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 1934
 
 For the
quarterly period ended March
31, 2008
 
 OR
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934


For the
transition period from ________________ to ________________





Commission
file number:  1-6663





COLONIAL
COMMERCIAL CORP.


(Exact
name of registrant as specified in its charter)





New
      York
            
            11-2037182(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)275
      Wagaraw Road, Hawthorne, New Jersey
            
            07506(Address
      of principal executive offices)
            
            (Zip
      Code)





973-427-8224


(Registrant’s
telephone number, including area code)





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


Yes x                      No  o




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


Large
      accelerated filer        o
            Accelerated
      filer                         oNon-accelerated
      filer          o
            Smaller
      reporting company       x





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


Yes 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 May 1, 2008Common
      Stock, $.05 par value per share
            
            4,653,955
      sharesConvertible
      Preferred Stock, $.05 par value per share
            
            451,075
      shares










COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES




CONTENTS




PART
      I.    FINANCIAL INFORMATIONItem
      1.
            Financial Statements
            PageCondensed Consolidated Balance Sheets as of March 31, 2008
      (Unaudited) and December 31, 2007
            1Condensed Consolidated Statements of Operations (Unaudited) for
      the Three Months Ended March 31, 2008 and 2007
            2Condensed Consolidated Statements of Cash Flows (Unaudited) for
      the Three Months Ended March 31, 2008 and 2007
            3Notes to Condensed Consolidated Financial Statements
      (Unaudited)
            4Item
      2.
            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            13Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            20Item
      4.
            Controls and Procedures
            21PART
      II.   OTHER INFORMATIONItem
      1.
            Legal Proceedings
            21Item
      6.
            Exhibits
            21


Table of Contents




PART I.  FINANCIAL
INFORMATION




Item 1.  Financial
Statements




COLONIAL COMMERCIALCORP. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets





March
      31,
            
            
            December
      31,2008
            
            
            2007(unaudited)AssetsCurrent
      assets:Cash
            
            $
            628,524
            
            
            $
            622,723Accounts
      receivable, net of allowance for doubtful accounts of $325,355 in 2008 and
      $478,857 in 2007
            
            
            9,774,878
            
            
            
            11,364,038Inventory
            
            
            17,380,821
            
            
            
            17,282,661Prepaid
      expenses and other current assets
            
            
            943,868
            
            
            
            1,107,623Deferred
      tax asset - current portion
            
            
            532,500
            
            
            
            532,500Total
      current assets
            
            
            29,260,591
            
            
            
            30,909,545Property
      and equipment
            
            
            1,782,271
            
            
            
            1,799,689Goodwill
            
            
            1,628,133
            
            
            
            1,628,133Other
      intangibles
            
            
            357,726
            
            
            
            366,376Other
      assets - noncurrent
            
            
            208,295
            
            
            
            227,478Deferred
      tax asset – noncurrent
            
            
            1,176,000
            
            
            
            1,176,000$
            34,413,016
            
            
            $
            36,107,221Liabilities
      and Stockholders' EquityCurrent
      liabilities:Trade
      payables
            
            $
            8,849,068
            
            
            $
            7,774,988Accrued
      liabilities
            
            
            2,056,337
            
            
            
            1,970,396Income
      taxes payable
            
            
            -
            
            
            
            2,576Borrowings
      under credit facility - revolving credit
            
            
            16,699,245
            
            
            
            18,027,055Convertible
      notes payable, includes related party notes of $162,500 in 2008 and
      $62,500 in 2007
            
            
            237,500
            
            
            
            137,500Notes
      payable - current portion; includes related party notes of $780,000 in
      2008 and $30,000 in 2007
            
            
            904,063
            
            
            
            158,827Total
      current liabilities
            
            
            28,746,213
            
            
            
            28,071,342Convertible
      notes payable, includes related party notes of $162,500 in 2008 and
      $262,500 in 2007
            
            
            237,500
            
            
            
            337,500Notes
      payable, excluding current portion; includes related party notes of $0 in
      2008 and $750,000 in 2007
            
            
            153,731
            
            
            
            929,814Total
      liabilities
            
            
            29,137,444
            
            
            
            29,338,656Commitments
      and contingenciesStockholders'
      equity:Redeemable
      convertible preferred stock, $.05 par value, 2,500,000 shares authorized,
      467,500 shares issued and outstanding in 2008 and 2007, liquidation
      preference of $2,337,500 in 2008 and 2007
            
