**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**March
                  31, 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  ̈
 
 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 ̈
              Accelerated
                  filer ̈
              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  ̈    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 May 1, 2006Common
                  Stock, $.05 par value per share
              
              4,577,614
                  sharesConvertible
                  Preferred Stock, $.05 par value per share
              
              475,566
                  shares
  
  **COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES**
  CONTENTS
 
 PART
                  I.FINANCIAL
                  INFORMATIONItem
                  1.
              
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheets as of March 31, 2006
                  (Unaudited) and December 31, 2005
              
              1Condensed
                  Consolidated Statements of Operations (Unaudited)
                  for the Three Months Ended March 31, 2006 and 2005
              
              2Condensed
                  Consolidated Statements of Cash Flows (Unaudited)
                  for the Three Months Ended March 31, 2006 and 2005
              
              3Notes
                  to Condensed Consolidated Financial Statements
                  (Unaudited)
              
              4Item
                  2.
              
              Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              
              9Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              
              13Item
                  4.
              
              Controls
                  and Procedures
              
              14PART
                  II.OTHER
                  INFORMATIONItem
                  1.
              
              Legal
                  Proceedings
              
              14Item
                  6.
              
              Exhibits
              
              16
  *Contents*
  **PART
        I. FINANCIAL INFORMATION**
 **Item1.
        Financial Statements**
 
 COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Condensed
        Consolidated Balance Sheets
 
 March
                  31,
              
              December
                  31,2006
              
              2005(Unaudited)AssetsCurrent
                  assets:Cash
              
              $
              563,156
              
              $
              613,456Accounts
                  receivable, net of allowance for doubtful accounts of $169,268
                  in 2006 and
                  $185,971 in 2005
              
              
              7,707,152
              
              
              8,489,717Inventory
              
              
              14,314,466
              
              
              12,214,261Prepaid
                  expenses and other current assets
              
              
              980,841
              
              
              1,066,658Deferred
                  tax asset - current portion
              
              
              637,500
              
              
              637,500Total
                  current assets
              
              
              24,203,115
              
              
              23,021,592Property
                  and equipment
              
              
              1,653,514
              
              
              1,669,484Goodwill
              
              
              1,628,133
              
              
              1,628,133Other
                  intangibles
              
              
              7,917
              
              
              11,334Other
                  assets - noncurrent
              
              
              122,713
              
              
              135,832Deferred
                  tax asset - noncurrent
              
              
              1,071,000
              
              
              1,071,000$
              28,686,392
              
              $
              27,537,375Liabilities
                  and Stockholders' EquityCurrent
                  liabilities:Trade
                  payables
              
              $
              6,802,202
              
              $
              5,991,946Accrued
                  liabilities
              
              
              1,911,084
              
              
              2,047,159Income
                  taxes payable
              
              
              19,029
              
              
              12,772Borrowings
                  under credit facility - revolving credit
              
              
              12,336,234
              
              
              11,183,008Borrowings
                  under credit facility - term loan
              
              
              312,977
              
              
              562,977Notes
                  payable - current portion; includes related party notes of $30,000
                  in 2006
                  and $60,389 in 2005
              
              
              134,677
              
              
              165,112Total
                  current liabilities
              
              
              21,516,203
              
              
              19,962,974Notes
                  payable, excluding current portion; includes related party notes
                  of
                  $1,010,000 in 2006 and $1,000,625 in 2005
              
              
              1,407,671
              
              
              1,400,834Total
                  liabilities
              
              
              22,923,874
              
              
              21,363,808Commitments
                  and contingenciesStockholders'
                  equity:Redeemable
                  convertible preferred stock, $.05 par value, 2,500,000 shares authorized,
                  475,566 in 2006 and 484,721 in 2005 shares issued and outstanding,
                  liquidation preference of $2,377,830 in 2006 and $2,423,605 in
                  2005
              
              
              23,778
              
              
              24,236Common
                  stock, $.05 par value, 20,000,000 shares authorized, 4,553,614
                  in 2006 and
                  4,544,459 in 2005 shares issued and outstanding
              
              
              227,681
              
              
              227,223Additional
                  paid-in capital
              
              
              10,638,899
              
              
              10,626,859Accumulated
                  deficit
              
              
              (5,127,840
              )
              
              (4,704,751
              )Total
                  stockholders' equity
              
              
              5,762,518
              
              
              6,173,567$
              28,686,392
              
              $
              27,537,375
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  1
 *Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Condensed
        Consolidated Statements of Operations
 (Unaudited)
 
