**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D. C. 20549**





**FORM
      10-KSB/A**





x
            Annual
                report under Section 13 or 15 (d) of the Securities Exchange Act
                of 1934
                for the fiscal year ended December 31,
                2005


o
            Transition
                report under Section 13 or 15 (d) of the Securities Exchange Act
                of 1934
                for the transition period from _____________to
                _____________





**Commission
      File Number: 000-50813**





**COASTAL
      BANCSHARES ACQUISITION CORP.**


(Name
      of
      Small Business Issuer in Its Charter)


**Delaware**
              (State
                or Other Jurisdiction of
              Incorporation
                or Organization)
              
              **9821
                Katy Freeway, Suite 500**
              **Houston,
                Texas**
              (Address
                of Principal Executive Offices)
            
            **20-1191778**
              (I.R.S.
                Employer
              Identification
                No.)
              
              
              **77024**
              (Zip
                code)


**(713)
      827-2104**


(Issuer’s
      Telephone Number, Including Area Code)





Securities
      registered under Section 12(b) of the Exchange Act:


None


(Title
      of
      class)





Securities
      registered under Section 12(g) of the Exchange Act:


Units
      consisting of one share of Common Stock,


par
      value
      $.01 per share, and two Warrants


Common
      Stock, $.01 par value per share


Warrants
      to purchase shares of Common Stock


(Title
      of
      class)





Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the past 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 checkmark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-B is not contained in this form, and will not be contained, to
      the
      best of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. x





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





Yes
x   No
o





State
      issuer’s revenues for its most recent fiscal year: None





The
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the registrant as of March 1, 2006, was approximately $29,145,600. For
      purposes of this computation, all executive officers, directors and 10%
      stockholders were deemed affiliates. Such a determination should not be
      construed as an admission that such executive officers, directors or 10%
      stockholders are affiliates.





As
      of
      February 28, 2006, 6,520,000 **** shares
      of
      common stock, par value $.01 per share, were issued and outstanding.





Transitional
      Small Business Disclosure Format: Yes o  No
x





Coastal
      Bancshares Acquisition Corp., a Delaware corporation (the “Company”), hereby
      amends, as set forth herein, the Company’s Annual Report on Form 10-KSB filed
      with the Securities and Exchange Commission on March 17, 2006 (the “Form
      10-KSB”). The item numbers and responses thereto are in accordance with the
      requirements of Form 10-KSB. All capitalized terms used and not otherwise
      defined herein shall have the meaning specified in the Form
      10-KSB.





**COASTAL
      BANCSHARES ACQUISITION CORP.**





PagePART
                I
            1Item
                1. Description of Business
            1Item
                2. Description of Property
            22Item
                3. Legal Proceedings
            22Item
                4. Submission of Matters to a Vote of Security Holders
            22PART
                II
            23Item
                5. Market for Common Equity and Related Stockholder
                Matters
            23Item
                6. Management’s Discussion and Analysis or Plan of
                Operation
            24Item
                7. Financial Statements
            28Item
                8. Changes In and Disagreements With Accountants or Accounting and
                Financial Disclosure
            30Item
                8A. Controls and Procedures
            30PART
                III
            30Item
                9. Directors, Executive Officers, Promoters and Control
                Persons
            30Item
                10. Executive Compensation
            33Item
                11. Security Ownership of Certain Beneficial Owners and
                Management
            33Item
                12. Certain Relationships and Related Transactions
            34SIGNATURES
            S-1INDEX
                TO EXHIBITS
            S-2










**PART
      I**





This
      report contains forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
      of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
      forward-looking statements are subject to certain risks and uncertainties that
      could cause actual results to differ materially from historical results or
      anticipated results, including those set forth under “Management’s Discussion
      and Analysis or Plan of Operation” and elsewhere in, or incorporated by
      reference into, this report.





**Item
      1. Description of Business**





**General**




Coastal
      Bancshares Acquisition Corp. (the “Company”) is a blank check company formed to
      serve as a vehicle for the acquisition of a target business in a specified
      industry. Our objective is to acquire
      an operating business in the banking industry. Specifically, we intend to merge
      with or acquire an operating commercial bank or commercial bank holding company. We
      were
      incorporated in Delaware on May 19, 2004. Our initial stockholders purchased
      1,000,000 shares of common stock, $.01 par value, for $25,000. The registration
      statement for our initial public offering (the “Offering”) was declared
      effective February 14, 2005. We consummated the Offering on February 18, 2005.
      The gross proceeds of the Offering, including the sale of 720,000 units included
      in the underwriters’ over-allotment option, was $33,120,000. $28,483,200 of the
      net proceeds were placed in a trust fund and invested in United States
      government securities. The funds held in the trust account will not be released
      until the earlier of the date on which we consummate a business combination
      or
      liquidate our assets.




We
      are
      not presently engaged in, and we will not engage in, any substantive commercial
      business for an indefinite period of time following the Offering. We intend
      to
      utilize cash derived from the proceeds of the Offering, our capital stock,
      debt
      or a combination of these in effecting a business combination. Our management
      has broad discretion with respect to the specific application of the net
      proceeds of the Offering and, as a result, the Offering was characterized as
      a
      blank check offering. While we may seek to effect business combinations with
      more than one target business, we will probably have the ability, as a result
      of
      our limited resources, to effect only a single business combination.




**Industry
      Overview**





We
      believe that the banking industry is a favorable industry in which to seek
      a
      merger or acquisition and an attractive operating environment for a target
      business. We believe that the current status of the U.S. economy will lead
      to
      growth in deposits at banks and increased demand for borrowing by businesses
      from banks and other financial institutions.





We
      believe the industry is highly fragmented, which provides a favorable industry
      in which to seek mergers and acquisitions. Our current management team and
      Board
      of Directors have significant management experience and significant experience
      in managing and growing both banks and commercial finance
      businesses.





**Strategy**




Our
      strategy is to acquire or merge with a commercial bank that is in the $100
      -
      $500 million asset size range and has one or more of the following
      characteristics:




·
            An
                attractive franchise with opportunities for geographic expansion
                and/or
                the addition of new products and
                services;




·
            An
                institution that is capital constrained and has limited access to
                alternative capital markets due to its size or other special
                considerations; and




1


·
            Generally
                avoiding premium valuations because the institution’s size is too small
                for larger acquirers, because it has a capital deficiency, or because
                it
                is in a geographic market not currently being sought by larger
                banks.




We
      believe our capital and our capital structure can be utilized to grow an
      existing banking institution, and ultimately, create an attractive acquisition
      target for a larger bank. Growth opportunities may include some or all of the
      following:




·
            Expanding
                the branch network of a banking
                institution;




·
            Utilizing
                our capital to grow internally by increasing loans and
                deposits;




·
            Attracting
                personnel from other banks who can bring substantial business with
                them;




·
            Seeking
                other profitable business lines to add to the bank’s core business;
                and




·
            Seeking
                strategic acquisitions which can provide growth to the existing franchise
                or a platform to enter another geographic
                market.




**Recent
      Developments**




On
      April 5, 2006, the Company and its wholly-owned subsidiary Coastal Merger
      Corp., a Texas corporation (“Merger Sub”), entered into a definitive Agreement
      and Plan of Merger with Intercontinental Bank Shares Corporation, a Texas
      corporation (“Intercontinental”), pursuant to which Merger Sub will merge with
      and into Intercontinental in a cash-for-stock transaction (the “Merger”). At the
      effective time of the Merger, Intercontinental will be the surviving corporation
      and become a wholly-owned subsidiary of Coastal. Intercontinental is the parent
      company of Intercontinental National Bank, based in San Antonio, Texas (the
      "Bank"). At the effective time and as a result of the Merger, the holders of
      Intercontinental common stock will receive approximately $16.8 million in
      cash in exchange for their shares, subject to adjustment based on certain
      conditions. Consummation of the Merger is subject to the approval of the
      Company’s shareholders and certain other conditions, including that the Merger
      cannot be consummated if holders of 20% or more of the Company’s common stock
      vote against the merger and demand that their shares of common stock of the
      Company be converted to cash. .





For
      a
      more complete discussion of our proposed business combination, see our Current
      Report on Form 8-K, dated April 5, 2006 and filed with the Securities and
      Exchange Commission on April 10, 2006, and our preliminary proxy statement
      filed
      with the Securities and Exchange Commission on May 2, 2006.




**Effecting
      A Business Combination**




*General*




Although
      substantially all of the net proceeds of the Offering are intended to be
      generally applied toward effecting a business combination in a specified
      industry, the proceeds are not otherwise being designated for any more specific
      purposes. Accordingly, our stockholders do not have an opportunity to evaluate
      the specific merits or risks of any one or more business combinations. A
      business combination may involve the acquisition of, or merger with, a company
      that does not need substantial additional capital but which desires to establish
      a public trading market for its shares, while avoiding what it may deem to
      be
      adverse consequences of undertaking a public offering itself. These include
      time
      delays, significant expense, loss of voting control and compliance with various
      Federal and state securities laws. In the alternative, we may seek to consummate
      a business combination with a company that may be financially unstable or in
      its
      early stages of development or growth.




*We
      have not identified a target business*




Our
      search for a target company will be limited to the United States. Subject to
      the
      limitations that a target business is an operating commercial bank or bank
      holding company and has a fair market value of at least 80% of our net assets
      at
      the time of the acquisition, as described below in more detail, we will have
      great flexibility in identifying and selecting a prospective acquisition
      candidate. Accordingly, there is no basis for our stockholders to evaluate
      the
      possible merits or risks of the target business with which we may ultimately
      complete a business combination. To the extent we effect a business combination
      with a financially unstable company or an entity in its early stage of
      development or growth, including entities without an established record of
      sales
      or earnings, we may be affected by numerous risks inherent in the business
      and
      operations of financially unstable and early stage or potential emerging growth
      companies. Although our management will endeavor to evaluate the risks inherent
      in a particular target business, there can be no assurance that we will properly
      ascertain or assess all significant risk factors.




2




*Sources
      of target businesses*




We
      anticipate that target business candidates will be brought to our attention
      from
      various unaffiliated sources, including investment bankers, venture capital
      funds, private equity funds, leveraged buyout funds, management buyout funds
      and
      other members of the financial community, who may present solicited or
      unsolicited proposals. Our officers and directors as well as their affiliates
      may also bring to our attention target business candidates. In no event,
      however, will we pay any of our existing officers, directors or stockholders
      or
      any entity with which they are affiliated any finder’s fee or other compensation
      for services rendered to us prior to or in connection with the consummation
      of a
      business combination.




*Selection
      of a target business and structuring of a business combination*




Subject
      to the requirement that our initial business combination must be with a target
      business with a fair market value that is at least 80% of our net assets at
      the
      time of such acquisition, our management has virtually unrestricted flexibility
      in identifying and selecting a prospective target business. In evaluating a
      prospective target business, our management will consider, among other factors,
      the following:




·
            financial
                condition and results of operation;




·
            growth
                potential;




·
            experience
                and skill of management;




·
            capital
                requirements;




·
            competitive
                position;




·
            stage
                of development;




·
            asset
                quality;




·
            valuation
                expectations; and




·
            the
                costs associated with effecting the business
                combination.




These
      criteria are not intended to be exhaustive. Any evaluation relating to the
      merits of a particular business combination will be based, to the extent
      relevant, on the above factors as well as other considerations deemed relevant
      by our management in effecting a business combination consistent with our
      business objective. In evaluating a prospective target business, we will conduct
      an extensive due diligence review which will encompass, among other things,
      meetings with incumbent management and inspection of facilities, as well as
      review of financial and other information which is made available to us.




The
      time
      and costs required to select and evaluate a target business and to structure
      and
      complete the business combination cannot presently be ascertained with any
      degree of certainty. Any costs incurred with respect to the identification
      and
      evaluation of a prospective target business with which a business combination
      is
      not ultimately completed will result in a loss to us and reduce the amount
      of
      capital available to otherwise complete a business combination.


3




*Fair
      market value of target business*




The
      initial target business that we acquire must have a fair market value equal
      to
      at least 80% of our net assets at the time of such acquisition. The fair market
      value of such business will be determined by our board of directors based upon
      standards generally accepted by the financial community, such as actual and
      potential sales, earnings and cash flow and book value. If our board is not
      able
      to independently determine that the target business has a sufficient fair market
      value, we will obtain an opinion from an unaffiliated, independent investment
      banking firm that is a member of the National Association of Securities Dealers,
      Inc. with respect to the satisfaction of these criteria. Since any opinion,
      if
      obtained, would merely state that fair market value meets the 80% of net assets
      threshold, it is not anticipated that copies of such opinion would be
      distributed to our stockholders, although copies will be provided to
      stockholders who request it. We are not required to obtain an opinion from
      an
      investment banking firm as to the fair market value if our board of directors
      independently determines that the target business has sufficient fair market
      value.




*Probable
      lack of business diversification*




While
      we
      may seek to effect business combinations with more than one target business,
      our
      initial business combination must be with a target business that satisfies
      the
      minimum valuation standard at the time of such acquisition, as discussed above.
      Consequently, it is probable that we will have the ability to effect only a
      single business combination. Accordingly, the prospects for our success may
      be
      entirely dependent upon the future performance of a single business. Unlike
      other entities that may have the resources to complete several business
      combinations of entities operating in multiple industries or multiple areas
      of a
      single industry, it is probable that we will not have the resources to diversify
      our operations or benefit from the possible spreading of risks or offsetting
      of
      losses. By consummating a business combination with only a single entity, our
      lack of diversification may:




·
            subject
                us to numerous economic, competitive and regulatory developments,
                any or
                all of which may have a substantial adverse impact upon the particular
                industry in which we may operate subsequent to a business combination,
                and




·
            result
                in our dependency upon the development of a single market
                area.




*Limited
      ability to evaluate the target business’ management*




Although
      we intend to closely scrutinize the management of a prospective target business
      when evaluating the desirability of effecting a business combination, there
      can
      be no assurance that our assessment of the target business’ management will
      prove to be correct. In addition, there can be no assurance that the future
      management will have the necessary skills, qualifications or abilities to manage
      a public company. Furthermore, the future role of our officers and directors,
      if
      any, in the target business cannot presently be stated with any certainty.
      While
      it is possible that one or more of our directors will remain associated in
      some
      capacity with us following a business combination, it is unlikely that any
      of
      them will devote their full efforts to our affairs subsequent to a business
      combination. Moreover, we cannot assure you that our officers and directors
      will
      have significant experience or knowledge relating to the operations of the
      particular target business or that they will be familiar with their
      responsibilities under the United States securities laws.




Following
      a business combination, we may seek to recruit additional managers to supplement
      the incumbent management of the target business. There can be no assurance
      that
      we will have the ability to recruit additional managers, or that additional
      managers will have the requisite skills, knowledge or experience necessary
      to
      enhance the incumbent management.




