stock by exercising 4,000 outstanding stock options.
 
 On
        May
        31, 2006, a non-executive employee of the Company obtained 4,000 shares of
        common stock by exercising 4,000 outstanding stock options.
 
 The
        Company’s reports on Form 8-K and Form 8-K/A filed on April 21, 2006 and April
        25, 2006, respectively, refer to sales of common stock by former directors
        of
        the Company to two current directors and other investors. Concurrently with
        these transactions, Messrs. Bernard Korn, William Koon, Jack Rose and Carl
        Sussman resigned as Directors of the Company, and Mr. Korn also resigned
        as
        Chief Executive Officer and Chairman of the Board. Michael Goldman, who
        continues as a Director of the Company, was elected as Chairman of the Board
        and
        William Pagano, also continues as a Director and was appointed Chief Executive
        Officer. On May 11, 2006, Stuart H. Lubow and Phillip Siegel became Directors
        of
        the Company. Mr. Siegel also serves on the Audit Committee of the
        Company.
  7
 *Contents*
  During
        the quarter ended September 30, 2006 and 2005, holders of a total of 1,323
        shares and 238,131 shares, respectively, of redeemable preferred stock converted
        these shares into 1,323 shares and 238,131 shares, respectively, of common
        stock.
 
 During
        the nine months ended September 30, 2006 and 2005, holders of a total of
        17,120
        shares and 257,059 shares, respectively, of redeemable preferred stock converted
        these shares into 17,120 shares and 257,059 shares, respectively, 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,
                  2006
              
              September
                  30, 2005Cash
                  paid during the period for:Interest
              
              $
              946,646
              
              $
              704,032Income
                  taxes
              
              $
              81,954
              
              $
              253,046
  8
 *Contents*
  5.
              Net
                  Income Per Common Share
  For
                  the Quarter Ended
                September
                  30,
              
              For
                  the Nine Months Ended
                September
                  30,2006
              
              2005
              
              2006
              
              2005Net
                  Income (numerator)
              
              $
              529,447
              
              $
              1,018,619
              
              $
              448,191
              
              $
              1,339,868Weighted
                  average common shares(denominator
                  for basic income per share)
              
              
              4,592,968
              
              
              4,300,270
              
              
              4,574,227
              
              
              4,217,250Effect
                  of dilutive securities:Convertible
                  preferred stock
              
              
              468,212
              
              
              668,193
              
              
              474,083
              
              
              745,333Convertible
                  notes
              
              
              175,000
              
              
              175,000
              
              
              175,000
              
              
              175,000Stock
                  options
              
              
              65,602
              
              
              152,670
              
              
              77,157
              
              
              152,924Weighted
                  average common and potential common shares outstanding (denominator
                  for
                  diluted income per share)
              
              
              5,301,782
              
              
              5,296,133
              
              
              5,300,467
              
              
              5,290,507Basic
                  net income per share
              
              $
              0.12
              
              $
              0.24
              
              $
              0.10
              
              $
              0.32Diluted
                  net income per share
              
              $
              0.10
              
              $
              0.19
              
              $
              0.08
              
              $
              0.25
  6.
              Financing
                  Arrangements
 
 At
        September 30, 2006, the amount outstanding under the Company’s credit facility
        with Wells Fargo Business Credit, Inc. (“Wells”) was $13,712,099. In addition,
        the Company has a standby letter of credit in the amount of $300,000 which
        expires on July 31, 2007. Availability under the revolving credit line is
        determined by a percentage of available assets as defined in the Agreement,
        less
        letter of credit and reserves, and was $887,901 as of September 30, 2006.
        The
        interest rate on the credit facility, as of September 30, 2006 was 8.0% (prime
        minus .25%).
 
 The
        facility contains covenants relating to the financial condition of the Company,
        its business operations, and restricts the payment of dividends, subordinated
        debt, purchase of securities and capital expenditures. The Company is in
        compliance with all of its financial loan covenants.
  9
 *Contents*
  7.
              Litigation
 
 Universal
        Supply Group, Inc.
 