 For
                  The Three Months EndedMarch
                  31,2006
              
              2005Sales
              
              $
              14,884,214
              
              $
              13,347,318Cost
                  of sales
              
              
              10,297,447
              
              
              9,094,248Gross
                  profit
              
              
              4,586,767
              
              
              4,253,070Selling,
                  general and administrative expenses, net
              
              
              4,756,862
              
              
              4,250,624Operating
                  (loss) income
              
              
              (170,095
              )
              
              2,446Other
                  income
              
              
              65,789
              
              
              61,877Interest
                  expense, net; includes related party interest of $25,629 in 2006
                  and
                  $21,820in
                  2005
              
              
              (299,662
              )
              
              (243,560
              )Loss
                  before income taxes
              
              
              (403,968
              )
              
              (179,237
              )Income
                  tax expense
              
              
              19,121
              
              
              19,696Net
                  loss
              
              $
              (423,089
              )
              $
              (198,933
              )Loss
                  per common share:Basic
              
              $
              (0.09
              )
              $
              (0.05
              )Diluted
              
              $
              (0.09
              )
              $
              (0.05
              )Weighted
                  average shares outstanding:Basic
              
              
              4,549,411
              
              
              4,165,183Diluted
              
              
              4,549,411
              
              
              4,165,183
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  2
 *Contents*
  COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES
 Condensed
        Consolidated Statements of Cash Flows
 (Unaudited)
 
 For
                  The Three Months Ended2006
              
              2005Cash
                  flows from operating activities:Net
                  loss
              
              $
              (423,089
              )
              $
              (198,933
              )Adjustments
                  to reconcile net loss to net cash (used in) provided by operating
                  activities:Stock-based
                  compensation
              
              
              -
              
              
              (10,900
              )Provision
                  for doubtful accounts
              
              
              59,844
              
              
              35,170Depreciation
              
              
              106,690
              
              
              98,737Amortization
                  of intangibles
              
              
              3,417
              
              
              6,694Accretion
                  of debt discount
              
              
              9,375
              
              
              9,375Changes
                  in operating assets and liabilitiesAccounts
                  receivable
              
              
              722,721
              
              
              787,790Inventory
              
              
              (2,100,205
              )
              
              (835,513
              )Prepaid
                  expenses and other current assets
              
              
              97,857
              
              
              308,477Other
                  assets - noncurrent
              
              
              13,119
              
              
              13,896Trade
                  payables
              
              
              810,256
              
              
              436,259Accrued
                  liabilities
              
              
              (136,075
              )
              
              (23,308
              )Income
                  taxes payable
              
              
              6,257
              
              
              (10,846
              )Net
                  cash (used in) provided by operating activities
              
              
              (829,833
              )
              
              616,898Cash
                  flows from investing activities:Additions
                  to property and equipment
              
              
              (90,720
              )
              
              (107,995
              )Net
                  cash used in investing activities
              
              
              (90,720
              )
              
              (107,995
              )Cash
                  flows from financing activities:Issuance
                  of common stock and exercise of stock options
              
              
              -
              
              
              3,500Repayments
                  of notes payable: includes related party repayments of $30,389 in 2006,
                  and $0.00 in 2005.
              
              
              (46,046
              )
              
              (14,434
              )Issuance
                  of notes payable
              
              
              13,073
              
              
              -Repayments
                  under credit facility - term loan
              
              
              (250,000
              )
              
              (353,690
              )Borrowings
                  (repayments) under credit facility - revolving credit
              
              
              1,153,226
              
              
              (25,399
              )Net
                  cash provided by (used in) financing activities
              
              
              870,253
              
              
              (390,023
              )(Decrease)
                  increase in cash
              
              
              (50,300
              )
              
              118,880Cash
                  - beginning of period
              
              
              613,456
              
              
              310,659Cash
                  - end of period
              
              $
              563,156
              
              $
              429,539
  See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  3
 *Contents*
  **COLONIAL
        COMMERCIAL CORP. AND SUBSIDIARIES**
  Notes
        To
        Condensed Consolidated Financial Statements
 March
        31,
        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 March 31,
        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.
  Stock
        Options
  The
        Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No.
        123R), 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.
        123R 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 expects that the adoption of SFAS No. 123(R), will have 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
        ended March 31, 2005, the amount of stock based compensation was $(10,900).
        During the quarters ended March 31, 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.
  At
        March
        31, 2006, a total of 106,000 options were outstanding under the Company's
        1996
        Stock Option Plan which expired December 31, 2005. The outstanding options
        have expiration dates ranging from 2009 to 2013.
  4
 *Contents*
 The
          following table summarizes information about stock options at March 31,
          2006:
 