*Opportunity
      for stockholder approval of business combination*




Prior
      to
      the completion of a business combination, we will submit the transaction to
      our
      stockholders for approval, even if the nature of the acquisition is such as
      would not ordinarily require stockholder approval under applicable state law.
      In
      connection with seeking stockholder approval of a business combination, we
      will
      furnish our stockholders with proxy solicitation materials prepared in
      accordance with the Exchange Act, which, among other matters, will include
      a
      description of the operations of the target business and audited historical
      financial statements of the business.


4




In
      connection with the vote required for any business combination, all of our
      initial stockholders, including all of our officers and directors, have agreed
      to vote the 1,000,000 shares of common stock they owned immediately prior to
      the
      Offering in accordance with the vote of the public stockholders owning a
      majority of the shares of our common stock sold in the Offering. This voting
      arrangement does not apply to shares included in units purchased in the Offering
      or purchased following the Offering in the open market by any of our initial
      stockholders, officers and directors. We will proceed with the business
      combination only if public stockholders who own at least a majority of the
      shares of common stock sold in the Offering vote in favor of the business
      combination and public stockholders owning less than 20% of the shares sold
      in
      the Offering exercise their conversion rights.




*Conversion
      rights*




At
      the
      time we seek stockholder approval of any business combination, we will offer
      each public stockholder the right to have their shares of common stock converted
      to cash if the stockholder votes against the business combination and the
      business combination is approved and completed. The actual per-share conversion
      price will be equal to the amount in the trust fund, inclusive of any interest,
      as of the record date for determination of stockholders entitled to vote on
      the
      business combination, divided by the number of shares sold in the Offering.
      Without taking into any account interest earned on the trust fund, the initial
      per-share conversion price would be $5.16. An eligible stockholder may request
      conversion at any time after the mailing to our stockholders of the proxy
      statement and prior to the vote taken with respect to a proposed business
      combination at a meeting held for that purpose, but the request will not be
      granted unless the stockholder votes against the business combination and the
      business combination is approved and completed. Any request for conversion,
      once
      made, may be withdrawn at any time up to the date of the meeting. It is
      anticipated that the funds to be distributed to stockholders entitled to convert
      their shares who elect conversion will be distributed promptly after completion
      of a business combination. Public stockholders who convert their stock into
      their share of the trust fund still have the right to exercise the warrants
      that
      they received as part of the units. We will not complete any business
      combination if public stockholders, owning 20% or more of the shares sold in
      the
      Offering, exercise their conversion rights.




*Liquidation
      if no business combination*




If
      we do
      not complete a business combination within 18 months after the consummation
      of
      the Offering (August 18, 2006), or within 24 months (February 18, 2007) if
      the
      extension criteria described below have been satisfied, we will be dissolved
      and
      will distribute to all of our public stockholders, in proportion to their
      respective equity interests, an aggregate sum equal to the amount in the trust
      fund, inclusive of any interest, plus any remaining net assets of the Company.
      Our initial stockholders have waived their rights to participate in any
      liquidation distribution with respect to shares of common stock owned by them
      immediately prior to the Offering.




If
      we
      were to expend all of the net proceeds of the Offering, other than the proceeds
      deposited in the trust fund, and without taking into account interest, if any,
      earned on the trust fund, the initial per-share liquidation price would be
      $5.16. The proceeds deposited in the trust fund could, however, become subject
      to the claims of our creditors which could be prior to the claims of our public
      stockholders. There can be no assurance that the actual per-share liquidation
      price will not be less than $5.16, plus interest, due to claims of creditors.
      Cary M. Grossman and W. Donald Brunson, our Co-Chief Executive Officers, have
      agreed pursuant to an agreement with us and the representatives of the
      underwriters in the Offering, that, if we liquidate prior to the consummation
      of
      a business combination, they will be personally liable to pay debts and
      obligations to vendors or other entities that are owed money by us for services
      rendered or products sold to us in excess of the net proceeds of the Offering
      not held in the trust account. There can be no assurance, however, that Mr.
      Grossman and Mr. Brunson would be able to satisfy those obligations.




If
      we
      enter into a letter of intent, an agreement in principle or a definitive
      agreement to complete a business combination prior to the expiration of 18
      months after the consummation of the Offering (August 18, 2006), but are unable
      to complete the business combination within the 18-month period, then we will
      have an additional six months (February 18, 2007) in which to complete the
      business combination contemplated by the letter of intent, agreement in
      principle or definitive agreement. If we are unable to do so by the expiration
      of the 24-month period from the consummation of the Offering, we will then
      liquidate. Upon notice from us, the trustee of the trust fund will commence
      liquidating the investments constituting the trust fund and will turn over the
      proceeds to our transfer agent for distribution to our stockholders. We
      anticipate that our instruction to the trustee would be given promptly after
      the
      expiration of the applicable 18-month or 24-month period.


5




Our
      public stockholders are entitled to receive funds from the trust fund only
      in
      the event of our liquidation or if the stockholders seek to convert their
      respective shares into cash upon a business combination that the stockholder
      voted against and which is actually completed by us. In no other circumstances
      shall a stockholder have any right or interest of any kind to or in the trust
      fund. There will be no distribution from the trust fund with respect to our
      warrants.




**Competition**




In
      identifying, evaluating and selecting a target business, we expect to encounter
      intense competition from other financial institutions seeking acquisitions
      and
      from investment banking firms proposing to underwrite initial public offerings
      or offerings of debt and trust preferred certificates for the target businesses.
      Many of these entities are well established and have extensive experience
      identifying and effecting business combinations directly or through affiliates.
      Many of these competitors possess greater technical, human and other resources
      than us and our financial resources will be relatively limited when contrasted
      with those of many of these competitors. While we believe there are numerous
      potential target banking institutions that we could acquire or merge with using
      the net proceeds of the Offering, our ability to compete in acquiring or merging
      with certain sizable target businesses will be limited by our available
      financial resources. This inherent competitive limitation gives others an
      advantage in pursuing the acquisition of a target business.
      Further:




·
            our
                obligation to seekstockholderapproval of a business combination may delay the completion of a
                transaction;




·
            our
                obligation toconvertinto cash shares of common stock held by our public stockholders
                in
                certain instances may reduce the resources available to us for a
                business
                combination; and




·
            our
                outstanding redeemable warrants and options, and the future dilution
                they
                potentially represent, maynotbe
                viewed favorably by certain target
                businesses.




Any
      of
      these obligations may place us at a competitive disadvantage in successfully
      negotiating a business combination. Our management believes, however, that
      our
      status as a public entity and potential access to the United States public
      equity markets may give us a competitive advantage over privately held entities
      having a similar business objective as us in acquiring a target business with
      significant growth potential on favorable terms.





If
      we
      succeed in effecting a business combination, there will be, in all likelihood,
      intense competition from competitors of the target business in the commercial
      banking industry and other financial service businesses. There can be no
      assurance that, subsequent to a business combination, we will have the resources
      or ability to compete effectively.




**Facilities**




We
      maintain our executive offices at 9821 Katy Freeway, Suite 500, Houston, Texas
      77024. The cost for this space is included in the $7,500 per-month fee Coastal
      Acquisition, LLC charges us for general and administrative services pursuant
      to
      a letter agreement between us and Coastal Acquisition, LLC. Coastal
      Acquisition, LLC is an affiliate of certain of our directors and executive
      officers. We believe, based on rents and fees for similar services in the
      Houston, Texas metropolitan area, the fee charged by Coastal Acquisition, LLC
      is
      at least as favorable as we could have obtained from an unaffiliated person.
      We
      consider our current office space adequate for our current
      operations.




**Employees**




We
      have
      three executive officers, two of whom are members of our board of directors.
      These individuals are not obligated to contribute any specific number of hours
      per week and intend to devote only as much time as they deem necessary to our
      affairs. The executive officers are also involved with business ventures other
      than the Company. The amount of time they will devote in any time period will
      vary based on the availability of suitable target businesses to investigate.
      We
      do not intend to have any full time employees prior to the consummation of
      a
      business combination.




6




**Risks
      Associated with Our Business**




In
      addition to other information included in this report, the following factors
      should be considered in evaluating our business and future
      prospects.




*We
      are a development stage company with a limited operating history and will be
      unable to generate any revenues until we complete a business combination.*




We
      are a
      development stage company that has earned no revenues to date. Since we have
      a
      limited operating history, there is no basis upon which to evaluate our ability
      to achieve our business objective, which is to acquire an operating commercial
      bank or bank holding company. We will not generate any revenues (other than
      interest income on the proceeds of the Offering) until, at the earliest, after
      the consummation of a business combination.




*The
      Company’s management has broad discretion with respect to the specific
      application of the net proceeds of the Offering.*




Although
      substantially all of the net proceeds of the Offering are to be generally
      applied toward consummating a merger with or acquisition of an operating
      commercial bank or bank holding company, management has virtually unrestricted
      flexibility in identifying and selecting a prospective target business.
      Stockholders must therefore rely on management’s due diligence review and
      evaluation of potential acquisition candidates. There can be no assurance that,
      if we complete the acquisition of a target business, such acquisition will
      be
      successful.




*If
      we
      are forced to liquidate before a business combination, our public stockholders
      could receive less than their purchase price per share upon distribution of
      the
      trust fund and our warrants will expire worthless.*




If
      we are
      unable to complete a business combination and are forced to liquidate our
      assets, the per-share liquidation distribution could be less than the purchase
      price per share that purchasers paid for our securities because of the expenses
      of the Offering, our general and administrative expenses and the anticipated
      costs of seeking a business combination. Furthermore, there will be no
      distribution with respect to our outstanding warrants and, accordingly, the
      warrants will expire worthless if we liquidate before the completion of a
      business combination.




*If
      third parties bring claims against us, the proceeds held in trust could be
      reduced and the per share liquidation price received by stockholders could
      be
      less than their purchase price per share.*




Our
      placing of funds in trust may not protect those funds from third party claims
      against us. The proceeds held in trust could be subject to claims which could
      take priority over the claims of our public stockholders. There can be no
      assurance that the per-share liquidation price will not be less than the
      purchase price per share that purchasers paid for our securities, plus interest,
      due to claims of creditors. If we liquidate before the completion of a business
      combination, Cary M. Grossman and W. Donald Brunson, our Co-Chief Executive
      Officers, will be personally liable under certain circumstances to ensure that
      the proceeds in the trust fund are not reduced by the claims of various vendors
      or other entities that are owed money by us for services rendered or products
      sold to us. However, we cannot assure you that Messrs. Grossman and Brunson
      will
      be able to satisfy those obligations.




*Since
      we have not yet selected any target business with which to complete a business
      combination, we are unable to currently ascertain the merits or risks of the
      business which we may ultimately operate.*




Subject
      to the limitations that a target business be an operating commercial bank or
      bank holding company and have a fair market value of at least 80% of our net
      assets at the time of the acquisition, we will have flexibility in identifying
      and selecting a prospective acquisition candidate. To the extent we complete
      a
      business combination with a financially unstable company or an entity in its
      development stage, we may be affected by numerous risks inherent in the business
      operations of those entities. Although our management will endeavor to evaluate
      the risks inherent in a particular target business, there can be no assurance
      that we will properly ascertain or assess all of the significant risk factors.
      There also can be no assurance that an investment in our company will not
      ultimately prove to be less favorable to investors than a direct investment,
      if
      an opportunity were available, in a target business.




*Resources
      could be wasted in researching acquisitions that are not
      consummated.*





It
      is
      anticipated that the investigation of each specific business acquisition or
      merger and the negotiation, drafting, and execution of relevant agreements,
      disclosure documents, and other instruments will require substantial management
      time and attention and substantial costs for accountants, attorneys, and others.
      If a decision is made not to complete a specific business acquisition or merger,
      the costs incurred up to that point for the proposed transaction would not
      be
      recoverable. Furthermore, even if an agreement is reached for the acquisition
      of
      or merger with a specific business, the failure to consummate that transaction
      (which failure could occur as a result of any number of reasons, including
      issues beyond our control) will result in a loss to us of the related costs
      incurred. Such a loss could materially adversely affect subsequent attempts
      to
      locate and acquire or merge with another business.


7




*We
      may issue shares of our capital stock or debt securities to complete a business
      combination, which would reduce the equity interest of our stockholders and
      likely cause a change of control of our ownership.*




Our
      certificate of incorporation authorizes the issuance of up to 50,000,000 shares
      of common stock, par value $.01 per share, and 5,000,000 shares of preferred
      stock, par value $.01 per share. There are 31,465,000 **** authorized
      but unissued shares of our common stock (after appropriate reservation for
      the
      issuance of shares upon full exercise of our outstanding warrants and the
      purchase option granted to I-Bankers Securities and Newbridge Securities, the
      representatives of the underwriters in the Offering) and all of the 5,000,000
      shares of preferred stock available for issuance. Although we have no
      commitments as of December 31, 2005 to issue our securities, we will, in all
      likelihood, issue a substantial number of additional shares of our common stock
      or preferred stock, or a combination of common and preferred stock, to complete
      a business combination. The issuance of additional shares of our common stock
      or
      any number of shares of our preferred stock:




·
            may
                significantly reduce the equity interest of our
                stockholders;




·
            will
                likely cause a change in control if a substantial number of our shares
                of
                common stock are issued, which may affect, among other things, our
                ability
                to use our net operating loss carry forwards, if any, and most likely
                also
                result in the resignation or removal of our present officers and
                directors; and




·
            may
                adversely affect prevailing market prices for our common stock, our
                warrants and the units.




Similarly,
      if we issued debt securities ,
      it
      could result in:




·
            default
                and foreclosure on our assets if our operating cash flow after a
                business
                combination were insufficient to pay our debt
                obligations;




·
            acceleration
                of our obligations to repay the indebtedness even if we have made
                all
                principal and interest payments when due if the debt security contained
                covenants that required the maintenance of certain financial ratios
                or
                reserves and any such covenant were breached without a waiver or
                renegotiation of that covenant;




·
            our
                immediate payment of all principal and accrued interest, if any,
                if the
                debt security was payable on
                demand;




·
            covenants
                that limit our ability to acquire capital assets or make additional
                acquisitions; and




·
            our
                inability to obtain additional financing, if necessary, if the debt
                security contained covenants restricting our ability to obtain additional
                financing while such security was
                outstanding.




*Our
      current officers and directors may resign upon consummation of a business
      combination or earlier. We may have limited ability to evaluate the management
      of the target business.*




Our
      ability to successfully effect a business combination will be totally dependent
      upon the efforts of our key personnel. The future role of our key personnel
      in
      the target business, however, cannot presently be ascertained. In addition,
      current key personnel may choose to resign from service to the Company. Although
      it is possible that some of our key personnel will remain associated in various
      capacities with the target business following a business combination, it is
      also
      possible that the management of the target business at the time of the business
      combination will remain in place. Although we intend to closely scrutinize
      the
      management of a prospective target business in connection with evaluating the
      desirability of effecting a business combination, we cannot assure you that
      our
      assessment of management will prove to be correct.