            
            23,375
            
            
            
            23,375Common
      stock, $.05 par value, 20,000,000 shares authorized, 4,637,530 shares
      issued and outstanding in 2008 and 2007
            
            
            231,876
            
            
            
            231,876Additional
      paid-in capital
            
            
            10,780,128
            
            
            
            10,773,451Accumulated
      deficit
            
            
            (5,759,807
            )
            
            
            (4,260,137
            )Total
      stockholders' equity
            
            
            5,275,572
            
            
            
            6,768,565$
            34,413,016
            
            
            $
            36,107,221




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


1
 Table of Contents


COLONIAL COMMERCIALCORP. AND SUBSIDIARIES


Condensed
Consolidated Statements of Operations


(Unaudited)





For
      The Three Months EndedMarch
      31,2008
            
            
            2007Sales
            
            $
            18,221,128
            
            
            $
            16,042,232Cost
      of sales
            
            
            12,865,542
            
            
            
            11,170,730Gross
      profit
            
            
            5,355,586
            
            
            
            4,871,502Selling,
      general and administrative expenses, net
            
            
            6,557,004
            
            
            
            4,988,606Operating
      loss
            
            
            (1,201,418
            )
            
            
            (117,104
            )Other
      income
            
            
            84,785
            
            
            
            64,598Interest
      expense, net; includes related party interest of $21,551 in 2008 and
      $25,967 in 2007
            
            
            (379,149
            )
            
            
            (334,042
            )Loss
      before income tax expense
            
            
            (1,495,782
            )
            
            
            (386,548
            )Income
      tax expense
            
            
            3,888
            
            
            
            3,392Net
      loss
            
            $
            (1,499,670
            )
            
            $
            (389,940
            )Loss
      per common share:Basic
            
            $
            (0.32
            )
            
            $
            (0.08
            )Diluted
            
            $
            (0.32
            )
            
            $
            (0.08
            )Weighted
      average shares outstanding:Basic
            
            
            4,637,530
            
            
            
            4,645,102Diluted
            
            
            4,637,530
            
            
            
            4,645,102




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


2
 Table of Contents


COLONIAL COMMERCIALCORP. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





For
      The Three Months EndedMarch
      31,2008
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (1,499,670
            )
            
            $
            (389,940
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Stock-based
      compensation
            
            
            6,677
            
            
            
            10,335Provision
      for doubtful accounts
            
            
            139,661
            
            
            
            1,792Depreciation
            
            
            158,509
            
            
            
            119,151Amortization
      of intangibles
            
            
            8,650
            
            
            
            500Accretion
      of debt discount
            
            
            14,423
            
            
            
            9,375Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            1,449,499
            
            
            
            611,563Inventory
            
            
            (98,160
            )
            
            
            (1,770,569
            )Prepaid
      expenses and other current assets
            
            
            163,755
            
            
            
            (214,181
            )Other
      assets - noncurrent
            
            
            19,183
            
            
            
            11,437Trade
      payables
            
            
            1,074,080
            
            
            
            2,203,625Accrued
      liabilities
            
            
            85,941
            
            
            
            (66,844
            )Income
      taxes payable
            
            
            (2,576
            )
            
            
            (1,321
            )Net
      cash provided by operating activities
            
            
            1,519,972
            
            
            
            524,923Cash
      flows from investing activities:Additions
      to property and equipment
            
            
            (141,091
            )
            
            
            (60,373
            )Net
      cash used in investing activities
            
            
            (141,091
            )
            
            
            (60,373
            )Cash
      flows from financing activities:Issuance
      of common stock and exercise of stock options
            
            
            -
            
            
            
            13,000Repayments
      of notes payable
            
            
            (45,270
            )
            
            
            (19,102
            )Repayments
      under credit facility - revolving credit, net
            
            
            (1,327,810
            )
            
            
            (340,313
            )Net
      cash used in financing activities
            
            
            (1,373,080
            )
            
            
            (346,415
            )Increase
      in cash
            
            
            5,801
            
            
            
            118,135Cash
      - beginning of period
            
            
            622,723
            
            
            
            482,251Cash
      - end of period
            
            $
            628,524
            
            
            $
            600,386




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


3
 Table of Contents


COLONIAL COMMERCIALCORP. AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


March 31,
2008


(Unaudited)




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




The
condensed consolidated financial statements of Colonial Commercial Corp. and
Subsidiaries (the "Company") included herein have been prepared by the Company
and are unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the opinion
of management, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the interim periods to which the
report relates.  The results of operations for the period ended March
31, 2008 is not necessarily indicative of the operating results that may be
achieved for the full year.