 Universal
        Supply Group, Inc. is a New York corporation (“Universal”). On June 25, 1999,
        Universal acquired substantially all of the assets of Universal Supply Group,
        Inc., a New Jersey corporation, including its name, pursuant to the terms
        of a
        purchase agreement. The Company filed a copy of the purchase agreement with
        the
        Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g) on
        Form
        10KSB, and the Company filed a copy of an amendment to the purchase agreement
        on
        July 9, 1999 as Exhibit 10(a)(ii) on Form 8-K. Subsequent to the sale, Universal
        Supply Group, Inc. (the selling corporation) formerly known as Universal
        Engineering Co., Inc., changed its name to Hilco, Inc. Hilco, Inc. acquired
        the
        assets of Amber Supply Co., Inc., formerly known as Amber Oil Burner Supply
        Co.,
        Inc., in 1998, prior to Hilco’s sale of assets to Universal. Hilco, Inc. is
        hereinafter referred to as the “Predecessor.” The majority shareholders of
        Hilco, Inc. were John A. Hildebrandt and Paul Hildebrandt.
 
 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 94 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, seven filed actions in 2006, 15 filed actions in 2005,
        43
        filed actions in 2004, 27 filed actions in 2003, and two filed actions in
        2002.
        There are 105 other plaintiffs that have had their actions dismissed and
        eight
        other plaintiffs that have settled as of September 30, 2006 for a total of
        $3,313,000. There has been no judgment against the Predecessor.
 
 Our
        Universal subsidiary was named by 24 plaintiffs; of these, two filed actions
        in
        1999, one filed an action in 2000, five filed actions in 2001, eleven filed
        actions in 2005 and five filed actions in 2006. Six plaintiffs naming Universal
        have had their actions dismissed and, of the total $3,313,000 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 16 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, 2006 is
        material, and that the only material litigation that was brought against
        Predecessor through that date was Rhodes
        v. A.O. Smith Corporation ,
        filed
        on April 26, 2004 in the Superior Court of New Jersey, Law Division, Middlesex
        County, Docket Number MID-L-2979-04AS. The Company was advised that the Rhodes case was
        settled for $3,250,000 under an agreement reached in connection with a
        $10,000,000 jury verdict that was rendered on August 5, 2005. The Company
        was
        not a defendant in the Rhodes case.
 
 The
        Company believes that Rhodes differed
        from the other lawsuits in that plaintiff established that he contracted
        mesothelioma as a result of his occupational exposure to asbestos dust and
        fibers and that a predecessor of the Company was a major supplier of the
        asbestos containing products that allegedly caused his disease.
  10
 *Contents*
  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.
 
 Insurance
 
 The
        assets that the Predecessor sold to us included its insurance policies and
        other
        agreements and contracts. The policies provide coverage for liability accruing
        during the periods for which premiums were paid. The Predecessor was formed
        in
        1940. Copies of policies are available for each year beginning in 1970 and
        ending with the closing under the purchase agreement in 1999. Copies of policies
        for the period from 1940 to 1969 are not available.
 
 Insurance
        companies acknowledge coverage for potential asbestos claims under certain
        of
        these policies. Insurance companies under additional policies have reserved
        their right to deny coverage but have continued to defend and indemnify the
        Predecessor and the Company under the contested policies.
 
 There
        are
        periods during the years from 1940 to 1999 in which our Predecessor did not
        have
        coverage for potential asbestos claims. Subject to litigation, insurance
        companies may maintain that the existence of these periods’ results in coverage
        for only a portion of a particular injury that varies with the period during
        which there was asbestos coverage relating to the injury, and that the balance
        of any settlement or judgment is to be paid by the insured. To date, no
        insurance company has claimed any contribution for a gap in coverage except
        for
        a claim for $159.64 made by one insurance company to the Predecessor in 1995.
        The Predecessor asserted that it had no obligation to pay this amount and
        did
        not make any payment.
 
 Insurance
        companies have to date defended us and the Predecessor, and have paid all
        settlement amounts and defense costs. Except for $159.64 referred to above,
        the
        insurance companies have not requested any payments from us or from the
        Predecessor.
 
 Our
        Universal subsidiary has not engaged in the sale of asbestos products since
        its
        formation in 1997. Its product liability policies for all years since 1998
        exclude asbestos claims.
  11
 *Contents*
  General
 
 Regardless
        of indemnification and insurance coverage, we do not in any event consider
        our
        Company to be liable for the asbestos-based lawsuits that name us or for
        any
        other claim that arises as a result of actions or omissions by Predecessor
        companies. We expressly disclaimed the assumption of any liabilities when
        we
        purchased the assets of the Predecessor. It is our opinion that the existing
        asbestos litigation will not have a material adverse effect on the Company.
        Nevertheless, we could be materially and adversely affected if we are held
        liable for substantial asbestos claims or if the Company incurs substantial
        legal or settlement costs. This material and adverse effect would occur if
        indemnitors fail to honor their indemnification agreements and insurance
        is not
        available either because policy limits are exceeded, or because insurance
        companies successfully claim limitations on their liabilities by reason of
        gaps
        in coverage or otherwise.
 