8




*Our
      officers and directors may allocate their time to other businesses, which could
      cause a conflict of interest as to which business they present a viable
      acquisition opportunity.*




Our
      officers and directors are not required to commit their full time to our
      affairs, which may result in a conflict of interest in allocating their time
      between our operations and other businesses. Some of these persons may in the
      future become affiliated with entities, including other “blank check” companies,
      engaged in business activities similar to those intended to be conducted by
      us.
      Mr. Grossman, our Co-Chief Executive Officer and Chairman, is a director of
      Sand
      Hill IT Security Acquisition Corp., a blank check company organized on April
      15,
      2004 for the purpose of acquiring an operating business in the IT security
      industry. Our officers and directors may become aware of business opportunities
      that may be appropriate for presentation to us as well as the other entities
      with which they may be affiliated. Accordingly, they may have conflicts of
      interest in determining to which entity a particular business opportunity should
      be presented. There can be no assurance that these conflicts will be resolved
      in
      our favor.




All
      of
      our officers and directors own stock in our company, but have waived their
      right
      to receive distributions upon liquidation. The shares and warrants owned by
      our
      directors and officers will be worthless if we do not consummate a business
      combination. The personal and financial interests of our directors and officers
      may influence their motivation in identifying and selecting a target business
      and completing a business combination within the time allotted. Consequently,
      our directors and officers’ discretion in identifying and selecting a suitable
      target business may result in a conflict of interest when determining whether
      the terms, conditions and timing of a particular business combination are
      appropriate and in our stockholders’ best interest.




*If
      our common stock becomes subject to the SEC’s penny stock rules, broker dealers
      may experience difficulty in completing customer transactions and trading
      activity in our securities may be adversely affected.*




If
      at any
      time we have net tangible assets of $5,000,000 or less and our common stock
      has
      a market price per share of less than $5.00, transactions in our common stock
      may be subject to the “penny stock” rules promulgated under the Exchange Act.
      Under these rules, broker-dealers who recommend such securities to persons
      other
      than institutional accredited investors must:




·
            make
                a special written suitability determination for the
                purchaser;




·
            receive
                the purchaser’s written agreement to a transaction prior to
                sale;




·
            provide
                the purchaser with risk disclosure documents that identify certain
                risks
                associated with investing in “penny stocks” and which describe the market
                for these “penny stocks” as well as a purchaser’s legal remedies;
                and




·
            obtain
                a signed and dated acknowledgment from the purchaser demonstrating
                that
                the purchaser has actually received the required risk disclosure
                document
                before a transaction in a “penny stock” can be
                completed.




If
      our
      common stock becomes subject to these rules, broker-dealers may find it
      difficult to effectuate customer transactions and trading activity in our
      securities may be adversely affected. As a result, the market price of our
      securities may be depressed, and stockholders may find it more difficult to
      sell
      our securities.




*It
      is
      probable that we will only be able to complete one business combination, which
      will cause us to be solely dependent on a single business and a limited number
      of products or services.*




We
      presently have approximately $29.4 million on deposit in a trust fund which
      we may use to complete a business combination. Our initial business combination
      must be with a business with a fair market value of at least 80% of our net
      assets at the time of such acquisition. Consequently, it is probable that we
      will have the ability to complete only a single business combination.
      Accordingly, the prospects for our success may be:




9




·
            solely
                dependent upon the performance of a single business,
                or




·
            dependent
                upon the development or market acceptance of a single or limited
                number of
                products, processes or services.




In
      this
      case, we will not be able to diversify our operations or benefit from the
      possible spreading of risks or offsetting of losses, unlike other entities
      that
      may have the resources to complete several business combinations.




*Because
      of our limited resources and the significant competition for business
      combination opportunities, we may not be able to consummate a business
      combination.*




We
      expect
      to encounter intense competition from other entities competing for acquisitions
      of commercial banks. Many of these entities are well established and have
      extensive experience in identifying and effecting business combinations directly
      or through affiliates. Many of these competitors possess greater human and
      other
      resources than we do and our financial resources will be relatively limited
      when
      contrasted with those of many of these competitors. While we believe that there
      are numerous potential target businesses that we could acquire with the net
      proceeds of the Offering, our ability to compete in acquiring certain sizable
      target businesses will be limited by our available financial resources. This
      inherent competitive limitation gives others an advantage in pursuing the
      acquisition of certain target businesses. Further, the obligation we have to
      seek stockholder approval of a business combination may delay the consummation
      of a transaction, and our obligation to convert into cash the shares of common
      stock held by public stockholders in certain instances may reduce the resources
      available for a business combination. Additionally, our outstanding redeemable
      warrants, and the future dilution they potentially represent, may not be viewed
      favorably by certain target businesses. Any of these obligations combined with
      the time limitation within which we must complete a business combination may
      place us at a competitive disadvantage in successfully negotiating a business
      combination.




*We
      may be unable to obtain additional financing, if required, to complete a
      business combination or to fund the operations and growth of the target
      business, which could compel us to restructure the transaction or abandon a
      particular business combination.*




Although
      we believe that the net proceeds of the Offering will be sufficient to allow
      us
      to consummate a business combination, in as much as we have not yet identified
      any prospective target business, we cannot ascertain the capital requirements
      for any particular transaction. If the cash on deposit in our trust account
      is
      insufficient, either because of the size of the business combination or the
      depletion of the available net proceeds in search of a target business, or
      because we become obligated to convert into cash a significant number of shares
      from dissenting stockholders, we will be required to seek additional financing.
      There can be no assurance that such financing would be available on acceptable
      terms, if at all. To the extent that additional financing proves to be
      unavailable when needed to consummate a particular business combination, we
      would be compelled to restructure the transaction or abandon that particular
      business combination and seek an alternative target business candidate. In
      addition, if we consummate a business combination, we may require additional
      financing to fund the operations or growth of the target business. The failure
      to secure additional financing could have a material adverse effect on the
      continued development or growth of the target business. None of our officers,
      directors or stockholders is required to provide any financing to us in
      connection with or after a business combination.




*Our
      initial stockholders, including our officers and directors, control a
      substantial interest in us and thus may influence certain actions requiring
      stockholder vote.*




As
      of
      February 18, 2005, our initial stockholders (including all of our officers
      and directors) collectively owned 15.3% of our issued and outstanding shares
      of
      common stock. Our board of directors is divided into three classes, each of
      which will generally serve for a term of three years with only one class of
      directors being elected in each year. **** It
      is
      unlikely that there will be an annual meeting of stockholders to elect new
      directors prior to the consummation of a business combination, in which case
      all
      of the current directors will continue in office at least until the consummation
      of a business combination or our liquidation. If there is an annual meeting,
      as
      a consequence of our “staggered” board of directors, only a minority of the
      board of directors will be considered for election and our initial stockholders,
      because of their ownership position, will have considerable influence regarding
      the outcome. Accordingly, our initial stockholders will continue to exert
      control at least until the consummation of a business combination. In addition,
      our initial stockholders and their affiliates and relatives are not prohibited
      from purchasing units, warrants or shares in the aftermarket. If they do, there
      can be no assurance that our initial stockholders will not have considerable
      influence upon the vote in connection with a business
      combination.


10




*Our
      outstanding warrants and options may have an adverse effect on the market price
      of our common stock and make it more difficult to effect a business combination.*




We
      currently have 12,015,000 shares of common stock reserved for issuance upon
      exercise of issued and outstanding warrants and the option to purchase 325,000
      units that we granted to the representatives of the underwriters in the
      Offering. To the extent we issue shares of common stock to effect a business
      combination, the potential for the issuance of substantial numbers of additional
      shares upon exercise of these warrants and options could make us a less
      attractive acquisition vehicle in the eyes of a target business as such
      securities, when exercised, will increase the number of issued and outstanding
      shares of our common stock, reduce the ownership the stockholders would have
      had
      excluding the shares issued from the exercise of warrants and options, and
      may
      reduce the value of the shares issued to complete the business combination.
      Accordingly, our warrants and options may make it more difficult to effectuate
      a
      business combination or increase the cost of the target business. Additionally,
      the sale, or even the possibility of sale, of the shares underlying the warrants
      and options could have an adverse effect on the market price for our securities
      or on our ability to obtain future public financing. If and to the extent these
      warrants and options are exercised, stockholders may experience dilution to
      their holdings.




*If
      our initial stockholders exercise their registration rights, it may have an
      adverse effect on the market price of our common stock and the existence of
      theses rights may make it more difficult to effect a business combination.*




Our
      initial stockholders are entitled to demand that we register the resale of
      their
      shares of common stock at any time after the date on which their shares are
      released from escrow. If our initial stockholders exercise their registration
      rights with respect to all of their shares of common stock, then there will
      be
      an additional 1,000,000 shares of common stock eligible for trading in the
      public market. The presence of this additional number of shares of common stock
      eligible for trading in the public market may have an adverse effect on the
      market price of our securities. In addition, the existence of these rights
      may
      make it more difficult to effectuate a business combination, or may increase
      the
      cost of the target business, as the stockholders of the target business may
      be
      discouraged from entering into a business combination with us or will request
      a
      higher price for their securities as a result of these registration rights
      and
      the potential future effect their exercise may have on the trading market for
      our securities.




*Our
      securities lack a significant trading market.*




Our
      securities are not eligible for trading on any national or regional exchange.
      Our securities are eligible for trading in the over-the-counter market on the
      OTC Bulletin Board pursuant to Rule 15c2-11 of the Exchange Act. This market
      tends to be highly illiquid, in part because there is no national quotation
      system by which potential investors can trace the market price of shares except
      through information received or generated by certain selected broker-dealers
      that make a market in these particular securities. There are currently no plans,
      proposals, arrangements or understandings with any person with regard to the
      development of a trading market in our securities. There can be no assurance
      that an active trading market in our securities will develop, or if such a
      market develops, that it will be sustained. In addition, there is a greater
      chance for market volatility for securities that trade on the OTC Bulletin
      Board
      as opposed to securities that trade on a national exchange or quotation system.
      This volatility may be caused by a variety of factors, including the lack of
      readily available quotations, the absence of consistent administrative
      supervision of "bid" and "ask" quotations and generally lower trading
      volume.




*If
      we
      are deemed to be an investment company, we may be required to institute
      burdensome compliance requirements and our activities may be restricted, which
      may make it difficult for us to complete a business combination.*




If
      we are
      deemed to be an investment company under the Investment Company Act of 1940,
      our
      activities may be restricted, including:




·
            restrictions
                on the nature of our investments;
                and




·
            restrictions
                on the issuance of securities,




which
      may
      make it difficult for us to complete a business combination.




11




In
      addition, we may have imposed upon us burdensome requirements, including:




·
            registration
                as an investment company under federal and state
                laws;




·
            adoption
                of a specific form of corporate structure;
                and




·
            reporting,
                record keeping, voting, proxy and disclosure requirements and other
                rules
                and regulations.




We
      do not
      believe that our principal business activities will subject us to the Investment
      Company Act of 1940. To this end, the proceeds of the Offering that are held
      in
      trust may only be invested by the trust agent in “government securities” with
      specific maturity dates. By restricting the investment of the proceeds to these
      instruments, we intend to meet the requirements for the exemption provided
      in
      Rule 3a-1 promulgated under the Investment Company Act of 1940. If we were
      deemed to be subject to the act, compliance with these additional regulatory
      burdens would require additional expense that we have not allotted for.




**Risks
      Related to Our Proposed Business and Industry**




*If
      we
      acquire or merge with a newly formed bank, we may incur significant
      losses.*




Our
      target business could be a recently formed bank. Due to a recent accounting
      rule
      change that requires immediate write-off of start-up costs, de novo banks are
      expected to incur operating losses in their early periods of operation because
      of an inability to generate sufficient net interest income to cover start up
      and
      operating costs. Those operating losses can be significant and can occur for
      longer periods than planned depending upon the ability to control operating
      expenses and generate net interest income.




*Our
      ability to pay dividends is limited.*




Banks
      and
      bank holding companies are both subject to certain regulatory restrictions
      on
      the payment of cash dividends. As a result, even after a business combination
      with a financial institution, our ability to pay dividends to our stockholders
      may be limited.




*We
      will be subject to significant government regulation following a business
      combination.*




We
      will
      operate in a highly regulated environment and will be subject to supervision
      and
      regulation by a number of governmental regulatory agencies, including the Board
      of Governors of the Federal Reserve System, or Federal Reserve, the Office
      of
      the Comptroller of the Currency, or the OCC, and the FDIC, as well as state
      banking commissions. Regulations adopted by these agencies, which are generally
      intended to provide protection for depositors and customers rather than for
      the
      benefit of stockholders, govern a comprehensive range of matters relating to
      the
      ownership and control of shareholders, acquisition of other companies and
      businesses, permissible activities we may engage in, maintenance of adequate
      capital levels and other aspects of our operations. The bank regulatory agencies
      possess broad authority to prevent or remedy unsafe or unsound practices or
      violations of law. In addition, future legislation and government policy,
      including with respect to bank deregulation and interstate expansion, could
      adversely affect the banking industry as a whole, including our results of
      operations. For example, new legislation or regulation may limit the manner
      in
      which we may conduct our business, including our ability to offer new products,
      obtain financing, attract deposits, make loans and achieve satisfactory interest
      spreads.




*There
      are substantial regulatory limitations on changes of control.*




With
      certain limited exceptions, federal regulations prohibit a person or company
      or
      a group of persons deemed to be “acting in concert” from, directly or
      indirectly, acquiring more than 10% (5% if the acquirer is a bank holding
      company) of any class of a bank holding company’s voting stock or obtaining the
      ability to control in any manner the election of a majority of directors or
      otherwise direct the management or policies of a bank holding company without
      prior notice or application to and the approval of the Federal Reserve.
      Accordingly, stockholders need to be aware that it is likely we will become
      subject to and comply with these requirements, if applicable.




12


*If
      we
      acquire or merge with a bank holding company, we may be liable for an
      undercapitalized subsidiary bank.*




Under
      federal law, a bank holding company may be required to guarantee a capital
      plan
      filed by an undercapitalized bank or thrift subsidiary with its primary
      regulator. If the subsidiary defaults under the plan, the holding company may
      be
      required to contribute to the capital of the subsidiary bank an amount equal
      to
      the lesser of 5% of the bank’s assets at the time it became undercapitalized or
      the amount necessary to bring the bank into compliance with applicable capital
      standards.