The financial statements have been
prepared on a going concern basis.  The Company has incurred a net
loss of $1,499,670 for the three months ended March 31, 2008 and a net loss of
$51,637 for the year ended December 31, 2007.  The Company’s credit
facility provides that financial covenants are to be determined on an annual
basis by agreement between the Company and its lender. The Company and its
lender have agreed on financial covenants for the period through December 31,
2008, and the Company is in compliance with these covenants.  The
continuation of the credit agreement for 2009 and later years is conditioned on
the Company and the lender reaching agreement on financial covenants for these
years.  While the Company and the lender have reached mutually
agreeable covenants in the past, there can be no assurance that they will be
able to do so in the future.  If these agreements are not reached, the
Company may be unable to continue as a going concern.  The
accompanying financial statements do not include any adjustments that might be
necessary if such agreements are not reached.




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




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




Inventory
is comprised of finished goods.


4
 Table of Contents




2.
            Stock
      Options




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




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




The
following table summarizes information about stock options at March 31,
2008:




Options
      Outstanding and ExercisableWeighted
      AverageRange
      of
            
            
            
            
            
            Remaining
            
            
            Weighted
      Average
            
            
            AggregateExercise Prices
            
            
            Shares
            
            
            Contractual Life
            
            
            Exercise Price
            
            
            Intrinsic Value$
            .25
            
            
            
            22,000
            
            
            
            1.22
            
            
            $
            .25$
            1.85
            
            
            
            45,000
            
            
            
            8.69
            
            
            $
            1.8567,000
            
            
            
            
            
            
            $
            1.32
            
            
            $
            26,400Options
      Outstanding and Non-exercisable$
            1.85
            
            
            
            30,000
            
            
            
            8.69
            
            
            $
            1.85
            
            
            $
            0





For the
quarters ended March 31, 2008 and 2007, the amount of stock based compensation
was $6,677 and $10,335, respectively.




3.
            Equity
      Transactions




During
the quarters ended March 31, 2008 and 2007, no shares of redeemable preferred
stock were converted into common stock.




No stock
options were exercised during the quarter ended March 31,
2008.  During the quarter ended March 31, 2007, the Company issued
52,000 shares of common stock pursuant to the exercise of stock
options.


5
 Table of Contents




4.
            Purchases of Equity
      Securities




On
November 21, 2007, the Board of Directors authorized the Company to repurchase
up to $250,000 of its common and/or preferred stock in open market or privately
negotiated purchases.  There is no expiration date associated with
this program.  Since the inception of this program, the Company
purchased 8,150 shares of common stock for an aggregate purchase price of
$9,832.  No shares were purchased during the quarter ended March 31,
2008.  On March 26, 2008, the Company retired 8,150 shares of common
stock and the shares remain authorized, but un-issued.  Approximately
$240,168 remains available for repurchase under the program.  The
Company accounted for these transactions utilizing the constructive retirement
method.




5.
            Supplemental Cash Flow
      Information




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




For
      the Three Months EndedMarch 31, 2008
            
            
            March 31, 2007Cash
      paid during the period for:Interest
            
            $
            393,432
            
            
            $
            332,170Income
      taxes
            
            $
            4,964
            
            
            $
            3,804




6.
            Net Loss Per Common
      Share




Employee
stock options totaling 97,000 for each of the three months ended March 31, 2008
and 2007 were not included in the net loss per share calculation because their
effect would have been anti-dilutive.  Convertible preferred stock,
convertible into 467,500 shares of common stock for each of the three months
ended March 31, 2008 and 2007 were not included in the net loss per share
because their effects would have been anti-dilutive.  Convertible
notes, in the principal amount of $475,000 and $525,000, convertible into
158,333 and 175,000 shares of common stock, respectively, were not included in
the net loss per share calculation for the three months ended March 31, 2008 and
2007, respectively, because their effect would have been
anti-dilutive.