 Since
        we
        do not regard as likely the potential payment of any asbestos-based claim,
        we
        have not accrued any balance for any period relating to asbestos claims,
        and we
        have not recorded any amount for asbestos claims for any period in any of
        our
        financial statements.
 
 8.
              New
                  Accounting Pronouncements
 
 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 is currently
        evaluating the impact of adopting FIN 48 on the Company’s consolidated financial
        statements.
 
 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.
 
 9.
              Related
                  Party Transaction
 
 On
        August
        31, 2006, the Company purchased from Goldman Associates of NY, Inc., (“Goldman
        Associates”), its Speed Queen home laundry equipment inventory and its related
        accounts receivable at their then book value of $149,625. Goldman Associates
        is
        an affiliate of Michael Goldman, who is the Chairman of Colonial, as well
        as
        president and majority shareholder of Goldman Associates. Separately, the
        Company entered into a non-exclusive agreement with Alliance Laundry Systems,
        LLC for the distribution of Speed Queen home laundry equipment in the New
        York
        metropolitan area, and in portions of Connecticut, Delaware and Eastern
        Pennsylvania.
 
 The
        Company owes Goldman Associates $750,000 pursuant to a secured note which
        is
        subordinate to the Company’s senior secured lender. The note bears interest at
        the prime rate and is due on June 30, 2008.
 
 The
        wife
        of Michael Goldman is the holder of a convertible unsecured note in the amount
        of $25,000, issued pursuant to the terms of a private placement made on July
        29,
        2004, with 50% of the principal payable on June 1, 2008 and the balance on
        June
        1, 2009.
 
  12
 *Contents*
  The
        daughter of Michael Goldman has been a Director of the Company since October
        22,
        2004, and is the Chief Operating Officer of Goldman Associates as well as
        a
        member of their Board of Directors.
 
 10.
              Subsequent
                  Events
 
 None
 
 **Item
        2. Management’s Discussion and Analysis of Financial Condition
        and Results** **of
        Operations**
 
 The
        Company
 
 Colonial
        Commercial Corp. (“Colonial”) is a New York corporation, which was incorporated
        on October 28, 1964. Unless otherwise indicated, the term “Company” refers to
        Colonial Commercial Corp. and its consolidated subsidiaries. The Company’s
        operations are conducted through its wholly-owned subsidiaries, Universal
        Supply
        Group, Inc. (“Universal”), The RAL Supply Group, Inc. (“RAL”) and
        American/Universal Supply, Inc. (“American”).
 
 Forward-Looking
        Statements
 
 This
        report on Form 10-Q contains forward-looking statements relating to such
        matters
        as anticipated financial performance and business prospects. When used in
        this
        report, the words, “anticipates,” “expects,” “believes,” “may,” “intends,” and
        similar expressions are intended to be among the statements that identify
        forward-looking statements. From time to time, the Company may also publish
        forward-looking statements. The Private Securities Litigation Reform Act
        of 1995
        provides a safe harbor for forward-looking statements. Forward-looking
        statements involve risks and uncertainties, including, but not limited to,
        the
        consummation of certain events referred to in this report, technological
        changes, competitive factors, maintaining customer and vendor relationships,
        inventory obsolescence and availability, and other risks detailed in the
        Company's periodic filings with the Securities and Exchange Commission, which
        could cause the Company's actual results and experience to differ materially
        from the anticipated results or other expectations expressed in the Company's
        forward-looking statements.
 
 Critical
        Accounting Policies
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires that we make estimates and
        judgments on the reported amounts of assets, liabilities, revenues and expenses,
        and the related disclosure of contingent assets and liabilities. We base
        our
        estimates on historical experience and on various other assumptions we believe
        to be applicable and reasonable under the current circumstances, the results
        of
        which form the basis for making judgments about the carrying values of assets
        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.
  13
 *Contents*
  Revenue
        Recognition
 
 Revenue
        for the Company primarily consists of sales of heating, ventilation and air
        conditioning equipment, climate control systems and plumbing fixtures and
        supplies. The Company recognizes revenue after 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.
 