**Regulation** **and Supervision**




*This
      following is a summary description of the relevant laws, rules and regulations
      governing banks and bank holding companies. The descriptions of, and references
      to, the statutes and regulations below are brief summaries and do not purport
      to
      be complete. The descriptions are qualified in their entirety by reference
      to
      the specific statutes and regulations discussed.*




Banking
      is a complex, highly regulated industry. Consequently, the growth and earnings
      performance of the Company following a business combination can be affected,
      not
      only by management decisions and general and local economic conditions, but
      also
      by the statutes administered by, and the regulations and policies of, various
      governmental regulatory authorities. Current banking laws contain numerous
      provisions affecting various aspects of the banking business. A bank, depending
      on its charter, may be subject to various federal and state banking laws and
      regulations that impose specific requirements on and provide regulatory
      oversight of virtually all aspects of operations. These laws and regulations
      are
      generally intended for the protection of depositors, the deposit insurance
      funds
      of the FDIC, and the banking system as a whole, rather than for the protection
      of stockholders. Banking regulators have broad enforcement powers over bank
      holding companies, banks and their affiliates, including the power to impose
      large fines and other penalties for violations of laws and regulations. The
      following is a brief summary of laws and regulations to which we expect to
      become subject to upon consummation of a business combination.




*Bank
      Holding Company Regulation*




After
      a
      business combination, we may operate as a bank holding company registered under
      the Bank Holding Company Act, and as such, we would become subject to
      supervision, regulation and examination by the Federal Reserve. The Bank Holding
      Company Act and other federal laws subject bank holding companies to particular
      restrictions on the types of activities in which they may engage, and to a
      range
      of supervisory requirements and activities, including regulatory enforcement
      actions for violations of laws and regulations. The Federal Reserve has broad
      oversight authority with respect to many aspects of the activities, operations
      and expansion of bank holding companies. For example, the Federal Reserve must
      grant prior approval of (i) certain acquisitions of banks or thrifts by bank
      holding companies; (ii) the engagement by bank holding companies or their
      subsidiaries in certain activities that are deemed to be closely related to
      banking; and (iii) transactions regarding the transfer of ownership of a bank
      holding company’s stock that constitute a “change in bank control” under the
      provisions of the Change in Bank Control Act of 1978, as amended.




*Support
      of Subsidiary Banks.* Under
      Federal Reserve policy, a bank holding company is expected to act as a source
      of
      financial strength to each of its banking subsidiaries and commit resources
      to
      their support. Such support may be required at times when, absent this Federal
      Reserve policy, a holding company may not be inclined to provide it. As
      discussed below, a bank holding company in certain circumstances could be
      required to guarantee the capital plan of an undercapitalized banking subsidiary
      in order for it to be accepted by the regulators.




In
      the
      event of a bank holding company’s bankruptcy under Chapter 11 of the U.S.
      Bankruptcy Code, the bankruptcy trustee will be deemed to have assumed and
      is
      required to cure immediately any deficit under any commitment by the debtor
      holding company to any of the federal banking agencies to maintain the capital
      of an insured depository institution, and any claim for breach of such
      obligation will generally have priority over most other unsecured
      claims.




13


Because
      a
      bank holding company is a legal entity separate and distinct from its bank
      subsidiary, our right to participate in the distribution of assets of a bank
      subsidiary upon its liquidation or reorganization will be subject to the prior
      claims of the bank’s creditors. In the event of liquidation or other resolution
      of a bank subsidiary, the claims of depositors and other general or subordinated
      creditors of the bank are entitled to a priority of payment over the claims
      of
      the holders of any obligation of the bank to its stockholders, which would
      include us or our stockholders or creditors.




*Capital
      Adequacy* .
      The
      Federal Reserve has adopted a system using risk-based capital guidelines to
      evaluate the capital adequacy of bank holding companies having $150 million
      or
      more in assets on a consolidated basis. These risk-based capital guidelines
      set
      forth the calculation of bank holding companies’ capital to asset ratios by
      assigning a weight to all assets, including off-balance-sheet assets, and by
      defining the components that may be included in capital. The guidelines
      establish a capital ratio that compares an institution’s qualifying capital base
      (the numerator of the risk-based capital) to its risk-weighted assets (the
      denominator of the ratio). We will become subject to these capital adequacy
      guidelines only to the extent that we become a bank holding company and have
      total assets of $150 million or more on a consolidated basis.





The
      guidelines create two categories of capital: Tier 1, or core capital, and Tier
      2, or supplementary capital. Generally, Tier 1 capital consists primarily of
      the
      sum of common stock and perpetual noncumulative preferred stock less goodwill
      and certain percentages of other intangible assets. Tier 2 capital consists
      primarily of perpetual preferred stock not qualifying as Tier 1 capital,
      perpetual debt, mandatory convertible securities, subordinated debt, convertible
      preferred stock with an original weighted average maturity of at least five
      years and the allowance for loan and lease losses up to a maximum of 1.25%
      of
      risk weighted assets. The sum of Tier 1 and Tier 2 capital constitutes
      qualifying total capital. The Tier 1 component must comprise at least 50% of
      qualifying total capital. All assets are assigned a weighted risk factor from
      0%
      to 100%. Risk-based capital ratios are calculated using risk-weighted assets,
      which include both on-and off-balance sheet assets.





Bank
      holding companies are required to maintain a ratio of total capital to
      risk-weighted assets (“Total Capital Ratio”) of at least 8.0%, and a ratio of
      Tier 1 capital to risk weighted assets (“Tier 1 Capital Ratio”) of at least
      4.0%. The Federal Reserve risk-based capital standards contemplate that
      evaluation of capital adequacy will take account of a wide range of other
      factors, including overall interest rate exposure; liquidity, funding and market
      risks; the quality and level of earnings; investment, loan portfolio, and other
      concentrations of credit; certain risks arising from nontraditional activities;
      the quality of loans and investments; the effectiveness of loan and investment
      policies; and management’s overall ability to monitor and control financial and
      operating risks including the risks presented by concentrations of credit and
      nontraditional activities.





In
      addition, bank holding companies are required to maintain a minimum leverage
      ratio of Tier 1 capital to average total consolidated assets (“Leverage Capital
      Ratio”) of at least 3.0% for the most highly-rated, financially sound banks and
      bank holding companies and a minimum Leverage Capital Ratio of at least 4.0%
      for
      all other banks. The OCC, the FDIC and the Federal Reserve define Tier 1 capital
      in the same manner for both the leverage ratio and the risk-based capital ratio.
      Adjusted total assets are comprised of total assets less intangible assets.
      The
      guidelines also provide that banking organizations experiencing internal growth
      or making acquisitions will be expected to maintain strong capital positions
      substantially above the minimum supervisory level, without significant reliance
      on intangible assets. Furthermore, the guidelines indicate that the Federal
      Reserve will continue to consider a “Tangible Tier 1 Leverage Ratio” in
      evaluating proposals for expansion or new activities. The Tangible Tier 1
      Leverage Ratio is the ratio of Tier 1 capital, less intangible assets not
      deducted from Tier 1 capital, to quarterly average total assets.





Capital
      adequacy guidelines focus principally on broad categories of credit risk
      although the framework for assigning assets and off-balance sheet items to
      risk
      categories does incorporate elements of transfer risk. The risk-based capital
      ratio does not, however, incorporate other factors that may affect a company's
      financial condition, such as overall interest rate exposure, liquidity, funding
      and market risks, the quality and level of earnings, investment or loan
      concentrations, the quality of loans and investments, the effectiveness of
      loan
      and investment policies and management's ability to monitor and control
      financial and operating risks.





The
      Federal Reserve is vested with broad enforcement powers over bank holding
      companies to forestall activities that represent unsafe or unsound practices
      or
      constitute violations of law. These powers may be exercised through the issuance
      of cease and desist orders or other actions. The Federal Reserve is also
      empowered to assess civil money penalties against companies or individuals
      that
      violate the Bank Holding Company Act, to order termination of non-banking
      activities of non-banking subsidiaries of bank holding companies and to order
      termination of ownership and control of non-banking subsidiaries by bank holding
      companies.




14


*Change
      in Bank Control.* Subject
      to various exceptions, the Bank Holding Company Act and the Change in Bank
      Control Act of 1978, together with related regulations, prohibits a person
      or
      group of persons from acquiring “control” of a bank holding company unless the
      Federal Reserve has been notified and has not objected to the transaction.
      Under
      a rebuttable presumption established by the Federal Reserve, the acquisition
      of
      10% or more of a class of voting stock of a bank holding company with a class
      of
      securities registered under Section 12 of the Securities Exchange Act of 1934
      would, under the circumstances set forth in the presumption, constitute
      acquisition of control.




In
      addition, any company is required to obtain the approval of the Federal Reserve
      under the Bank Holding Company Act before acquiring 25% (5% in the case of
      an
      acquiror that is a bank holding company) or more of the outstanding common
      stock
      of the company, or otherwise obtaining control or a “controlling influence” over
      the company.




*Permitted
      Activities.* Generally,
      bank holding companies are prohibited under the Bank Holding Company Act, from
      engaging in or acquiring direct or indirect control of more than 5% of the
      voting shares of any company engaged in any activity other than (i) banking
      or
      managing or controlling banks or (ii) an activity that the Federal Reserve
      determines to be so closely related to banking as to be a proper incident to
      the
      business of banking.




Activities
      that the Federal Reserve has found to be so closely related to banking as to
      be
      a proper incident to the business of banking include:




·
            factoring
                accounts receivable;




·
            making,
                acquiring, brokering or servicing loans and usual related activities;




·
            leasing
                personal or real property;




·
            operating
                a non-bank depository institution, such as a savings association;




·
            trust
                company functions;




·
            financial
                and investment advisory activities;




·
            conducting
                discount securities brokerage activities;




·
            underwriting
                and dealing in government obligations and money market instruments;




·
            providing
                specified management consulting and counseling activities;




·
            performing
                selected data processing services and support services;




·
            acting
                as agent or broker in selling credit life insurance and other types
                of
                insurance in connection with credit transactions;
                and




·
            performing
                selected insurance underwriting
                activities.




Despite
      prior approval, the Federal Reserve has the authority to require a bank holding
      company to terminate an activity or terminate control of or liquidate or divest
      certain subsidiaries or affiliates when the Federal Reserve believes the
      activity or the control of the subsidiary or affiliate constitutes a significant
      risk to the financial safety, soundness or stability of any of its banking
      subsidiaries.




15




*Expansion of Activities* .
      Traditionally, the activities of bank holding companies have been limited to
      the
      business of banking and activities closely related or incidental to banking.
      The
      Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the
“Modernization Act”), expands the types of activities in which a bank holding
      company may engage. Subject to various limitations, the Modernization Act
      generally permits a bank holding company to elect to become a “financial holding
      company.” A financial holding company may affiliate with securities firms and
      insurance companies and engage in other activities that are “financial in
      nature.” The Modernization Act:





·
            allows
                bank holding companies meeting management, capital and Community
                Reinvestment Act standards to engage in a substantially broader range
                of
                non-banking activities than was permissible prior to enactment, including
                insurance underwriting and making merchant banking investments in
                commercial and financial companies;




·
            allows
                insurers and other financial services companies to acquire
                banks;




·
            removes
                various restrictions that applied to bank holding company ownership
                of
                securities firms and mutual fund advisory companies;
                and




·
            establishes
                the overall regulatory structure applicable to bank holding companies
                that
                also engage in insurance and securities
                operations.




At
      this
      time, we cannot determine whether we will apply to operate as a financial
      holding company. If we do not do so, we will be ineligible to engage in the
      broader range of activities that are permitted by the Modernization Act. The
      Modernization Act also modified other current financial laws, including laws
      related to financial privacy and community reinvestment. The new financial
      privacy provisions generally prohibit financial institutions, from disclosing
      nonpublic personal financial information to non-affiliated third parties unless
      customers have the opportunity to “opt out” of the disclosure.




A
      bank
      holding company may become a financial holding company under the Modernization
      Act if each of its subsidiary banks is “well capitalized” under the Federal
      Deposit Insurance Corporation Improvement Act, or FDICIA, prompt corrective
      action provisions, is well managed and has at least a satisfactory rating under
      the Community Reinvestment Act. In addition, the bank holding company must
      file
      a declaration with the Federal Reserve registering the bank holding company
      as a
      financial holding company. A bank holding company that falls out of compliance
      with such requirements may be required to cease engaging in certain activities.
      Any bank holding company that does not elect to become a financial holding
      company remains subject to the current restrictions of the Bank Holding Company
      Act. In a similar manner, a bank may establish one or more subsidiaries, which
      subsidiaries may then engage in activities that are financial in nature.
      Applicable law and regulation provide, however, that the amount of such
      investments are generally limited to 45% of the total assets of the bank, and
      such investments are not aggregated with the bank for determining compliance
      with capital adequacy guidelines. Further, the transactions between the bank
      and
      such a subsidiary are subject to certain limitations. (See generally, the
      discussion of Transactions with Affiliates and Insiders described under “Certain
      Regulations Applicable to all Financial Institutions” below.)




Under
      the
      Modernization Act, the Federal Reserve serves as the primary “umbrella”
regulator of financial holding companies, with supervisory authority over each
      parent company and limited authority over its subsidiaries. Expanded financial
      activities of financial holding companies will generally be regulated according
      to the type of such financial activity: banking activities by banking
      regulators, securities activities by securities regulators, and insurance
      activities by insurance regulators. The Modernization Act also imposes
      additional restrictions and heightened disclosure requirements regarding private
      information collected by financial institutions.




In
      addition, bank holding companies are required to file annual and other reports
      with, and furnish information regarding its business to, the Federal Reserve.
      The Federal Reserve has available to it several administrative remedies
      including cease-and-desist powers over parent holding companies and nonbanking
      subsidiaries where the actions of such companies would constitute a serious
      threat to the safety, soundness or stability of a subsidiary bank. The Federal
      Reserve also has the authority to regulate debt obligations (other than
      commercial paper) issued by bank holding companies. This authority includes
      the
      power to impose interest ceilings and reserve requirements on such debt
      obligations. A bank holding company and its subsidiaries are also prohibited
      from engaging in certain tie-in arrangements in connection with any extension
      of
      credit, lease or sale of property or furnishing of services.




16




Federal
      banking law provides that bank holding companies are able to acquire or
      establish banks in any state of the United States, subject to certain aging
      and
      deposit concentration limits that may be imposed under applicable state laws.




*Safe
      and sound banking practice.* Bank
      holding companies are not permitted to engage in unsafe and unsound banking
      practices. For example, the Federal Reserve’s Regulation Y generally requires a
      holding company to give the Federal Reserve prior notice of any redemption
      or
      repurchase of its own equity securities, if the consideration to be paid,
      together with the consideration paid for any repurchases in the preceding year,
      is equal to 10% or more of the company’s consolidated net worth. The Federal
      Reserve may oppose the transaction if it believes that the transaction would
      constitute an unsafe or unsound practice or would violate any law or regulation.
      As another example, a holding company could not impair its subsidiary bank’s
      soundness by causing it to make funds available to non-banking subsidiaries
      or
      their customers if the Federal Reserve believed it not prudent to do so.