7.
            Financing
      Arrangements




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


6
 Table of Contents




The
revolving credit line bears interest at .25% below prime.  At March
31, 2008, the Company had a standby letter of credit, which expires on July 31,
2008.  The standby letter of credit reduces the availability of the
credit facility by $300,000 and additional reserves determined by the bank
further reduce the availability of the credit facility by
$100,000.  Borrowings under the credit facility are secured by the
available assets of the Company, as defined in the
Agreement.  Availability under the revolving credit line was $169,881
as of March 31, 2008 and is determined by a percentage of available assets as
defined in the Agreement, less letters of credit and reserves.  The
balance outstanding under the revolving line of credit was $16,699,245 as of
March 31, 2008.  The interest rate on the revolving credit facility as
of March 31, 2008 was 5.0%.




The
Company believes that the credit facility with Wells is sufficient to finance
its current operating needs.  The credit facility provides that
financial covenants are to be determined by agreement between Wells and the
Company on an annual basis.  While the Company and Wells have reached
mutually agreeable covenants for the period through December 31, 2008, the
Company has incurred a net loss of $1,499,670 for the three months ended March
31, 2008 and a net loss of $51,637 for the year ended December 31, 2007, and
there can be no assurance that the Company and Wells will be able to reach an
agreement on covenants in the future.  In the event the Company and
Wells are unable in the future to agree upon these annual covenants, the credit
facility would be in default, and Wells could demand immediate
payment.  The business of the Company would be materially and
adversely affected if the Company is unable to obtain alternate
financing.  The Company is in compliance with all of its financial
loan covenants.




8.
            Litigation




Universal Supply Group,
Inc.




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




The
Company understands that Predecessor and many other companies have been sued in
the Superior Court of New Jersey (Middlesex County) by plaintiffs filing
lawsuits alleging injury due to asbestos. As of March 31, 2008, there exist 85
plaintiffs in these lawsuits relating to alleged sales of asbestos products, or
products containing asbestos, by the Predecessor.  Subsequent to March
31, 2008, one of the existing plaintiffs’ cases was dismissed by summary
judgment, resulting in 84 remaining plaintiffs in these lawsuits.  The
Company never sold any asbestos related products.


7
 Table of Contents




Of the
existing plaintiffs as of March 31, 2008, 15 filed actions in 2007, 7 filed
actions in 2006, 14 filed actions in 2005, 32 filed actions in 2004, 15 filed
actions in 2003, and 2 filed actions in 2002. There are 127 other plaintiffs
that have had their actions dismissed and 12 other plaintiffs that have settled
as of March 31, 2008 for a total of $3,357,500. There has been no judgment
against the Predecessor.




Our
Universal subsidiary was named by 36 plaintiffs; of these, 11 filed actions in
2007, 6 filed actions in 2006, 11 filed actions in 2005, 5 filed actions in
2001, 1 filed an action in 2000, and 2 filed actions in 1999.  Six
plaintiffs naming Universal have had their actions dismissed and, of the total
$3,357,500 of settled actions, 2 plaintiffs naming Universal have settled for
$26,500.  No money was paid by Universal in connection with any
settlement.  Following these dismissed and settled actions, as of
March 31, 2008, there exist 28 plaintiffs that name Universal.




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




Based on
advice of counsel, the Company believes that none of the litigation that was
brought against the Company’s Universal subsidiary through March 31, 2008 is
material, and that the only material litigation that was brought against
Predecessor through that date was Rhodes v. A.O. Smith Corporation, filed on
April 26, 2004 in the Superior Court of New Jersey, Law Division, Middlesex
County, Docket Number MID-L-2979-04AS. The Company was advised that the Rhodes
case was settled for $3,250,000 (“Settlement”) under an agreement reached in
connection with a $10,000,000 jury verdict that was rendered on August 5, 2005.
The Company was not a defendant in the Rhodes case.




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




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




Indemnification




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


8
 Table of Contents




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




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




Insurance




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




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




There are
periods during the years from 1940 to 1999 in which our Predecessor did not have
coverage for potential asbestos claims.  Subject to litigation,
insurance companies may maintain that the existence of these periods’ results in
coverage for only a portion of a particular injury that varies with the period
during which there was asbestos coverage relating to the injury, and that the
balance of any settlement or judgment is to be paid by the
insured.  As of March 31, 2008, no insurance company has claimed any
contribution for a gap in coverage except for a claim for $160 made by one
insurance company to the Predecessor in 1995.  The Predecessor
asserted that it had no obligation to pay this amount and did not make any
payment.