 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 $114,189 and $102,592 for the quarter ended September 30,
        2006
        and 2005, respectively, and $305,496 and $291,590 for the nine months ended
        September 30, 2006 and 2005, respectively.
 
 Property
        and Equipment
 
 Property
        and equipment are stated at cost. Depreciation is calculated on the straight
        line method over the estimated useful lives of the assets as follows:
  Computer
                  hardware and software
              3-5
                  yearsFurniture
                  and fixtures
              5
                  yearsAutomobiles
              3-5
                  years
 
 Leasehold
        improvements are amortized over the shorter of the lease term or the estimated
        useful life of the asset.
 
 Deferred
        Income Tax Asset
 
 The
        Company's deferred income tax asset represents certain future tax benefits
        related to the expected utilization of net operating loss carryforwards.
        The
        Company records a valuation allowance against any portion of the deferred
        income
        tax asset when it believes, based on the weight of available evidence, it
        is
        more likely than not that some portion of the deferred tax asset will not
        be
        realized.
  14
 *Contents*
  Goodwill
        and Other Intangible Assets
 
 Statement
        of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
        Assets," requires that goodwill having indefinite lives not be amortized,
        but
        instead be tested for impairment at least annually. Intangible assets determined
        to have finite lives are amortized over their remaining useful
        lives.
 
 Results
        of Operations For the Quarter Ended September 30, 2006 and 2005
 
 Sales
        increased by 10.6%, or $1,839,901, to $19,217,556 for the quarter ended
        September 30, 2006 from $17,377,655 for the same period in 2005. The increase
        in
        sales is primarily a result of increased market penetration at two of the
        Company’s subsidiaries, an increase in general industry pricing, and a
        continuing strong demand for residential and light commercial heating, air
        conditioning and plumbing fixtures, supplies and accessories. The increases
        in
        these areas were offset by weaknesses in sales of commercial control systems.
 
 Gross
        profit increased by 12.2%, or $620,871, to $5,713,326 for the quarter ended
        September 30, 2006 from $5,092,455 for the same period in 2005. Gross profit
        expressed as a percentage of sales increased by 0.4% to 29.7% in 2006 compared
        to 29.3% for the comparable period in 2005. The increase in the percentage
        of
        gross profit is primarily the result of improved pricing received from
        manufacturers, purchasing of additional inventory prior to price increases
        to
        preserve price protection, and sales of higher margin, more efficient models
        of
        air conditioning and heating systems. 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 $114,189 and $102,592 for the quarter
        ended September 30, 2006 and 2005, respectively.
 
 Operating
        income increased by 33.1%, or 212,964, to $855,793 for the quarter ended
        September 30, 2006 from $642,829 for the same period in 2005. This percentage
        increase in operating income reflects the effect of the difference between
        the
        increase in gross profit of 12.2% compared to the increase in selling, general
        and administrative expenses of 9.2%. The increase in selling, general and
        administrative expenses was $407,907, to $4,857,533 for the quarter ended
        September 30, 2006 from $4,449,626 for the same period in 2005. This was
        caused
        by increased expenses for personnel to improve customer service, expansion
        of
        our commercial departments, and added cost for increased health insurance,
        gasoline, utility expenses and interest expenses and decreasing sales in
        our
        commercial control systems business. Staffing costs increased by $246,115,
        while
        costs for trucking and fuel increased by $26,011.
 
 Pre-tax
        income increased by 28.4%, or $123,808, to $560,286 for the quarter ended
        September 30, 2006 from $436,478 for the same period in 2005.  Interest
        expense, net increased by 33.1%, or $89,317, to $359,214 for the quarter
        ended
        September 30, 2006 from $269,897 for the same period in 2005. The interest
        expense increase is primarily the result of increasing interest rates and
        increased borrowings under the credit line to support higher inventory levels
        and accounts receivable related to the increased sales of air conditioning
        products and higher inventory levels in the third quarter of 2006. The revolving
        credit line bears interest at .25% below prime rate, which was 8.25% at
        September 30, 2006 compared to 6.75% at September 30, 2005.
  15
 *Contents*
  The
        Company’s net income decreased by
        48.0%, or $489,172, to $529,447 for the quarter ended September 30, 2006,
        compared to net income of $1,018,619 for the same period in 2005. The
        primary reason for the decrease in the Company’s net income was the inclusion of
        a deferred tax benefit in the quarter ended September 30, 2005 in the amount
        of
        $641,500 with no benefit recognized in the quarter ended September 30, 2006.
        In
        2005, the tax benefit resulted from extending the tax benefit calculation
        from a
        two year earnings projection to a three year earnings projection, due to
        improved earnings predictability.
 