The
      Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA,
      expanded the Federal Reserve’s authority to prohibit activities of bank holding
      companies and their non-banking subsidiaries that represent unsafe and unsound
      banking practices or which constitute violations of laws or regulations. FIRREA
      increased the amount of civil money penalties which the Federal Reserve can
      assess for activities conducted on a knowing and reckless basis, if those
      activities caused a substantial loss to a depository institution. The penalties
      can be as high as $1,000,000 for each day the activity continues. FIRREA
      expanded the scope of individuals and entities against which such penalties
      may
      be assessed.




*Annual
      Reporting; Examinations* .
      Bank
      holding companies are required to file annual reports with the Federal Reserve,
      and such additional information as the Federal Reserve may require pursuant
      to
      the Bank Holding Company Act. The Federal Reserve Board may examine a bank
      holding company or any of its subsidiaries, and charge the company for the
      cost
      of such examination.




*Anti-tying
      restrictions.* Bank
      holding companies and affiliates are prohibited from tying the provision of
      services, such as extensions of credit, to other services offered by a holding
      company or its affiliates.




*Dividends.* The
      ability of a bank holding company that does not, as an entity, currently engage
      in separate business activities of a material nature, to pay cash dividends
      depends upon the cash dividends it receives from its subsidiary banks. As a
      result, shareholders may receive dividends from the bank holding company only
      to
      the extent that funds are available after payment of the bank holding company’s
      operating expenses, which it must pay from funds received by it from its
      subsidiary banks. The Federal Reserve has stated that, as a matter of prudent
      banking, a bank holding company generally should not maintain a rate of cash
      dividends unless its net income available to shareholders has been sufficient
      to
      fully fund the dividends, and the prospective rate of earnings retention appears
      consistent with the bank holding company’s capital needs, asset quality and
      overall financial condition.




The
      ability of a bank holding company to pay dividends is further restricted by
      the
      requirement that it maintain an adequate level of capital, on a consolidated
      basis, in accordance with guidelines of the Federal Reserve. Funds available
      for
      payment of dividends to its shareholders and other expenses will be provided
      primarily from dividends to the bank holding company received from its
      subsidiary banks. Of course, the ability of a bank to pay dividends is also
      restricted by provisions of application federal or state law.




*Imposition
      of Liability for Undercapitalized Subsidiaries* .
      Bank
      regulators are required to take “prompt corrective action” to resolve problems
      associated with insured depository institutions whose capital declines below
      certain levels. In the event an institution becomes “undercapitalized,” it must
      submit a capital restoration plan. The capital restoration plan will not be
      accepted by the regulators unless each company having control of the
      undercapitalized institution guarantees the subsidiary’s compliance with the
      capital restoration plan up to a certain specified amount. Any such guarantee
      from a depository institution’s holding company is entitled to a priority of
      payment in bankruptcy.




17




The
      aggregate liability of the holding company of an undercapitalized bank is
      limited to the lesser of 5% of the institution’s assets at the time it became
      undercapitalized or the amount necessary to cause the institution to be
“adequately capitalized.” The bank regulators have greater power in situations
      where an institution becomes “significantly” or “critically” undercapitalized or
      fails to submit a capital restoration plan. For example, a bank holding company
      controlling such an institution can be required to obtain prior Federal Reserve
      approval of proposed dividends, or might be required to consent to a
      consolidation or to divest the troubled institution or other
      affiliates.




*Cross-guarantees* .
      Under
      the Federal Deposit Insurance Act, or FDIA, a depository institution (which
      definition includes both banks and savings associations), the deposits of which
      are insured by the FDIC, can be held liable for any loss incurred by, or
      reasonably expected to be incurred by, the FDIC in connection with (1) the
      default of a commonly controlled FDIC-insured depository institution or (2)
      any
      assistance provided by the FDIC to any commonly controlled FDIC-insured
      depository institution “in danger of default.” “Default” is defined generally as
      the appointment of a conservator or a receiver and “in danger of default” is
      defined generally as the existence of certain conditions indicating that default
      is likely to occur in the absence of regulatory assistance. In some
      circumstances (depending upon the amount of the loss or anticipated loss
      suffered by the FDIC), cross-guarantee liability may result in the ultimate
      failure or insolvency of one or more insured depository institutions in a
      holding company structure. Any obligation or liability owed by a subsidiary
      bank
      to its parent company is subordinated to the subsidiary bank’s cross-guarantee
      liability with respect to commonly controlled insured depository
      institutions.




*Regulation
      of National Banks*




National
      banks are subject to supervision and examination by the OCC and to regulation
      by
      both the Federal Reserve and the FDIC. Deposits in a national bank are insured
      by the FDIC up to a maximum amount (generally $100,000 per depositor). The
      majority of a national bank's operations and activities are subject to
      regulation and supervision by one or more of the regulatory authorities noted
      above. For example, activities and operations of a national bank such as:
      (i) extension of credit and lending activities; (ii) deposit
      collection activities; (iii) dividend payments; (iv) branch office
      operations; and (v) interstate expansion are regulated by at least one or
      more of these regulatory agencies. The following is a summary of certain
      restrictions that are applicable to the operations of a national
      bank.





*Branch
      Banking.* In
      1994,
      Congress adopted the Riegle-Neal Interstate Banking and Branching Efficiency
      Act. That statute provides for nationwide interstate banking and branching,
      subject to certain aging and deposit concentration limits that may be imposed
      under applicable state laws. The ability of a national bank to establish
      branches is subject to the laws where its main office is located as well as
      the
      state in which it intends to branch. Currently, the laws of 15 states provide
      such reciprocity, but it is possible that, over the next few years, additional
      states will provide for reciprocity in *de
      novo* branching.





The
      FDIC
      has adopted regulations under the Riegle-Neal Act to prohibit an out-of-state
      bank from using the new interstate branching authority primarily for the purpose
      of deposit production. These regulations include guidelines to ensure that
      interstate branches operated by an out-of-state bank in a host state are
      reasonably helping to meet the credit needs of the communities served by the
      out-of-state bank.





*Dividends.* The
      ability of national banks to pay dividends is restricted under the National
      Bank
      Act and may be subject to dividend restrictions imposed by the OCC. Under the
      National Bank Act, a national bank generally may pay dividends to the extent
      of
      net profits. The prior approval of the OCC, however, is required for any
      dividend by any national bank if the total of all dividends, including any
      proposed dividend, declared by the national bank in any calendar year exceeds
      the total of its net profits (as defined) for such year combined with its
      retained net profits for the preceding two years, less any required transfers
      to
      surplus. The OCC also has the authority to prohibit a national bank from
      engaging in any activity that, in its opinion, constitutes an unsafe or unsound
      practice in conducting its business. Under certain circumstances relating to
      the
      financial condition of a national bank, the OCC may determine that the payment
      of dividends would be an unsafe or unsound practice. In addition, the OCC and
      the Federal Reserve have expressed the view that national banks and bank holding
      companies should refrain from dividend increases or reduce or eliminate
      dividends under certain circumstances.




18




The
      ability of a national bank to pay dividends is also restricted by the
      requirement that it maintain adequate levels of capital in accordance with
      guidelines promulgated from time to time by the Comptroller and the FDIC, as
      applicable. Regulations adopted by the OCC and the FDIC require banks to
      maintain minimum Tier 1 Capital Ratios of 4.0%, Total Capital Ratios of 8.0%,
      and Leverage Capital Ratios of at least 3.0% for the most highly rated,
      financially sound banks and at least 4.0% for all other banks.




*Regulation
      of State Banks*




A
      state
      bank will be subject to the laws of the state under which it is formed in
      addition to federal regulations. Various requirements and restrictions under
      the
      laws of the state of organization and operation of the bank relate to many
      aspects of the operations, including levels of capital, reserves against
      deposits, interest rates payable on deposits, loans, investments, mergers and
      acquisitions, borrowings, dividends, locations of branch offices and capital
      requirements.




Because
      we will not limit our search for potential business combination targets to
      a
      specific charter type or state or geographic region of the United States, we
      cannot assure you of the type of financial institution that we may acquire.
      If
      we acquire a financial institution chartered under state law, we will be subject
      to regulation and examination by that financial institution's state regulator.




*Certain
      Regulations Applicable to all Financial Institutions*




*Corrective
      Measures for Capital Deficiencies.* FDICIA
      imposes a regulatory matrix that requires federal banking agencies, which
      include the FDIC, the OCC, and the Federal Reserve, to take “prompt corrective
      action” with respect to capital deficient institutions. The prompt corrective
      action provisions subject undercapitalized institutions to an increasingly
      stringent array of restrictions, requirements and prohibitions as their capital
      levels deteriorate and supervisory problems mount. Should these corrective
      measures prove unsuccessful in recapitalizing the institution and correcting
      its
      problems, the FDICIA mandates that the institution be placed in
      receivership.




Pursuant
      to regulations promulgated under the FDICIA, the corrective actions that the
      banking agencies must or may take are tied primarily to an institution’s capital
      levels. In accordance with the framework mandated by the FDICIA, the banking
      agencies have developed a classification system, the levels at which
      institutions are “well capitalized”, “adequately capitalized”,
“undercapitalized”, “significantly undercapitalized”, and “critically
      undercapitalized”. As described above, a well capitalized bank has a Total
      Capital Ratio of 10% or higher; a Tier 1 Capital Ratio of 6% or higher; a
      Leverage Ratio of 5% or higher; and is not subject to any written agreement,
      order or directive requiring it to maintain a specific capital level for any
      capital measure. An institution is critically undercapitalized if it has a
      tangible equity to total assets ratio that is equal to or less than 2%.




In
      addition to requiring undercapitalized institutions to submit a capital
      restoration plan, which must be guaranteed by its holding company (up to
      specified limits) in order to be accepted by the bank regulators, agency
      regulations contain broad restrictions on activities of undercapitalized
      institutions including asset growth, acquisitions, branch establishment and
      expansion into new lines of business. With some exceptions, an insured
      depository institution is prohibited from making capital distributions,
      including dividends, and is prohibited from paying management fees to control
      persons if the institution would be undercapitalized after any such distribution
      or payment.




As
      an
      institution’s capital decreases, the enforcement powers of the bank regulators
      become more severe. A significantly undercapitalized institution is subject
      to
      mandated capital raising activities, restrictions on interest rates paid and
      transactions with affiliates, removal of management and other restrictions.
      The
      federal bank regulators have only very limited discretion in dealing with a
      critically undercapitalized institution and are generally required to appoint
      a
      receiver or conservator if the capital deficiency is not corrected
      promptly.




19




Banks
      with risk-based capital and leverage ratios below the required minimums may
      also
      be subject to certain administrative actions, including the termination of
      deposit insurance upon notice and hearing, or a temporary suspension of
      insurance without a hearing in the event the institution has no tangible
      capital.




*Transactions
      with Affiliates and Insiders.* Financial
      institutions are subject to Section 23A and 23B of the Federal Reserve Act,
      and
      Regulation W promulgated thereunder. Section 23A places limits on the amount
      of
      loans or extensions of credit to, or investments in, or other transactions
      with,
      affiliates that a bank may make. In addition, extensions of credit would be
      required to be collateralized by our securities or obligations or the securities
      or obligations of any of our non-banking subsidiaries. Section 23B of the
      Federal Reserve Act, prohibits, among other things, an institution from engaging
      in transactions with affiliates unless the transactions are on terms
      substantially the same, or at least as favorable to such institution or its
      subsidiaries, as those prevailing at the time for comparable transactions with
      non-affiliated companies.




We
      expect
      to become subject to restrictions on extensions of credit to executive officers,
      directors, principal stockholders, and their related interests. These
      restrictions contained in the Federal Reserve Act and Federal Reserve Regulation
      O apply to all insured institutions and their subsidiaries and holding
      companies. These restrictions include limits on loans to one borrower and
      conditions that must be met before such a loan can be made. There is also an
      aggregate limitation on all loans to insiders and their related interests.
      These
      loans cannot exceed the institution’s total unimpaired capital and surplus, and
      the FDIC may determine that a lesser amount is appropriate. Insiders are subject
      to enforcement actions for knowingly accepting loans in violation of applicable
      restrictions.




In
      the
      absence of such comparable transactions, any transaction between a national
      bank
      and its affiliates must be on terms and under circumstances, including credit
      standards that in good faith would be offered or would apply to nonaffiliated
      companies. In addition, certain transactions, referred to as “covered
      transactions,” between a national bank and its affiliates may not exceed 10% of
      a national bank’s capital and surplus per affiliate and an aggregate of 20% of
      its capital and surplus for covered transactions with all affiliates. Certain
      transactions with affiliates, such as loans, also must be secured by collateral
      of specific types and amounts. Finally, a national bank is prohibited from
      purchasing low quality assets from an affiliate. Every company under common
      control with a national bank, including its holding company, are deemed to
      be
      affiliates of a national bank.




*FDIC
      Deposit Insurance Assessments* .
      In
      addition, under FDICIA, the FDIC is authorized to assess insurance premiums
      on a
      bank’s deposits at a variable rate depending on the probability that the deposit
      insurance fund will incur a loss with respect to the bank. (Under prior law,
      the
      deposit insurance assessment was a flat rate, regardless of the likelihood
      of
      loss.) In this regard, the FDIC has issued regulations for a transitional
      risk-based deposit assessment that determines the deposit insurance assessment
      rates on the basis of the bank’s capital classification and supervisory
      evaluations. Premiums are assessed based on a matrix of these categories and
      ranged from $0.00 to $0.27 per $100 of deposits.




The
      FDIC
      may terminate the deposit insurance of any insured depository institution if
      it
      determines after a hearing that the institution has engaged or is engaging
      in
      unsafe or unsound practices, is in an unsafe or unsound condition to continue
      operations, or has violated any applicable law, regulation, order or any
      condition imposed by an agreement with the FDIC. It also may suspend deposit
      insurance temporarily during the hearing process for the permanent termination
      of insurance, if the institution has no tangible capital. If insurance of
      accounts is terminated, the accounts at the institution at the time of the
      termination, less subsequent withdrawals, shall continue to be insured for
      a
      period of six months to two years, as determined by the FDIC.




*Check
      Clearing for the 21* *st* *Century Act* .
      On
      October 28, 2003, President Bush signed into law the Check Clearing for the
      21 st Century
      Act, also known as Check 21. The new law, which is not effective until October
      28, 2004, gives “substitute checks,” such as a digital image of a check and
      copies made from that image, the same legal standing as the original paper
      check. Some of the major provisions include:




·
            allowing
                check truncation without making it
                mandatory;




·
            demanding
                that every financial institution communicate to accountholders in
                writing
                a description of its substitute check processing program and their
                rights
                under the law;




20




·
            legalizing
                substitutions for and replacements of paper checks without agreement
                from
                consumers;




·
            retaining
                in place the previously mandated electronic collection and return
                of
                checks between financial institutions only when individual agreements
                are
                in place;




·
            requiring
                that when accountholders request verification, financial institutions
                produce the original check (or a copy that accurately represents
                the
                original) and demonstrate that the account debit was accurate and
                valid;
                and




·
            requiring
                recrediting of funds to an individual’s account on the next business day
                after a consumer proves that the financial institution has
                erred.