Insurance
companies have, as of March 31, 2008, defended us and the Predecessor, and have
paid all settlement amounts and defense costs.  Except for $160
referred to above, the insurance companies have not requested any payments from
us or from the Predecessor.




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


9
 Table of 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
regard as remote the potential payment of any asbestos-based claim, we have not
accrued any balance for any period relating to asbestos claims, and we have not
recorded any amount for asbestos claims for any period in any of our financial
statements.




Other
Litigation




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




9.
            New Accounting
      Pronouncements




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




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


10
 Table of Contents




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




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




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




10.
            Related Party
      Transactions




(a)
            A
      subsidiary of the Company leases a warehouse and store in Wharton, New
      Jersey comprising of 27,000 square feet from a company owned by Mr. Paul
      Hildebrandt under a lease that expires in June 2010.  The
      Company paid Mr. Hildebrandt’s company $61,675 and $59,560 during the
      quarters ended March 31, 2008 and 2007, respectively.  The
      Company owes Mr. Hildebrandt $80,000 pursuant to two notes: (a) a
      subordinated note in the amount of $150,000, paid $30,000 annually
      commencing December 31, 2004 and (b) a $50,000 convertible note due 50% on
      June 1, 2008 and 50% on June 1, 2009.  William Salek, the
      Company’s Chief Financial Officer, is the son-in-law of Mr.
      Hildebrandt.




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


11
 Table of Contents




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




(c)
            Oscar
      and Jeffrey Folger were each an employee of the Company as Vice
      President-Chief Legal Counsel and Assistant Vice President-Legal,
      respectively, during the quarter ended March 31, 2007.  As of
      April 1, 2007, Oscar and Jeffrey Folger ceased to act as employees of the
      Company, but Oscar Folger’s law firm remains as counsel to the
      Company.  Rita Folger, a more than 5% shareholder of the
      Company, is the wife of Oscar Folger and the mother of Jeffrey
      Folger.  Professional fees paid to Oscar Folger’s law firm for
      the quarters ended March 31, 2008 and 2007, respectively, was $3,737 and
      $24,400.  Additionally, $0 and $3,000 was paid to each of Oscar
      and Jeffrey Folger as part time employees of the Company for the quarters
      ended March 31, 2008 and 2007,
respectively.




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




William
Pagano, Chief Executive Officer and Director of the Company, has a 55% interest
in Pioneer and each of Mrs. Folger and Jeffrey Folger has an 8% interest in
Pioneer Realty Partners I, LLC, which has a 40% interest in
Pioneer.  The Company paid Pioneer Realty Holdings, LLC $61,461 and
$31,100 in rent during the quarters ended March 31, 2008 and 2007,
respectively.




(e)
            Mr.
      Pagano, Mr. Salek, Mrs. Folger and the wife of Michael Goldman are holders
      of convertible unsecured notes in the amounts of $100,000, $50,000,
      $100,000 and $25,000, respectively, issued pursuant to the terms of a
      private placement made on July 29, 2004.  Interest expense on
      these notes amounted to $2,750, $1,375, $2,750 and $687.50 for each of the
      quarters ended March 31, 2008 and 2007 paid to Mr. Pagano, Mr. Salek, Mrs.
      Folger and the wife of Michael Goldman,
  respectively.




11.
            Acquisition




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


12
 Table of Contents




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


Pro Forma Condensed
Consolidated Operating Data
 (Unaudited)




For the Three Months EndedMarch 31, 2007Net
      sales
            
            $
            18,740,864Operating
      loss
            
            
            (378,505
            )Net
      loss
            
            $
            (725,075
            )(Loss)
      per common share:Basic:
            
            $
            (0.16
            )Diluted:
            
            $
            (0.16
            )




12.
            Subsequent
      Events




On April
4, 2008, the Company closed its North Adams, Massachusetts location of S&A
Supply, Inc. and moved that business into its Pittsfield, Massachusetts
location.




On April
21, 2008, 16,425 shares of redeemable preferred stock were converted into 16,425
shares of common stock.