 Options
          Outstanding and Exercisable
 
 Range
                    of
                  Exercise
                    Prices
                
                Shares
                
                Weighted
                    Average
                  Remaining
                  Contractual
                    Life
                
                Weighted
                    Average
                  Exercise
                    Price$ 
                    .25
                
                
                106,000
                
                
                5.37
                
                $
                .25
 The
        following table illustrates the effect on net loss if the fair-value-based
        method had been applied to all outstanding awards for the quarter ended
        March 31, 2005.
  For
                    the Quarter EndedMarch
                    31,2005Net
                    loss, as reported
                
                $
                (198,933
                )Add:Stock-based
                    compensationrelated
                    to option repricing
                
                
                (10,900
                )Pro
                    forma net loss
                
                $
                (209,833
                )Basic
                    loss per share, as reported
                
                
                (0.05
                )Basic
                    loss per share, pro forma
                
                
                (0.05
                )Diluted
                    loss per share, as reported
                
                
                (0.05
                )Diluted
                    loss per share, pro forma
                
                
                (0.05
                )
  2.
              Equity
                  Transactions
  During
        the quarter ended March 31, 2006, holders of a total of 9,155 shares of
        redeemable preferred stock converted these shares into 9,155 shares of common
        stock.
  5
 *Contents*
  3.
              Supplemental
                  Cash Flow Information
  The
        following is supplemental information relating to the consolidated statements
        of
        cash flows:
  For
                    the Three Months EndedMarch
                    31, 2006
                
                March
                    31, 2005Cash
                    paid during the period for:Interest
                
                $
                283,714
                
                $
                208,387Income
                    taxes
                
                $
                57,364
                
                $
                44,906
 
 4.
              Net
                  Loss Per Common Share
 
 Employee
        stock options totaling 106,000 and 180,000 for the three months ended March
        31,
        2006 and 2005, respectively, were not included in the income per share
        calculation because their effect would have been anti-dilutive. Convertible
        preferred stock, convertible into 475,566 shares of common stock and 790,360
        shares of common stock for the three months ended March 31, 2006 and 2005,
        respectively, were not included in the net loss per share because their effects
        would have been anti-dilutive. Convertible notes, convertible into 175,000
        shares of common stock were not included in the income per share calculation
        for
        the three months ended March 31, 2006 and 2005 because their effect would
        have
        been anti-dilutive.
 