This
      new
      legislation will likely affect bank capital spending as many financial
      institutions assess whether technological or operational changes are necessary
      to stay competitive and take advantage of the new opportunities presented by
      Check 21.




*Community
      Reinvestment Act* .
      Under
      the Community Reinvestment Act, or CRA, as implemented by the Congress in 1977,
      a financial institution has a continuing and affirmative obligation, consistent
      with its safe and sound operation, to help meet the credit needs of its entire
      community, including low and moderate income neighborhoods. The CRA does not
      establish specific lending requirements or programs for financial institutions
      nor does it limit an institution’s discretion to develop the types of products
      and services that it believes are best suited to its particular community,
      consistent with the CRA. The CRA requires federal examiners, in connection
      with
      the examination of a financial institution, to assess the institution’s record
      of meeting the credit needs of its community and to take such record into
      account in its evaluation of certain applications by such institution. The
      CRA
      also requires all institutions to make public disclosure of their CRA
      ratings.




*International
      Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.* On
      October 26, 2001, the President signed the USA Patriot Act of 2001 into law.
      The
      Patriot Act contains the International Money Laundering Abatement and Financial
      Anti-Terrorism Act of 2001, or IMLAFA. The IMLAFA contains anti-money laundering
      measures affecting insured depository institutions, broker-dealers, and certain
      other financial institutions. The IMLAFA requires U.S. financial institutions
      to
      adopt new policies and procedures to combat money laundering and grants the
      Secretary of the Treasury broad authority to establish regulations and to impose
      requirements and restrictions on financial institutions’ operations. Until we
      identify a business combination, we cannot determine the impact that the IMLAFA
      will have on our operations.




The
      USA
      Patriot Act, which was originally set to expire on December 31, 2005, has been
      extended by Congress through March 10, 2006. The renewal or extension of the
      USA
      Patriot Act, including certain amendments thereto, beyond March 10, 2006 is
      currently pending before Congress.




*Regulation
      of Lending Activities.* Loans
      made by a bank are also subject to numerous federal and state laws and
      regulations, including the Truth-In-Lending Act, Federal Consumer Credit
      Protection Act, state consumer credit and protection codes, the Equal Credit
      Opportunity Act, the Real Estate Settlement Procedures Act and adjustable rate
      mortgage disclosure requirements. Remedies to the borrower and penalties to
      a
      bank are provided for failure of a bank to comply with such laws and
      regulations.




*Mortgage
      Banking Operations* .
      Commercial banks are subject to the rules and regulations of FHA, VA, FNMA,
      FHLMC and GNMA with respect to originating, processing, selling and servicing
      mortgage loans and the issuance and sale of mortgage-backed securities. Those
      rules and regulations, among other things, prohibit discrimination and establish
      underwriting guidelines which include provisions for inspections and appraisals,
      require credit reports on prospective borrowers and fix maximum loan amounts,
      and, with respect to VA loans, fix maximum interest rates. Mortgage origination
      activities are subject to, among others, the Equal Credit Opportunity Act,
      Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act
      and
      the regulations promulgated thereunder which, among other things, prohibit
      discrimination and require the disclosure of certain basic information to
      mortgagors concerning credit terms and settlement costs. Commercial banks are
      also subject to regulation by the applicable state and federal regulatory
      authorities with respect to, among other things, the establishment of maximum
      origination fees on certain types of mortgage loan products.




21




*The
      Sarbanes-Oxley Act of 2002.* President
      Bush signed the Sarbanes-Oxley Act of 2002 into law on July 30, 2002.
      Regulations were issued by the Securities and Exchange Commission in connection
      with the new law during both 2002, 2003 and 2004, and additional regulations
      are
      anticipated. This important law has far reaching impact on corporate affairs.
      It
      directly affects how independent public accountants and companies must interact
      with each other. It limits non-audit services that may be provided by public
      companies’ independent accountants and the companies that they audit with a view
      to maintaining or imposing independence on public companies and their
      independent auditors. It creates an oversight board for all certified public
      accounting firms that practice before the Securities and Exchange Commission.
      The Sarbanes-Oxley Act also seeks to enhance both the quality and reliability
      of
      financial statements, as well as improving corporate disclosure and the timing
      of material disclosures. Public companies are also required to improve corporate
      governance, typically by establishing or reorganizing audit committees to assure
      audit committee independence and oversight. The law provides for restrictions
      on
      loans to officers and directors of public companies, although it appears that
      most bank loans to such persons are exempt so long as made pursuant to already
      existing federal restrictions on transactions between financial institutions
      and
      their insiders. Finally, the Sarbanes-Oxley Act imposes criminal penalties
      for
      certain violations. Obviously, this is a very broad brush and limited
      description of a very detailed and important new statute.




*Pending
      Legislation.* On
      April
      2, 2003, the U.S. House of Representatives passed H.R.522, the Federal Deposit
      Insurance Reform Act of 2003. This proposed legislation would reform the deposit
      insurance system by:




·
            merging
                the Bank Insurance Fund and the Savings Association Insurance
                Fund;




·
            ending
                the 23 basis point premium “rate cliff” that occurs when the reserve ratio
                of deposits insured to premiums held falls beneath 1.25% for more
                than one
                year;




·
            creating
                a reserve range within which a bank’s reserve ratio can
                float;




·
            increasing
                insurance coverage limits for municipal
                deposits;




·
            increasing
                insurance coverage limits for individual accounts to $130,000 and
                indexing
                future coverage limits to inflation;
                and




·
            doubling
                insurance coverage limits for certain types of IRAs and 401(k)
                plans.




As
      of the
      date of this report, this legislation was being considered by the U.S. Senate
      Banking, Housing and Urban Affairs committee.




**Item
      2.  Description of Property**





We
      maintain our executive offices 9821 Katy Freeway, Suite 500, Houston, Texas
      77024. The cost for this space is included in the $7,500 per-month fee Coastal
      Acquisition, LLC charges us for general and administrative services pursuant
      to
      a letter agreement between us and Coastal Acquisition, LLC. We believe, based
      on
      rents and fees for similar services in the Houston, Texas metropolitan area,
      that the fee charged by Coastal Acquisition, LLC is at least as favorable as
      we
      could have obtained from an unaffiliated person. We consider our current office
      space adequate for our current operation.





**Item
      3.  Legal Proceedings**





We
      are
      not presently a party to any pending legal proceeding.





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





There
      were no matters for submission to a vote of security holders during the fourth
      quarter ended December 31, 2005.




22





**PART
      II**





**Item
      5.  Market for Common Equity and Related Stockholder Matters**





The
      units, common stock and warrants are listed on the **** OTC
      Bulletin Board under the symbols CBASU, CBAS and CBASW, respectively. The
      following table indicates the quarterly high and low bid price for the units,
      common stock and warrants on the OTC Bulletin Board for the periods indicated
      since such units began trading on February 15, 2005 and common stock and
      warrants began trading on March 7, 2005. Such inter-dealer quotations do
      not necessarily represent actual transactions, and do not reflect retail
      mark-ups, mark-downs or commissions.





OTC


BULLETIN
      BOARD


BID
      PRICE


UNITS
              
              COMMON
                  STOCK
              
              WARRANTS2005
              
              
              HIGH
              
              
              LOW
              
              
              HIGH
              
              
              LOW
              
              
              HIGH
              
              
              LOWFirst
                  Quarter
              
              
              $6.58
              
              
              $6.18
              
              
              $5.09
              
              
              $4.91
              
              
              $0.76
              
              
              $0.65Second
                  Quarter
              
              
              6.25
              
              
              5.90
              
              
              5.01
              
              
              4.88
              
              
              0.65
              
              
              0.48Third
                  Quarter
              
              
              6.43
              
              
              5.81
              
              
              6.00
              
              
              4.85
              
              
              0.79
              
              
              0.46Fourth
                  Quarter
              
              
              6.16
              
              
              5.90
              
              
              5.12
              
              
              4.88
              
              
              0.61
              
              
              0.41




As
      of
      February 1, 2006, we had one holder of record of our units, seven holders
      of record of our common stock, and one holder of record of our
      warrants.





We
      have
      not paid any dividends on our common stock to date and do not intend to pay
      dividends in the foreseeable future, but intend to retain earnings for future
      growth.





*Recent
      Sales of Unregistered Securities*





In
      May
      2004, we sold the following shares of common stock without registration under
      the Securities Act:





**Stockholders**
            
            **Number of Shares**Cary
                M. Grossman
            
            
            282,500Coastal
                Acquisition, LLC
            
            
            300,000W.
                Donald Brunson
            
            
            242,500Scott
                Clingan
            
            
            85,000Fred
                S. Zeidman
            
            
            40,000Jeffrey
                P. Sangalis
            
            
            50,000





Such
      shares were issued in connection with our organization pursuant to the exemption
      from registration contained in Section 4(2) of the Securities Act as they were
      sold in a transaction not involving a public offering. The shares were sold
      at
      purchase prices of $0.025 per share.





On
      February 18, 2005, we closed the Offering of 4,800,000 units, with each unit
      consisting of one share of our common stock and two warrants, each to purchase
      one share of our common stock at an exercise price of $5.00 per share. The
      units
      were sold at an offering price of $6.00 per unit, generating gross proceeds
      of
      $28,800,000. Additionally, the underwriters’ purchased 720,000 units, pursuant
      to the exercise of the over-allotment option granted in connection with the
      Offering, generating gross proceeds of $4,320,000. The representatives of the
      underwriters in the Offering were I-Bankers Securities Incorporated and
      Newbridge Securities Corporation. The securities sold in the Offering were
      registered under the Securities Act pursuant to a registration statement on
      Form
      S-1 (No. 333-118294). The Securities and Exchange Commission declared the
      registration statement effective on February 14, 2005.




23





We
      paid a
      total of $3,081,600 in underwriting discounts and commissions, including
      $432,000 for the underwriters' non-accountable expense allowance, and incurred
      approximately $362,800 for other costs and expenses related to the
      Offering.





After
      deducting the underwriting discounts and commissions and the Offering expenses,
      the total net proceeds to us from the Offering were approximately $29,675,600,
      of which $28,483,200 was deposited into a trust fund and the remaining proceeds
      are available to be used to provide for business, legal and accounting due
      diligence on prospective business combinations and continuing general and
      administrative expenses.





On
      April
      7, 2005, Fred S. Zeidman resigned as a Class A member of the Board of Directors
      of the Company and forfeited his ownership of 40,000 shares of common stock
      of
      the Company. On April 7, 2005, the Board of Directors of the Company appointed
      Lawrence Fisher as a Class A member of the Board of Directors to fill the
      vacancy created by Mr. Zeidman's resignation and the Board granted 40,000
      restricted shares of the Company's common stock to Mr. Fisher. In connection
      with the stock grant, Mr. Fisher executed a Lock-up Agreement and an Insider
      Letter, in substantially the same form as the agreements executed by the initial
      stockholders of the Company in connection with the Offering.





**Item
      6.  Management’s Discussion and Analysis or Plan of
      Operation**





The
      following discussion should be read in conjunction with the Consolidated
      Financial Statements, including the notes thereto, included elsewhere in this
      report.





**Background:**





We
      were
      formed on May 19, 2004, to serve as a vehicle to effect a merger, capital stock
      exchange, asset acquisition or other similar business combination with an
      operating commercial bank or bank holding company. We intend to utilize cash
      derived from the proceeds of this offering, our capital stock, debt or a
      combination of cash, capital stock and debt, in effecting a business
      combination. We
      consummated the Offering on February 18, 2005.




**Critical
      Accounting Policies:**




Our
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States. The preparation of these financial
      statements requires management to make estimates and assumptions that affect
      the
      reported amounts of assets, liabilities, revenues, expenses and related
      disclosures. Actual results could differ from those estimates.




We
      believe the following critical accounting policy, among others, affect the
      more
      significant estimates and assumptions used in the preparation of our financial
      statements.




***Potential
      Obligation for Warrant Settlement***




We
      have
      outstanding warrants, which provide for us to register the shares underlying
      the
      warrants and is silent as to the penalty to be incurred in the absence of our
      ability to deliver registered shares to the warrant holders upon warrant
      exercise. Under EITF No. 00-19 *“Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock”* (“EITF
      No. 00-19”), registration of the common stock underlying our warrants is not
      within our control. As a result, we must assume that we could be required to
      settle the warrants on a net-cash basis, thereby necessitating the treatment
      of
      the potential settlement obligation as a liability. Further EITF No. 00-19,
      requires that we record the potential settlement liability at each reporting
      date using the current estimated fair value of the warrants, with any changes
      being recorded through our statement of operations. The potential settlement
      obligation related to the warrants will continue to be reported as a liability
      until such time that the warrants are exercised, expire, or we are otherwise
      able to modify the registration requirements in the warrant agreement to remove
      the provisions which require this treatment. The fair value of the warrant
      liability is determined using the trading value of the warrants.




24





**Results
      of Operations:**





For
      the
      year ended December 31, 2004, we had no operations or activities except for
      our
      initial capitalization on August 5, 2004 and activities associated with planning
      and preparation for an initial public offering. Our net loss in 2004 was
      $2,454.





For
      the
      year ended December 31, 2005, we had a net income of $2,603,265. We earned
      interest income of $18,899 on our money market account and $731,129 on our
      trust
      account. The unrealized appreciation in the value of our trust account was
      $55,397. We incurred operating expenses of $507,960 which was offset by income
      from a reduction of our warrant liability of $2,428,800. Our expenses consisted
      primarily of professional fees, overhead fees, amortization of prepaid
      insurance, amortization of deferred compensation, financial advisory fees,
      franchise taxes and certain other expenses associated with being a public
      company. We recorded an income tax provision of $123,000. We established a
      reserve against deferred tax assets from our 2004 net operating loss
      carry-forward due to the uncertainty about our ability to generate future income
      before taxes. We were able to utilize the carry-forward in 2005.