 Results
        of Operations For the Nine Months Ended September 30, 2006 and
        2005
 
 Sales
        increased by 8.4%, or $4,030,766, to $52,257,581 for the nine months ended
        September 30, 2006 from $48,226,815 for the same period in 2005. The increase
        in
        sales is primarily a result of increased market penetration at two of the
        Company’s subsidiaries, an increase in general industry pricing, and a
        continuing strong demand for residential and light commercial heating, air
        conditioning and plumbing fixtures, supplies and accessories. The increases
        in
        these areas were offset by weaknesses in sales of commercial control systems.
 
 Gross
        profit increased by 8.7%, or $1,263,381, to $15,741,026 for the nine months
        ended September 30, 2006 from $14,477,645 for the same period in 2005. Gross
        profit expressed as a percentage of sales increased by 0.1% to 30.1% in 2006
        compared to 30.0% for the comparable period in 2005. 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 $305,496 and $291,590 for
        the
        nine months ended September 30, 2006 and 2005, respectively.
 
 Operating
        income decreased by 5.4%, or $75,532, to $1,333,425 for the nine months ended
        September 30, 2006 from $1,408,957 for the same period in 2005. This percentage
        decrease in operating income reflects the effect of the difference between
        the
        increase in gross profit of 8.7% compared to the increase in selling, general
        and administrative expenses of 10.2%. The increase in selling, general and
        administrative expenses was $1,338,913, to $14,407,601 for the nine months
        ended
        September 30, 2006 from $13,068,688 for the same period in 2005. This was
        caused
        by increased expenses for personnel to improve customer service, expansion
        of
        our commercial departments, and added cost for increased health insurance,
        gasoline, utility expenses and interest expenses and decreasing sales in
        our
        commercial control systems business. Staffing costs increased by $797,022,
        while
        costs for trucking, fuel, and facilities increased by $197,670.
 
 Pre
        tax
        income decreased by 38.1%, or $327,179, to $531,272 for the nine months ended
        September 30, 2006 from $858,451 for the same period in 2005. Other income
        decreased by 9.5%, or $20,319, to $192,963 for the nine months ended September
        30, 2006 from $213,282 for the same period in 2005. This decrease is primarily
        the result of a decrease in service charges collected from customers’ past due
        invoices in the nine months ended September 30, 2006. Interest expense, net
        increased by 30.3%, or $231,328, to $995,116 for the nine months ended September
        30, 2006 from $763,788 for the same period in 2005. The interest expense
        increase is primarily the result of increasing interest rates and increased
        borrowings under the credit line to support higher inventory levels and accounts
        receivable related to the increased sales of air conditioning products and
        higher inventory levels in the third quarter of 2006. The revolving credit
        line
        bears interest at .25% below prime rate, which was 8.25% at September 30,
        2006
        compared to 6.75% at September 30, 2005.
  16
 *Contents*
  The
        Company’s net income decreased by 66.5%, or $891,677, to $448,191 for the nine
        months ended September 30, 2006, compared to net income of $1,339,868 for
        the
        same period in 2005. This decrease in net income was caused by the decrease
        in
        pre-tax income of $327,179, as stated above, in addition to the effect of
        the
        inclusion of a deferred tax benefit in the nine months ended September 30,
        2005
        in the amount of $641,500 with no benefit recognized in the nine months ended
        September 30, 2006. In 2005, the tax benefit resulted from extending the
        tax
        benefit calculation from a two year earnings projection to a three year earnings
        projection, due to improved earnings predictability.
 