 5.
              Financing
                  Arrangements
  At
        March
        31, 2006, amounts outstanding under the credit facility were $12,649,211,
        of
        which $312,977 represents a term loan payable in three monthly installments
        of
        approximately $83,333 and a final payment of approximately $62,977. In addition,
        the Company has a standby letter of credit in the amount of $300,000 which
        expires on July 31, 2006. 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 $646,962 as of March 31, 2006. The
        interest rate on the $312,977 term loan was 8.25% (prime plus .5%) as of
        March
        31, 2006. The interest rate on the remaining credit facility, as of March
        31,
        2006 was 7.5% (prime minus .25%).
  6.
              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.
  6
 *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 123 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, 5 filed actions in 2006, 15 filed actions in 2005, 38
        filed
        actions in 2004, 31 filed actions in 2003, and 34 filed actions in 2002.
        Seventy-eight other plaintiffs have had their actions dismissed and seven
        other
        plaintiffs have settled as of March 31, 2006 for a total of $3,306,000. There
        has been no judgment against the Predecessor. Our Universal subsidiary was
        named
        by twenty-one of the existing plaintiffs; of these, six filed actions in
        2001,
        one filed an action in 2003, eleven filed actions in 2005 and three filed
        actions in 2006. No case that names our Universal subsidiary has been settled
        or
        dismissed.
  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 March 31, 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.
  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.
  7
 *Contents*
  Insurance
  The
        assets that the Predecessor sold to us included its insurance policies and
        other
        agreements and contracts. The policies provide coverage for liability accruing
        during the periods for which premiums were paid. The Predecessor was formed
        in
        1940. Copies of policies are available for each year beginning in 1970 and
        ending with the closing under the purchase agreement in 1999. Copies of policies
        for the period from 1940 to 1969 are not available.
  Insurance
        companies acknowledge coverage for potential asbestos claims under certain
        of
        these policies. Insurance companies under additional policies have reserved
        their right to deny coverage but have continued to defend and indemnify the
        Predecessor and the Company under the contested policies.
  There
        are
        periods during the years from 1940 to 1999 in which our Predecessor did not
        have
        coverage for potential asbestos claims. Subject to litigation, insurance
        companies may maintain that the existence of these periods’ results in coverage
        for only a portion of a particular injury that varies with the period during
        which there was asbestos coverage relating to the injury, and that the balance
        of any settlement or judgment is to be paid by the insured. 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.
  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.
  7.
              New
                  Accounting Pronouncements
  None
  8.
              Subsequent
                  Events
  Effective
        April 1, 2006, E. Bruce Fredrikson’s annual retainer fee for serving as a
        Director and Chairman of the Audit Committee increased from $8,000 to $18,000.
        The fee is payable in $4,500 installments in advance of each
        quarter.
  8
 *Contents*
  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.
  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. Korn, Koon, Rose and 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 2,
        2006 holders
        of a total of 1,785 shares of redeemable preferred stock converted these
        shares
        into 1,785 shares of common stock.
  **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 that affect the amounts reported 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.
  9
 *Contents*
  We
        believe the following to be critical accounting policies that affect the
        most
        significant estimates and judgments used in the preparation of our consolidated
        financial statements:
  Principles
        of Consolidation
  The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiaries. All significant intercompany balances and
        transactions have been eliminated in consolidation.
  Revenue
        Recognition
  Revenue
        for the Company primarily consists of sales of heating, ventilation and air
        conditioning equipment, climate control systems 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 $103,939 and $98,948 for the quarter ended March 31, 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.
  10
 *Contents*
  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.
  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 Three Months Ended March 31, 2006 and 2005
  Sales
        increased by 11.5%, or $1,536,896, to $14,884,214 for the three months ended
        March 31, 2006 from $13,347,318 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.
  Gross
        profit increased by 7.8%, or $333,697, to $4,586,767 for the three months
        ended
        March 31, 2006 from $4,253,070 for the same period in 2005. Gross profit
        expressed as a percentage of sales declined by 1.1% to 30.8% in 2006 compared
        to
        31.9% for the comparable period in 2005. The decrease in the percentage of
        gross
        profit is primarily the result of a change in product mix, for example, selling
        more low-margin high volume products without a corresponding increase in
        sales
        of higher margin products such as control systems, 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 $103,939 and $98,948 for the three months ended March
        31, 2006 and 2005, respectively.
  The
        Company’s net loss increased by 112.7%, or $224,156, to $423,089 for the three
        months ended March 31, 2006, compared to net loss of $198,933 for the same
        period in 2005. Pre-tax loss increased by 125.4%, or $224,731, to $403,968
        for
        the three months ended March 31, 2006 from $179,237 for the same period in
        2005.
  This
        higher net loss was caused by increased expenses related to investments in
        personnel to improve customer service, expansion of our commercial departments,
        and added cost for increased gasoline, utility expenses and interest expenses.
        More specifically, selling, general and administrative expenses and cost
        of
        operations increased by 11.9%, or $506,238, to $4,756,862 for the three months
        ended March 31, 2006 from $4,250,624 for the same period in 2005. Staffing
        costs
        increased by $287,000, while costs for trucking, fuel, and facilities increased
        by $96,932.
  Other
        income increased by 6.3%, or $3,912, to $65,789 for the three months ended
        March
        31, 2006 from $61,877 for the same period in 2005. This increase is primarily
        the result of an increase in service charges collected in the three months
        ended
        March 31, 2006.
  11
 *Contents*
  Interest
        expense, net increased by 23.0%, or $56,102, to $299,662 for the three months
        ended March 31, 2006 from $243,560 for the same period in 2005. This increase
        is
        primarily the result of increasing interest rates and increased borrowings
        under
        the credit line to support higher inventory levels in preparation for the
        increased demand of sales of air conditioning products for the second quarter
        of
        2006. The revolving credit line bears interest at .25% below prime rate,
        which
        was 7.75% at March 31, 2006 compared to 5.75% at March 31, 2005.
  The
        following table summarizes information derived from the Company’s consolidated
        statements of income expressed as a percentage of sales for the quarter ended
        March 31, 2006 and 2005.
  For
                    the QuarterEnded
                    March 31,2006
                
                2005Sales
                
                
                100.0
                %
                
                100.0
                %Cost
                    of sales
                
                
                69.2
                %
                
                68.1
                %Gross
                    profit
                
                
                30.8
                %
                
                31.9
                %Selling,
                    general and administrative expenses
                