*Restatement*





Under
      EITF No. 00-19, *“Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock”* (“EITF
      No. 00-19”), the fair value of the warrants issued as part of the Units sold in
      our initial public offering have been reported as a liability. The warrant
      agreement provides for us to register the shares underlying the warrants and
      is
      silent as to the penalty to be incurred in the absence of our ability to deliver
      registered shares to the warrant holders upon warrant exercise. Under EITF
      No.
      00-19, registration of the common stock underlying the warrants is not within
      our control. As a result, we must assume that we could be required to settle
      the
      warrants on a net-cash basis, thereby necessitating the treatment of the
      potential settlement obligation as a liability. Further EITF No. 00-19, requires
      us to record the potential settlement obligation at each reporting date using
      the current estimated fair value of the warrants, with any changes being
      recorded through our statement of operations. The potential settlement
      obligation will continue to be reported as a liability until such time as the
      warrants are exercised, expire, or we are otherwise able to modify the
      registration requirements in the warrant agreement to remove the provisions
      which require this treatment. The fair value of the warrant liability in our
      balance sheets was determined using the trading value of the warrants. The
      fair
      value of the warrant liability at February 14 and 18, 2005 (the dates of
      issuance), March 31, 2005, June 30, 2005, September 30, 2005, and December
      31,
      2005 was $7,176,000, $8,721,600, $5,299,200, $6,624,000, and $4,747,200,
      respectively. The fair value of the warrants was determined by the trading
      value
      of the securities on the last day of each period. Amounts reported as warrant
      liability income in our statements of operations resulting from the change
      in
      valuation of the warrant liability was $0 and $2,428,800 for 2004 and 2005,
      respectively.




We
        had
        previously issued financial statements which did not present the warrant
        liability. Our 2005 financial statements have been restated to correct this
        error. The impact of the correction of this error on previously reported
        financial statements is as follows:




25






*(in
                  thousands except share and per share amounts)***As
                  of and for the Three Months Ended****March
                  31, 2005**
              
              
              **June
                  30, 2005**
              
              
              **September
                  30, 2005****As
                  Previously Reported**
              
              
              **As
                  Restated**
              
              
              **As
                  Previously Reported**
              
              
              **As
                  Restated**
              
              
              **As
                  Previously Reported**
              
              
              **As
                  Restated**Assets
              
              $
              29,762
              
              $
              29,762
              
              $
              29,872
              
              $
              29,872
              
              $
              30,044
              
              $
              30,044Liabilities
              
              $
              36
              
              $
              8,758
              
              $
              71
              
              $
              5,370
              
              $
              149
              
              $
              6,773Common
                  stock subject to conversion
              
              $
              5,709
              
              $
              5,709
              
              $
              5,752
              
              $
              5,752
              
              $
              5,802
              
              $
              5,802Stockholders'
                  equity
              
              $
              24,016
              
              $
              15,295
              
              $
              24,049
              
              $
              18,750
              
              $
              24,094
              
              $
              17,470Warranty
                  liability income (expense)
              
              $
              —
              
              $
              (1,546
              )
              $
              —
              
              $
              3,422
              
              $
              —
              
              $
              (1,325
              )Pre-tax
                  income (loss)
              
              $
              13
              
              $
              (1,533
              )
              $
              81
              
              $
              3,503
              
              $
              81
              
              $
              (1,243
              )Provision
                  for income taxes
              
              $
              3
              
              $
              3
              
              $
              40
              
              $
              40
              
              $
              23
              
              $
              23Net
                  income (loss)
              
              $
              9
              
              $
              (1,536
              )
              $
              41
              
              $
              3,463
              
              $
              59
              
              $
              (1,266
              )**Weighted
                  average shares:**Basic
              
              
              3,576,000
              
              
              3,576,000
              
              
              6,520,000
              
              
              6,520,000
              
              
              6,520,000
              
              
              6,520,000Diluted
              
              
              3,576,000
              
              
              3,576,000
              
              
              6,520,000
              
              
              17,560,000
              
              
              6,520,000
              
              
              6,520,000**Earnings
                  (loss) per share:**Basic
              
              $
              —
              
              $
              (0.43
              )
              $
              0.01
              
              $
              0.53
              
              $
              0.01
              
              $
              (0.19
              )Diluted
              
              $
              —
              
              $
              (0.43
              )
              $
              0.01
              
              $
              —
              
              $
              0.01
              
              $
              (0.19
              )


26




*(in
                  thousands except share and per share amounts)***As
                    of and for the Six**
                  **Months
                    Ended****June
                  30, 2005**
              
              **As
                    of and for the Nine**
                  **Months
                    Ended****September
                  30, 2005**
              
              **As
                  of and for the**
                **Year****Ended**
                **December
                  31, 2005****As
                  Previously Reported**
              
              **As
                  Restated**
              
              **As
                  Previously Reported**
              
              **As
                  Restated**
              
              **As
                  Previously Reported**
              
              **As
                  Restated**Assets
              
              $
              29,872
              
              $
              29,872
              
              $
              30,044
              
              $
              30,044
              
              $
              30,215
              
              $
              30,215Liabilities
              
              $
              71
              
              $
              5,370
              
              $
              149
              
              $
              6,773
              
              $
              219
              
              $
              4,966Common
                  stock subject to conversion
              
              $
              5,752
              
              $
              5,752
              
              $
              5,802
              
              $
              5,802
              
              $
              5,851
              
              $
              5,851Stockholders'
                  equity
              
              $
              24,049
              
              $
              18,750
              
              $
              24,094
              
              $
              17,470
              
              $
              24,145
              
              $
              19,398Warranty
                  liability income
              
              $
              —
              
              $
              1,877
              
              $
              —
              
              $
              552
              
              $
              —
              
              $
              2,429Pre-tax
                  income
              
              $
              94
              
              $
              1,971
              
              $
              175
              
              $
              727
              
              $
              297
              
              $
              2,726Provision
                  for income taxes
              
              $
              43
              
              $
              43
              
              $
              66
              
              $
              66
              
              $
              123
              
              $
              123Net
                  income
              
              $
              51
              
              $
              1,928
              
              $
              109
              
              $
              661
              
              $
              174
              
              $
              2,603**Weighted
                  average shares:**Basic
              
              
              5,056,133
              
              
              5,056,133
              
              
              5,549,451
              
              
              5,549,451
              
              
              5,794,082
              
              
              5,794,082Diluted
              
              
              5,056,133
              
              
              13,168,398
              
              
              5,549,451
              
              
              14,648,352
              
              
              5,794,082
              
              
              15,382,247**Earnings
                  per share:**Basic
              
              $
              0.01
              
              $
              0.38
              
              $
              0.02
              
              $
              0.12
              
              $
              0.03
              
              $
              0.45Diluted
              
              $
              0.01
              
              $
              —
              
              $
              0.02
              
              $
              0.01
              
              $
              0.03
              
              $
              0.01


**Liquidity
      and Capital Resources:**





The
      net
      proceeds from the Offering and the capital contributed by our initial
      stockholders amounted to approximately $29.7 million. As of December 31, 2005,
      we had cash of approximately $925,600. Our December 31, 2005 cash balance plus
      the $28,483,200 we placed in our trust account after our Offering is a total
      of
      approximately $29,408,800. The difference between the sum of our initial
      capitalization plus the net proceeds of the Offering reduced by the sum of
      our
      cash and amount we placed in trust (described in the preceding sentence) is
      approximately $310,200, which is the amount of cash we have used since
      inception. We used $126,500 to pay for our Directors’ & Officers liability
      insurance policy which was $115,000, and to prepay for one year of certain
      other
      expenses, $77,680 for monthly overhead fees to Coastal Acquisition, LLC, $52,300
      for financial advisory fees, and $43,825 for professional fees. The balance
      of
      $9,895 was used to pay general and administrative expenses.





In
      2006,
      we will generate interest income on our cash outside of the trust account which
      can also be used to pay our costs and expenses. From January 1, 2006 through
      the
      remainder of the 24-month period that commenced on the consummation of the
      Offering (period ending February 18, 2007), we estimate our use of cash as
      follows:





Federal
                income tax liability for 2005
            
            $
            123,000Accounts
                payable and accrued expenses as of December 31, 2005
            
            
            95,550Overhead
                fee to Coastal Acquisition, LLC.
            
            
            102,320Directors
                & Officers insurance premiums
            
            
            115,000Legal
                and accounting fees for SEC related purposes
            
            
            50,000Legal
                and other professional fees related to a business
                combination
            
            
            300,000Franchise
                taxes for 2006
            
            
            64,000Other
            
            
            75,130$
            925,000




27





Our
      cash
      requirements could change based on the timing, nature and outcome of any
      business combination that we pursue. In addition, depending on the outcome
      of
      any business combination we pursue, we could incur a federal income tax
      liability for 2006 and that liability could become due before we have completed
      a business combination or generated the capital from other sources to pay the
      liability. We do not believe we will need to raise additional funds in order
      to
      meet the expenditures required for operating our business. However, we may
      need
      to raise additional funds through a private offering of debt or equity
      securities if such funds are required to consummate a business combination
      that
      is presented to us or if we are required to pay 2006 income taxes prior to
      completing a business combination. We would only consummate such a fund raising
      simultaneously with the consummation of a business combination.





We
      are
      obligated, commencing February 14, 2005, to pay to Coastal Acquisition, LLC,
      an
      affiliate of our directors and executive officers, a monthly fee of $7,500
      for
      general and administrative services. In addition, in May 2004, Coastal
      Acquisition, LLC advanced an aggregate of $75,000 to us, on a non-interest
      bearing basis, for payment of offering expenses on our behalf. This amount
      was
      repaid in February 2005 out of the proceeds of the Offering.





*Off-balance
      Sheet Arrangements*





There
      were no off-balance sheet arrangements during the period from May 19, 2004
      (inception) through December 31, 2005, that have or are reasonably likely
      to have a current or future effect on our financial condition, changes in
      financial condition, revenues or expenses, results of operations, liquidity,
      capital expenditures, or capital resources that is material to our
      investors.




**Item
      7. Financial Statements**





*Report
      of Independent Registered Public Accounting Firm*




28





**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors


COASTAL
      BANCSHARES ACQUISITION CORP.





We
      have
      audited the accompanying balance sheets of Coastal Bancshares Acquisition Corp.
      (a corporation in the development stage) as of December 31, 2004 and 2005 and
      the related statements of operations, stockholders’ equity and cash flows for
      the periods from May 19, 2004 (the inception date) to December 31, 2004, and
      for
      the year ended December 31, 2005. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free from material misstatement. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Coastal Bancshares Acquisition
      Corp. as of December 31, 2004 and 2005 and the results of its operations and
      changes in its stockholders’ equity and cash flows for the periods from May 19,
      2004 (the inception date) to December 31, 2004 and for the year ended December
      31, 2005 in conformity with accounting principles generally accepted in the
      United States of America.





As
      discussed in Note 1 to the financial statements, the Company has restated the
      accompanying financial statements to reflect the warrants outstanding in
      connection with the Company’s initial public offering as a
      liability.





Hein
      & Associates LLP


Houston,
      Texas


January
      31, 2006 (except for paragraphs 6, 7 and 8 of Note 1 to which the date is June
      19, 2006)




29


**Coastal
      Bancshares Acquisition**


(A
      Corporation in the Development Stage)


**BALANCE
      SHEETS**





**December
                31,****ASSETS**
            
            **(Restated)**
              **2005**
            
            **2004****Current
                assets:**Cash
                and cash equivalents
            
            $
            925,643
            
            $
            21,711Trust
                Fund
            
            
            29,269,727
            
            
            —Prepaid
                expensesTrust
                Fund
            
            
            19,630
            
            
            —Total
                current assets
            
            
            30,215,000
            
            
            21,711Deferred
                offering costs
            
            
            —
            
            
            63,532**Total
                Assets**
            
            $
            30,215,000
            
            $
            85,243**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                Liabilities:**Accounts
                payable and accrued expenses
            
            $
            95,550
            
            $
            7,697Note
                payable, stockholder
            
            
            —
            
            
            55,000Federal
                income tax payable
            
            
            123,000
            
            
            —Warrant
                liability
            
            
            4,747,200
            
            
            —**Total
                Liabilities**
            
            
            4,965,750
            
            
            62,697**Common
                stock subject to stockholders’ right to conversion; 1,103,448 shares at
                conversion value**
            
            
            5,851,018
            
            
            —**Commitment
                - Note 7****Stockholders’
                Equity:**Preferred
                stock, $0.01 par value
              Authorized
                5,000,000 shares; none issued
            
            
            —
            
            
            —Common
                stock, $0.01 par valueAuthorized
                50,000,000 sharesIssued
                and outstanding: 1,000,000 shares in 2004, 6,520,000 in 2005 (including
                the 1,103,448 shares subject to possible conversion)
            
            
            54,166
            
            
            10,000Additional
                paid-in capital
            
            
            16,836,761
            
            
            15,000Deferred
                compensation
            
            
            (93,506
            )
            
            —Earnings
                (Deficit) accumulated during the development stage
            
            
            2,600,811
            
            
            (2,454
            )**Total
                Stockholders’ Equity**
            
            
            19,398,232
            
            
            22,546**Total
                Liabilities and Stockholders’ Equity**
            
            $
            30,215,000
            
            $
            85,243




See
      accompanying notes to financial
      statements.




F-1


**Coastal
      Bancshares Acquisition**


(A
      Corporation in the Development Stage)




**STATEMENTS
      OF OPERATIONS**





**Period
                from May 19, 2004 (inception) to December 31,****Year
                Ended December 31, 2005**
              **(Restated)**
            
            **2004**
            
            **2005**
              **(Restated)**Reduction
                in warrant liability
            
            $
            2,428,800
            
            $
            —
            
            $
            2,428,800Formation
                and operating costs
            
            
            (507,960
            )
            
            (2,454
            )
            
            (510,414
            )Operating
                income (loss)
            
            
            1,920,840
            
            
            (2,454
            )
            
            1,918,386Interest
                income:Received
                and accrued
            
            
            750,028
            
            
            —
            
            
            750,028Market
                value adjustment
            
            
            55,397
            
            
            —
            
            
            55,397Total
                interest income
            
            
            805,425
            
            
            —
            
            
            805,425Pre-tax
                income (loss)
            
            
            2,726,265
            
            
            (2,454
            )
            
            2,723,811Provision
                for income taxes
            
            
            123,000
            
            
            —
            
            
            123,000Net
                income (loss)
            
            $
            2,603,265
            
            $
            (2,454
            )
            $
            2,600,811Weighted
                average shares outstanding (basic and diluted)Basic
            
            
            5,794,082
            
            
            650,442
            
            
            4,680,000Diluted
            
            
            15,382,247
            
            
            650,442
            
            
            11,671,263Net
                income (loss) per shareBasic
            
            $
            0.45
            
            $
            0.00
            
            $
            0.56Diluted
            
            $
            0.01
            
            $
            0.00
            
            $
            0.01




See
      accompanying notes to financial
      statements.