 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 September 30, 2006 and 2005.
  For
                  the Quarter
                Ended
                  September 30,
              
              For
                  the Nine Months
                Ended
                  September 30,2006
              
              2005
              
              2006
              
              2005Sales
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of sales
              
              
              70.3
              
              
              70.7
              
              
              69.9
              
              
              70.0Gross
                  profit
              
              
              29.7
              
              
              29.3
              
              
              30.1
              
              
              30.0Selling,
                  general and administrative expenses
              
              
              25.3
              
              
              25.6
              
              
              27.5
              
              
              27.1Operating
                  income
              
              
              4.4
              
              
              3.7
              
              
              2.6
              
              
              2.9Other
                  income
              
              
              0.4
              
              
              0.4
              
              
              0.3
              
              
              0.4Interest
                  expense, net
              
              
              (1.9
              )
              
              (1.6
              )
              
              (1.9
              )
              
              (1.6
              )Income
                  before taxes
              
              
              2.9
              
              
              2.5
              
              
              1.0
              
              
              1.7Income
                  taxes
              
              
              (0.1
              )
              
              3.4
              
              
              (0.1
              )
              
              1.1Net
                  income
              
              
              2.8
              %
              
              5.9
              %
              
              0.9
              %
              
              2.8
              %
  Liquidity
        and Capital Resources
 
 The
        Company has a $15,000,000 secured loan facility pursuant to a credit and
        security agreement (“Agreement”) with Wells. On May 11, 2006 the Company
        received a $500,000 overadvance, payable in equal installments of $12,500
        each
        business day commencing July 11, 2006. The overadvance was paid in full on
        September 5, 2006. Effective June 23, 2006, the Agreement was amended to
        extend
        the maturity date from August 1, 2009 to August 1, 2010. The facility consists
        of a revolving line of credit which expires on August 1, 2010. In addition,
        the
        Company has a standby letter of credit in the amount of $300,000 which expires
        on July 31, 2007. Availability under the revolving credit line is determined
        by
        a percentage of available assets as defined in the Agreement, less letter
        of
        credit and reserves, and was $887,901 as of September 30, 2006. The balance
        outstanding under the revolving line of credit was $13,712,099 as of September
        30, 2006. The revolving credit line bears interest at .25% below prime.
        Substantially all of the assets of the Company, as well as a pledge of the
        stock
        of Colonial Commercial Corp.’s operating subsidiaries, collateralize the loans.
        The facility contains covenants relating to the financial condition of the
        Company, its business operations, and restricts the payment of dividends,
        subordinated debt, purchase of securities and capital expenditures. The Company
        is in compliance with all of its financial loan covenants. All loans are
        due on
        demand by the bank, and accordingly, have been classified as current
        liabilities.
 
 The
        Company believes that the credit facility is sufficient to finance its current
        operating needs. However, the business of the Company would be materially
        and
        adversely affected if the bank demands payment of the loan and the Company
        is
        unable to refinance the loan.
 
 As
        of
        September 30, 2006, the Company had $790,174 in cash compared with $613,456
        at
        December 31, 2005.
  17
 *Contents*
  Net
        cash
        used in operating activities was $1,457,221 for the nine months ended September
        30, 2006.  The net cash used in operating activities for the 2006 period is
        primarily a result of a net income of $448,191 and non-cash charges of $491,710,
        offset by cash used in operating assets and liabilities of $2,397,122.  The
        increase in accounts receivable of $1,005,649 was primarily a result of
        increased sales during the third quarter. Accounts payable increased due
        to a
        $1,909,384 increase in inventory over the nine months ended September 30,
        2006.
        The increase in inventory was primarily the result of additional product
        lines,
        inventory purchased prior to expected vendor-announced price increases and
        seasonal purchases in preparation for increased demand for heating products
        in
        the fourth quarter.
 
 Cash
        flows used in investing activities of $269,514 during the nine months ended
        September 30, 2006 were due to purchases of equipment.
 
 The
        cash
        flows provided by financing activities of $1,903,453 consisted of $2,529,091
        in
        borrowings under the credit facility-revolving credit, $500,000 in borrowings
        under the credit facility-overadvance, $8,000 received from the exercise
        of
        stock options and $13,073 from the issuance of notes payable. Cash flows
        used in
        financing activities consisted of $562,977 for repayments under the credit
        facility-term loan, $500,000 repayments under the credit facility-overadvance
        and $83,734 for repayments on notes payable.
 
 **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
 
 Market
        risk represents the risk of changes in value of a financial instrument,
        derivative or non-derivative, caused by fluctuations in interest rates, foreign
        exchange rates and equity prices. The Company has no financial instruments
        that
        give it exposure to foreign exchange rates or equity prices.
 
 The
        Company’s pre-tax earnings and cash flows are exposed to changes in interest
        rates. All borrowings under its credit facility bear interest based on the
        prime
        rate less .25% and a $750,000 note to Goldman Associates of NY, Inc. which
        bears
        interest at prime. A hypothetical 10% adverse change in such rates would
        reduce
        the pre-tax earnings and cash flows by approximately $116,000 over a one-year
        period, assuming the borrowing level remains consistent with the outstanding
        borrowings as of September 30, 2006. The fair value of the borrowings under
        the
        credit facility is not affected by changes in market interest
        rates.
 