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




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


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 Table of Contents




Forward-Looking
Statements




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




Company
Overview




Colonial
Commercial Corp. (“Colonial”) is a New York corporation which was incorporated
on October 28, 1964.  Unless otherwise indicated, the term “Company”
refers to Colonial Commercial Corp. and its consolidated
subsidiaries.  The Company’s operations are conducted through its
wholly owned subsidiaries, Universal Supply Group, Inc. (“Universal”), The RAL
Supply Group, Inc. (“RAL”), and S&A Supply, Inc (“S&A”).  We
distribute heating, ventilating and air conditioning equipment (HVAC), parts and
accessories, climate control systems, appliances, and plumbing and electrical
fixtures and supplies, primarily in New Jersey, New York, Massachusetts and
portions of eastern Pennsylvania, Connecticut and Vermont.




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




We have
developed a specialty in the design and sale of energy conservation control
systems and the fabrication of customized UL listed control
panels.  We also supply indoor air quality components and
systems.




Our
in-house staff provides technical assistance and training to
customers.  In some cases, we also use vendors’ representatives and
outside services. We do not install any equipment or systems.


14
 Table of Contents




In
September 2006, we began to distribute appliances, such as washers and dryers,
to appliance dealers primarily in New York, New Jersey, and portions of
Connecticut, Delaware and Pennsylvania.




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




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




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




Other Business
Considerations




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




Critical Accounting
Policies




The
accounting policies below are critical to the Company’s business operations and
the understanding of results of operations. The Company’s discussion and
analysis of its financial condition and results of operations are based upon the
Company’s consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as the date of the
consolidated financial statements and the reported amount of revenue and
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of asset and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.


15
 Table of Contents




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




The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company establishes and monitors the allowance for doubtful accounts based on
the credit risk of specific customers, customer concentrations, historical
trends and other information. The Company had accounts receivable of $9,774,878
and an allowance for doubtful accounts of $325,355 as of March 31,
2008.  Although the Company believes its allowance is sufficient, if
the financial condition of the Company’s customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required.




The
Company writes down its inventories for estimated slow moving and obsolete goods
in accordance with the lower of cost or market value, based upon assumptions
about future demand and market conditions. A significant sudden increase in the
demand for the Company’s products could result in a short-term increase in the
cost of inventory purchases, while a significant decrease in demand could result
in an increase in the amount of excess inventory quantities on-hand.
Additionally, the Company’s estimates of future product demand may prove to be
inaccurate, in which case the Company may have understated or overstated the
write-down required for excess and obsolete inventory.




Under
Statement of Financial Accounting Standards No. 142, goodwill is reviewed at
least annually for impairment.  In assessing the recoverability of the
Company’s goodwill, the Company must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets and liabilities of the reporting unit.  Upon adoption and again
as a result of the Company’s annual impairment test, there was no indication of
impairment for goodwill acquired in prior business combinations.  If
the Company’s estimates or its related assumptions change in the future, the
Company may be required to record impairment charges related to its
goodwill.  Goodwill and other intangible assets amounting to
$1,628,133 and $357,726 at March 31, 2008, respectively, consist of assets
arising from acquisitions.


16
 Table of Contents




The
Company has accounted for, and currently accounts for, income taxes in
accordance with Statement 109 “Accounting for Income Taxes.”  This
statement establishes financial accounting and reporting standards for the
effects of income taxes that result from an enterprise’s activities during the
current and preceding years.  It requires an asset and liability
approach for financial accounting and reporting of income taxes.  The
realization of future tax benefits of deductible temporary differences and
operating loss or tax credit carryforwards will depend on whether the Company
will have sufficient taxable income of an appropriate character within the
carryback and carryforward period permitted by the tax law to allow for
utilization of the deductible amounts and carryforwards. Without sufficient
taxable income to offset the deductible amounts and carryforwards, the related
tax benefits will expire unused. The Company evaluates both positive and
negative evidence in making a determination as to whether it is more likely than
not that all or some portion of the deferred tax asset will not be
realized.  As of March 31, 2008, the Company had a deferred tax
valuation allowance of approximately $6,800,000.