                
                31.9
                %
                
                31.9
                %Operating
                    loss
                
                
                (1.1
                )%
                
                0.0
                %Other
                    income
                
                
                0.4
                %
                
                0.4
                %Interest
                    expense
                
                
                (2.0
                )%
                
                (1.8
                )%Loss
                    before taxes
                
                
                (2.7
                )%
                
                (1.4
                )%Income
                    taxes
                
                
                (0.1
                )%
                
                (0.1
                )%Net
                    loss
                
                
                (2.8
                )%
                
                (1.5
                )%
  12
 *Contents*
  Liquidity
        and Capital Resources
  The
        Company has a $15,000,000 secured loan facility pursuant to a credit and
        security agreement (“Agreement”) with Wells Fargo Business Credit, Inc.
        (“Wells”). The facility consists of a revolving line of credit which expires on
        August 1, 2009, and a term loan with a balance of $312,977 as of March 31,
        2006,
        payable in three monthly installments of approximately $83,333 and a final
        payment of approximately $62,977. In addition, the Company has a standby
        letter
        of credit in the amount of $300,000 which expires on July 31, 2006. 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
        $646,962 as of March 31, 2006. The balance outstanding under the revolving
        line
        of credit including the term loan was $12,649,211 as of March 31, 2006. The
        revolving credit line bears interest at .25% below prime, and the term loan
        bears interest at .50% above 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
        March 31, 2006, the Company had $563,156 in cash compared with $613,456 at
        December 31, 2005.
  Net
        cash
        used in operating activities was $829,833 for the quarter ended March 31,
        2006.  The net cash used in operating activities for the 2006 period is
        primarily a result of a net loss approximating $423,089 and cash used in
        operating assets and liabilities approximating $586,070, offset by non-cash
        charges approximating $179,326.  The decrease in accounts receivable
        approximating $722,721 was primarily a result of the cyclical decrease in
        sales
        during the first quarter. Accounts payable increased due to additional inventory
        purchases in preparation for the increased demand of sales of air conditioning
        products for the second quarter of 2006.
  Cash
        flows used in investing activities of $90,720 during the quarter ended March
        31,
        2006 were due to purchases of equipment.
  The
        cash
        flows provided by financing activities of $870,253 consisted of $1,153,226
        borrowings under the credit facility-revolving credit and $13,073 from the
        issuance of notes payable. Cash flows used in financing activities consisted
        of
        $250,000 repayments under the credit facility-term loan and $46,046 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.
  13
 *Contents*
  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%, except for the term loan, with a balance of $312,977 as of
        March
        31, 2006, which bears interest at a rate of prime plus .5% 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 for the quarter ended March 31, 2006 by approximately $100,916 over
        a
        one-year period, assuming the borrowing level remains consistent with the
        outstanding borrowings as of March 31, 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 March 31, 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.
  (b)
              Changes
                  in Internal Controls
  Subsequent
        to that evaluation, there have been no significant changes in our internal
        controls or other factors that could significantly affect these controls
        after
        such evaluation.
  **PART
        II. OTHER INFORMATION**
  **Item
        1. Legal Proceedings**
  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 123 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.
  14
 *Contents*
  Of
        the
        existing plaintiffs, 5 filed actions in 2006, 15 filed actions in 2005, 38
        filed
        actions in 2004, 31 filed actions in 2003, and 34 filed actions in 2002.
        Seventy-eight other plaintiffs have had their actions dismissed and seven
        other
        plaintiffs have settled as of March 31, 2006 for a total of $3,306,000. There
        has been no judgment against the Predecessor. Our Universal subsidiary was
        named
        by twenty-one of the existing plaintiffs; of these, six filed actions in
        2001,
        one filed an action in 2003, eleven filed actions in 2005 and three filed
        actions in 2006. No case that names our Universal subsidiary has been settled
        or
        dismissed.
  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 March 31, 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.
  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.
  15
 *Contents*
  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.
  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.
  **Items
        1A, 2, 3, 4 and 5 are not applicable and have been
        omitted.**
  **Item
        6. Exhibits**
  31.1
              Certification
                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.
  31.2
                Certification
                    of Chief Financial Office Pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002.
  32.1
              Certification
                  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.
  32.2
              Certification
                  of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.
  16
 *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:
                    May 15, 2006
                
                COLONIAL
                    COMMERCIAL CORP./s/
                    William PaganoWilliam
                    Pagano,Chief
                    Executive Officer/s/
                    William SalekWilliam
                    Salek,Chief
                    Financial Officer