 The
        Company’s remaining interest-bearing obligations are at fixed rates of interest
        and as such, do not expose the pre-tax earnings and cash flows to changes
        in
        market interest rates. The change in fair value of the Company’s fixed rate
        obligations resulting from a hypothetical 10% adverse change in interest
        rates
        would not be material.
 
 **Item
        4. Controls and Procedures**
 
 a.
              Evaluation
                  of Disclosure Controls and
                  Procedures
 
 An
        evaluation has been carried out under the supervision and with the participation
        of our management, including our Chief Executive Officer and Chief Financial
        Officer, of the effectiveness of the design and the operation of our "disclosure
        controls and procedures" (as such term is defined in Rule 13a-15(e) under
        the
        Securities Exchange Act of 1934) as of September 30, 2006 (“Evaluation Date”).
        Based on such evaluation, our Chief Executive Officer and Chief Financial
        Officer have concluded that, as of the Evaluation Date, the disclosure controls
        and procedures are reasonably designed and effective to ensure that (i)
        information required to be disclosed by us in the reports we file or submit
        under the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported within the time periods specified in the SEC's rules and forms,
        and
        (ii) such information is accumulated and communicated to our management,
        including our Chief Executive Officer and Chief Financial Officer, as
        appropriate to allow timely decisions regarding required
        disclosure.
  18
 *Contents*
  b.
              Changes
                  in Internal Controls
 
 Subsequent
        to that evaluation, there have been no changes in our internal controls or
        other
        factors that could materially affect these controls after such
        evaluation.
 
 **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
        6 Litigation ,
        of this
        Report on Form 10-Q.
 
 **Items
        1A, 2 and 3 are not applicable and have been omitted.**
 
 **Item
        4. Submission of Matters to a Vote of Security
        Holders**
 
 a.
              A
                  Special Meeting of Shareholders was held on September 29,
                  2006.
 
 b.
              On
                  September 29, 2006, the common and preferred shareholders voted
                  in favor
                  of the following proposals:
 
 i.
              To
                  adopt an amendment to the Restated Certificate of Incorporation,
                  as
                  amended, that would allow the Company to issue up to 10,000,000
                  shares of
                  preferred stock in one or more series, the terms of any such series
                  to be
                  determined by the Board of Directors from time to time.
 
 ii.
              To
                  adopt a restated Certificate of Incorporation to include only those
                  articles that are currently applicable to the Company and that
                  incorporates all amendments to date.
 
 iii.
              To
                  adopt the Colonial Commercial Corp. 2006 Stock
                  Plan.
  **PROPOSAL**
              
              **FOR**
              
              **AGAINST**
              
              **ABSTAINED**To
                  adopt an amendment to the Restated Certificate of Incorporation,
                  as
                  amended, that would allow the Company to issue up to 10,000,000
                  shares of
                  preferred stock in one or more series, the terms of any such series
                  to be
                  determined by the Board of Directors from time to time.
              
              3,143,995
              
              318,895
              
              10,179To
                  adopt a restated Certificate of Incorporation to include only those
                  articles that are currently applicable to the Company and that
                  incorporates all amendments to date.
              
              3,150,949
              
              313,625
              
              8,495To
                  adopt the Colonial Commercial Corp. 2006 Stock Plan.
              
              3,075,472
              
              311,862
              
              85,735
 
 A
        copy of
        the Restated Certificate of Incorporation is filed as Exhibit 3.01 to this
        Report. A copy of the Colonial Commercial Corp. 2006 Stock Plan is filed
        as an
        Exhibit 10.01 to this Report.
  19
 *Contents*
  **Item
        5 is not applicable and has been omitted.**
 
 **Item
        6. Exhibits**
  3.01
              
              Restated
                  Certificate of Incorporation of Colonial Commercial Corp. dated
                  September
                  29, 2006.10.01
              
              Colonial
                  Commercial Corp. 2006 Stock Plan.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.
  20
  **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 13, 2006
              COLONIAL
                  COMMERCIAL CORP./s/
                  William PaganoWilliam
                  Pagano,Chief
                  Executive Officer/s/
                  William SalekWilliam
                  Salek,Chief
                  Financial Officer






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