Results of
Operations




Results
of Operations For the Quarter Ended March 31, 2008 and 2007




Sales
increased by 13.6%, or $2,178,896, to $18,221,128 for the quarter ended March
31, 2008 from $16,042,232 for the same period in 2007.  The new branch
opening in the Albany, New York area on April 10, 2007 and the acquisition of
S&A Supply, Inc. on September 10, 2007 constituted new operations in the
quarter ended March 31, 2008, as we did not have these operations in the same
period 2007.  Sales from these new operations were $2,810,343 for the
quarter ended March 31, 2008, while sales from continuing operations declined by
3.9%, or $631,447, from $16,042,232 to $15,410,785.  This decline in
sales is attributed to reduced sales of heating and air conditioning equipment
and accessories which were negatively impacted by reduced sales in new
residential construction, a decline in residential renovations caused by an
economic slowdown in the region, and unfavorable weather
conditions.




Gross
profit increased by 9.9%, or $484,084, to $5,355,586 for the quarter ended March
31, 2008 from $4,871,502 for the same period in 2007.  Gross profit
from the operations which we did not have in the comparable period in 2007 was
$813,290 for the quarter, while gross profit from continuing operations declined
by 6.8%, or $329,206, from $4,871,502 to $4,542,296.  The decline in
gross profit from continuing operations was directly caused by a corresponding
decrease in sales, lower earned vendor rebates, and reduced cash discounts taken
on purchases.  Gross profit expressed as a percentage of sales
decreased by 1.0% to 29.4% in 2008 compared to 30.4% for the comparable period
in 2007.  The decrease in gross profit expressed as a percentage of
sales is primarily the result of lower earned vendor rebates and reduced cash
discounts taken on purchases.  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 $145,396 and
$124,515 for the quarters ended March 31, 2008 and 2007,
respectively.


17
 Table of Contents




Selling,
general and administrative expenses increased by 31.4%, or $1,568,398, to
$6,557,004 for the quarter ended March 31, 2008 from $4,988,606 for the same
period in 2007.  Selling, general and administrative expenses from the
operations which we did not have in the comparable period in 2007 was $1,154,728
for the quarter, while selling, general and administrative expenses from
continuing operations increased by 8.3%, or $413,670, from $4,988,606 to
$5,402,276.  The increase in selling, general and administrative
expense for continuing operations is primarily related to an increase in
accounting, bank, and professional fees in the amount of $185,162, an increase
in reserves for bad debt in the amount of $132,069, and an increase in other
miscellaneous expenses in the amount of $96,439 related to general cost
increases.




Net
interest expense increased by 13.5%, or $45,107, to $379,149 for the quarter
ended March 31, 2008 from $334,042 for the same period in 2007.  The
net interest expense increase is primarily the result of increased borrowings
under the credit line.  The Company used its increased borrowings to
finance higher inventory levels and accounts receivable related to the operation
of S&A Supply, Inc. and of our Albany, New York area facility.




The
Company’s income tax expense for the quarter ended March 31, 2008 was $3,888
compared to $3,392 for the same period in 2007.  The Company records
state income tax expense based on year-to-date profit of the Company and its
subsidiaries and records federal alternative minimum tax expense as the Company
utilizes its net operating loss carryforwards to offset any federal taxes
due.  Comparison of the Company’s effective tax rate from period to
period may not be consistent as the Company’s subsidiaries file separate state
tax returns and the Company files a consolidated federal
return.  State taxes vary with the profit of the Company and its
separate subsidiaries, while federal taxes are based upon the consolidation of
the Company and its subsidiaries.




The
Company’s net loss increased by $1,109,730 to $1,499,670 for the quarter ended
March 31, 2008, compared to a net loss of $389,940 for the same period in
2007.  The increase in net loss is primarily the result of a decrease
in gross margins from continuing operations in the amount of $329,206, the
effect of losses incurred from our new operations in the amount of $397,298,
plus increased selling, general and administrative expenses for continuing
operations in accounting, bank, and professional fees, an increase in reserves
for bad debt, and an increase in other miscellaneous expenses, as stated
above.




The
Company anticipates continued weakness in the construction industry for the
remainder of 2008 through 2010, which will affect the Company’s growth through
the same period.  The Company anticipates that it will nevertheless
continue to increase revenues based upon organic growth, the addition of new
products and through possible acquisitions in 2008.  The Company has
implemented a cost reduction program and anticipates being profitable for the
year ended December 31, 2008.


18
 Table of Contents




The
following table summarizes information derived from the Company’s consolidated
statements of operations expressed as a percentage of sales for the quarter
ended March 31, 2008.




For
      the QuarterEnded
      March 31,2008
            
            
            2007Sales
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of sales
            
            
            70.6
            
            
            
            69.6Gross
      profit
            
            
            29.4
            
            
            
            30.4Selling,
      general and administrative expenses
            
            
            36.0
            
            
            
            31.1Operating
      income
            
            
            (6.6
            )
            
            
            (0.7
            )Other
      income
            
            
            0.5
            
            
            
            0.4Interest
      expense, net
            
            
            (2.1
            )
            
            
            (2.1
            )Income
      before taxes
            
            
            (8.2
            )
            
            
            (2.4
            )Income
      taxes
            
            
            0.0
            
            
            
            (0.1
            )Net
      income
            
            
            (8.2
            )%
            
            
            (2.5
            )%





Liquidity and Capital
Resources




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




The
revolving credit line bears interest at .25% below prime.  At March
31, 2008, the Company had a standby letter of credit, which expires on July 31,
2008.  The standby letter of credit reduces the availability of the
credit facility by $300,000 and additional reserves determined by the bank
further reduce the availability of the credit facility by
$100,000.  Borrowings under the credit facility are secured by the
available assets of the Company, as defined in the
Agreement.  Availability under the revolving credit line was $169,881
as of March 31, 2008 and is determined by a percentage of available assets as
defined in the Agreement, less letters of credit and reserves.  The
balance outstanding under the revolving line of credit was $16,699,245 as of
March 31, 2008.  The interest rate on the revolving credit facility as
of March 31, 2008 was 5.0%.


19
 Table of Contents




The
Company believes that the credit facility with Wells is sufficient to finance
its current operating needs.  The credit facility provides that
financial covenants are to be determined by agreement between Wells and the
Company on an annual basis.  While the Company and Wells have reached
mutually agreeable covenants for the period through December 31, 2008, the
Company has incurred a net loss of $1,499,670 for the three months ended March
31, 2008 and a net loss of $51,637 for the year ended December 31, 2007, and
there can be no assurance that the Company and Wells will be able to reach an
agreement on covenants in the future.  In the event the Company and
Wells are unable in the future to agree upon these annual covenants, the credit
facility would be in default, and Wells could demand immediate
payment.  The business of the Company would be materially and
adversely affected if the Company is unable to obtain alternate
financing.  The Company is in compliance with all of its financial
loan covenants.




As of
March 31, 2008, the Company had $628,524 in cash compared with $622,723 at
December 31, 2007.




Net cash
provided by operating activities was $1,519,972 for the quarter ended March 31,
2008.  The net cash provided by operating activities for the 2008
period is primarily a result of cash provided by operating assets and
liabilities of $2,691,722 and non-cash charges of $327,920, offset by a net loss
of $1,499,670.  The decrease in accounts receivable of $1,449,499 is
primarily a result of the cyclical decrease in sales during the first
quarter.  The increase in accounts payable of $1,074,080 is primarily
a result of the decrease in cash availability under the credit facility, which
is related to the decrease of assets available for borrowing.




Cash
flows used in investing activities were $141,091 during the quarter ended March
31, 2008 due to purchases of equipment.




Cash
flows used in financing activities of $1,373,080 consisted of $1,327,810 in net
repayments under the credit facility-revolving credit and $45,270 for repayments
of notes payable.




Item
3.  Quantitativeand 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 New
York, Inc. bears interest at the prime rate.  A hypothetical 10%
adverse change in such rates would reduce the pre-tax earnings and cash flows by
approximately $70,314 over a one-year period, assuming the borrowing level
remains consistent with the outstanding borrowings as of March 31,
2008.  The fair value of the borrowings under the credit facility is
not affected by changes in market interest rates.




The
Company’s remaining interest-bearing obligations are at fixed rates of interest
and as such, do not expose the pre-tax earnings and cash flows to changes in
market interest rates. The change in fair value of the Company’s fixed rate
obligations resulting from a hypothetical 10% adverse change in interest rates
would not be material.


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Item
4.  Controls andProcedures




Evaluation of Disclosure
Controls and Procedures




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




Changes in Internal Control
Over Financial Reporting




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




PART II.  OTHER
INFORMATION




Item
1.  Legal Proceedings




The
Company’s Legal Proceedings are incorporated by reference from Part I Financial
Information, Item 1 Financial Statements,
Section 8 Litigation, of this
Report on Form 10-Q.




Items 1A, 2, 3, 4 and 5 are
not applicable and have been omitted.




Item
6.  Exhibits




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


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