F-2




**Coastal
      Bancshares Acquisition**


(A
      Corporation in the Development Stage)


**STATEMENTS
      OF STOCKHOLDERS’ EQUITY**


**(RESTATED
      AS TO 2005)**


**Common
                  Stock**
              
              
              
              
              
              **Earnings
                  (Deficit)****Shares**
              
              **Amount**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Deferred
                  Compensation**
              
              **Accumulated
                  During Development Stage**
              
              **Total**
                **Stockholders’
                  Equity**Common
                  shares issued August 6, 2004 at $0.025 per share
              
              
              1,000,000
              
              $
              10,000
              
              $
              15,000
              
              $
              —
              
              $
              —
              
              $
              25,000Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,454
              )
              
              (2,454
              )Balance
                  at December 31, 2004
              
              
              1,000,000
              
              
              10,000
              
              
              15,000
              
              
              —
              
              
              (2,454
              )
              
              22,546Proceeds
                  of initial public offering, net
              
              
              5,520,000
              
              
              55,200
              
              
              29,638,745
              
              
              —
              
              
              —
              
              
              29,693,945Reduction
                  of stockholders’ equity related to 1,103,448 shares of common stock
                  subject to possible conversion
              
              
              —
              
              
              (11,034
              )
              
              (5,682,758
              )
              
              —
              
              
              —
              
              
              (5,693,792
              )Reduction
                  in stockholders’ equity related to warrant liability
              
              
              
              
              
              
              
              
              (7,176,000
              )
              
              
              
              
              
              
              
              (7,176,000
              )Increase
                  in value of common stock subject to possible conversion
              
              
              —
              
              
              —
              
              
              (157,226
              )
              
              —
              
              
              —
              
              
              (157,226
              )Deferred
                  compensation
              
              
              —
              
              
              —
              
              
              199,000
              
              
              (199,000
              )
              
              —
              
              
              —Amortization
                  of deferred compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              105,494
              
              
              —
              
              
              105,494Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2,603,265
              
              
              2,603,265Balance
                  at December 31, 2005
              
              
              6,520,000
              
              $
              54,166
              
              $
              16,836,761
              
              $
              (93,506
              )
              $
              2,600,811
              
              $
              19,398,232




See
      accompanying notes to financial
      statements.


F-3




**Coastal
      Bancshares Acquisition**


(A
      Corporation in the Development Stage)




**STATEMENTS
      OF CASH FLOWS**





**Year
                Ended December 31,**
            
            **Period
                from May 19, 2004 (inception) to December 31,****2005**
              **(Restated)**
            
            **2004**
            
            **(Restated)**
              **2005**CASH
                FLOW FROM OPERATING ACTIVITIESNet
                income (loss)
            
            $
            2,603,265
            
            $
            (2,454
            )
            $
            2,600,811Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Increase
                in market value of treasury bill
            
            
            (55,397
            )
            
            —
            
            
            (55,397
            )Amortization
                of deferred compensation
            
            
            105,494
            
            
            —
            
            
            105,494Common
                stock granted as compensation
            
            
            (199,000
            )
            
            —
            
            
            (199,000
            )Decrease
                in warrant liability
            
            
            (2,428,800
            )
            
            
            
            
            (2,428,800
            )Changes
                in operating assets and liabilities:Increase
                in prepaid expenses
            
            
            (19,630
            )
            
            —
            
            
            (19,630
            )Increase
                in accounts payable and accrued expenses
            
            
            87,853
            
            
            7,697
            
            
            95,550Increase
                in income taxes payable
            
            
            123,000
            
            
            —
            
            
            123,000Net
                cash provided by operating activities
            
            
            216,785
            
            
            5,243
            
            
            222,028CASH
                FLOW FROM INVESTING ACTIVITIESPurchases
                of treasury bill in trust account
            
            
            (29,214,330
            )
            
            —
            
            
            (29,214,330
            )Net
                cash used in investing activities
            
            
            (29,214,330
            )
            
            —
            
            
            (29,214,330
            )CASH
                FLOW FROM FINANCING ACTIVITIESProceeds
                from private sale of common stock
            
            
            
            
            
            25,000
            
            
            25,000Gross
                proceeds from public offering
            
            
            33,120,000
            
            
            —
            
            
            33,120,000Costs
                of public offering
            
            
            (3,163,523
            )
            
            —
            
            
            (3,227,055
            )Proceeds
                from stockholder loan
            
            
            20,000
            
            
            55,000
            
            
            75,000Repayment
                of stockholder loan
            
            
            (75,000
            )
            
            —
            
            
            (75,000
            )Deferred
                costs of public offering
            
            
            —
            
            
            (63,532
            )
            
            —Net
                cash provided by financing activities
            
            
            29,901477
            
            
            16,468
            
            
            29,917,945NET
                INCREASE IN CASH
            
            
            903,932
            
            
            21,711
            
            
            925,643CASH
                AT BEGINNING OF PERIOD
            
            
            21,711
            
            
            —
            
            
            —CASH
                AT END OF PERIOD
            
            $
            925,643
            
            $
            21,711
            
            $
            925,643




See
        accompanying notes to financial
        statements.


F-4


**Coastal
      Bancshares Acquisition**


(A
      Corporation in the Development Stage)


**NOTES
      TO FINANCIAL STATEMENTS**


**For
      the Period Ended December 31, 2005**





1.  ORGANIZATION,
      BUSINESS OPERATIONS





Coastal
      Bancshares Acquisition Corp. (the “Company”) was incorporated in Delaware on May
      19, 2004 as a blank check company whose objective is to acquire or merge with
      an
      operating commercial bank or bank holding company. The Company’s initial
      stockholders’ purchased 1,000,000 shares of common stock, $0.01 par value, for
      $25,000 on August 6, 2004.





The
      registration for the Company’s initial public offering (“Offering”) of 4,800,000
      units was declared effective on February 14, 2005. The Company consummated
      the
      Offering on February 18, 2005. The underwriters also exercised their
      over-allotment option to purchase an additional 720,000 units on February 18,
      2005. The Company received proceeds, net of the underwriters’ discount and
      estimated offering expenses of approximately $29.9 million. The Company’s
      management has broad discretion with respect to the specific application of
      the
      net proceeds of the Offering, although substantially all of the net proceeds
      of
      the Offering are intended to be generally applied toward consummating a merger
      with or acquisition of an operating commercial bank or bank holding company
      (“Business Combination”). There is no assurance that the Company will be able to
      successfully affect a Business Combination. An amount equal to $28,483,200
      was
      placed in an interest bearing trust account (“Trust Fund”) until the earlier of
      (i) the consummation of its first Business Combination or (ii) liquidation
      of
      the Company. Under the agreement governing the Trust Fund, funds may only be
      invested in United States government securities with a maturity of 180 days
      or
      less. The remaining proceeds may be used to pay for business, legal and
      accounting due diligence on prospective mergers or acquisitions and continuing
      general and administrative expenses.





The
      Company has signed a definitive agreement for the merger with a target business
      (See Note 11) and will submit such transaction for stockholder approval. In
      the
      event that stockholders owning 20% or more of the outstanding stock excluding,
      for this purpose, those persons who were stockholders immediately prior to
      the
      Offering, vote against the Business Combination, the Business Combination will
      not be consummated. All of the Company’s stockholders prior to the Offering,
      including all of the officers and directors of the Company (“Initial
      Stockholders”), have agreed to vote their founding shares of common stock in
      accordance with the vote of the majority in interest of all other stockholders
      of the Company (“Public Stockholders”) with respect to the Business Combination.
      The Business Combination will not be completed unless more than 50% of the
      Public Stockholders vote in favor of the transaction. After consummation of
      the
      Company’s first Business Combination, these voting safeguards no longer apply.





With
      respect to the first Business Combination which is approved and consummated,
      any
      Public Stockholder who voted against the Business Combination may demand that
      the Company redeem his or her shares. The per share redemption price will equal
      the amount in the Trust Fund as of the record date for determination of
      stockholders entitled to vote on the Business Combination divided by the number
      of shares of common stock held by Public Stockholders at the consummation of
      the
      Offering. Accordingly, Public Stockholders holding 19.99% of the aggregate
      number of shares owned by all Public Stockholders may seek redemption of their
      shares in the event of a Business Combination. Such Public Stockholders are
      entitled to receive their per-share interest in the Trust Fund computed without
      regard to the shares held by Initial Stockholders.





The
      Company’s Certificate of Incorporation provides for the mandatory liquidation of
      the Company, without stockholder approval, in the event that the Company does
      not consummate a Business Combination within 18 months from the date of the
      consummation of the Offering, or 24 months from the consummation of the Offering
      if certain extension criteria have been satisfied. In the event of liquidation,
      it is likely that the per share value of the residual assets remaining available
      for distribution (including Trust Fund assets) will be less than the initial
      public offering price per share in the Offering (assuming no value is attributed
      to the Warrants contained in the Units to be offered in the Offering as
      described in Note 3).





*Restatement*





Under EITF No. 00-19, *“Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock”* (“EITF
      No. 00-19”), the fair value of the warrants issued as part of the Units have
      been reported as a liability. The warrant agreement provides for the Company
      to
      register the shares underlying the warrants and is silent as to the penalty
      to
      be incurred in the absence of the Company’s ability to deliver registered shares
      to the warrant holders upon warrant exercise. Under EITF No. 00-19, registration
      of the common stock underlying the warrants is not within the Company’s control.
      As a result, the Company must assume that it could be required to settle the
      warrants on a net-cash basis, thereby necessitating the treatment of the
      potential settlement obligation as a liability. Further EITF No. 00-19, requires
      the Company to record the potential settlement liability at each reporting
      date
      using the current estimated fair value of the warrants, with any changes being
      recorded through the Company’s statement of operations. The potential settlement
      obligation will continue to be reported as a liability until such time as the
      warrants are exercised, expire, or the Company is otherwise able to modify
      the
      registration requirements in the warrant agreement to remove the provisions
      which require this treatment. The fair value of the warrant liability in the
      accompanying balance sheets was determined using the trading value of the
      warrants. The value assigned to the warrant liability at February 14 and 18,
      2005 (the dates of issuance), March 31, 2005, June 30, 2005, September 30,
      2005,
      and December 31, 2005 was $7,176,000, $8,721,600, $5,299,200, $6,624,000, and
      $4,747,200, respectively. The fair value of the warrants was determined by
      the
      trading value of the securities on the last day of each period.





F-5


Amounts
      reported as warrant liability income in the accompanying statement of operations
      resulting from the change in valuation of the warrant liability was $0 and
      $2,428,800 for 2004 and 2005, respectively.





The
      Company had previously issued financial statements which did not present the
      warrant liability. The accompanying 2005 financial statements have been restated
      to correct this error. The impact of the correction of this error in previously
      reported financial statements is as follows:




*(in
                  thousands except share and per share amounts)***As
                  of and for the Three Months Ended****March
                  31, 2005**
              
              **June
                  30, 2005**
              
              **September
                  30, 2005****AsPreviously
                  Reported**
              
              **As
                  Restated**
              
              **AsPreviously
                  Reported**
              
              **As
                  Restated**
              
              **As
                  Previously Reported**
              
              **As
                  Restated**Assets
              
              $
              29,762
              
              $
              29,762
              
              $
              29,872
              
              $
              29,872
              
              $
              30,044
              
              $
              30,044Liabilities
              
              $
              36
              
              $
              8,758
              
              $
              71
              
              $
              5,370
              
              $
              149
              
              $
              6,773Common
                  stock subject to conversion
              
              $
              5,709
              
              $
              5,709
              
              $
              5,752
              
              $
              5,752
              
              $
              5,802
              
              $
              5,802Stockholders'
                  equity
              
              $
              24,016
              
              $
              15,295
              
              $
              24,049
              
              $
              18,750
              
              $
              24,094
              
              $
              17,470Warranty
                  liability income (expense)
              
              $
              —
              
              $
              (1,546
              )
              $
              —
              
              $
              3,422
              
              $
              —
              
              $
              (1,325
              )Pre-tax
                  income (loss)
              
              $
              13
              
              $
              (1,533
              )
              $
              81
              
              $
              3,503
              
              $
              81
              
              $
              (1,243
              )Provision
                  for income taxes
              
              $
              3
              
              $
              3
              
              $
              40
              
              $
              40
              
              $
              23
              
              $
              23Net
                  income (loss)
              
              $
              9
              
              $
              (1,536
              )
              $
              41
              
              $
              3,463
              
              $
              59
              
              $
              (1,266
              )**Weighted
                  average shares:**Basic
              
              
              3,576,000
              
              
              3,576,000
              
              
              6,520,000
              
              
              6,520,000
              
              
              6,520,000
              
              
              6,520,000Diluted
              
              
              3,576,000
              
              
              3,576,000
              
              
              6,520,000
              
              
              17,560,000
              
              
              6,520,000
              
              
              6,520,000**Earnings
                  (loss) per share**Basic
              
              $
              —
              
              $
              (0.43
              )
              $
              0.01
              
              $
              0.53
              
              $
              0.01
              
              $
              (0.19
              )Diluted
              
              $
              —
              
              $
              (0.43
              )
              $
              0.01
              
              $
              —
              
              $
              0.01
              
              $
              (0.19
              )




F-6




*(in
                  thousands except share and per share amounts)***As
                  of and for the Six Months Ended**
                  **June
                    30, 2005**
              
              **As
                  of and for the Nine Months Ended**
                  **September
                    30, 2005**
              
              **As
                  of and for the Year Ended December 31,
                  2005****As
                  Previously Reported**
              
              **As
                  Restated**
              
              **As
                  Previously Reported**
              
              **As
                  Restated**
              
              **As
                  Previously Reported**
              
              **As
                  Restated**Assets
              
              $
              29,872
              
              $
              29,872
              
              $
              30,044
              
              $
              30,044
              
              $
              30,215
              
              $
              30,215Liabilities
              
              $
              71
              
              $
              5,370
              
              $
              149
              
              $
              6,773
              
              $
              219
              
              $
              4,966Common
                  stock subject to conversion
              
              $
              5,752
              
              $
              5,752
              
              $
              5,802
              
              $
              5,802
              
              $
              5,851
              
              $
              5,851Stockholders'
                  equity
              
              $
              24,049
              
              $
              18,750
              
              $
              24,094
              
              $
              17,470
              
              $
              24,145
              
              $
              19,398Warranty
                  liability income (expense)
              
              $
              —
              
              $
              1,877
              
              $
              —
              
              $
              552
              
              $
              —
              
              $
              2,429Pre-tax
                  income
              
              $
              94
              
              $
              1,971
              
              $
              175
              
              $
              727
              
              $
              297
              
              $
              2,726Provision
                  for income taxes (benefit)
              
              $
              43
              
              $
              43
              
              $
              66
              
              $
              66
              
              $
              123
              
              $
              123Net
                  income
              
              $
              51
              
              $
              1,928
              
              $
              109
              
              $
              661
              
              $
              174
              
              $
              2,603**Weighted
                  average shares:**Basic
              
              
              5,056,133
              
              
              5,056,133
              
              
              5,549,451
              
              
              5,549,451
              
              
              5,794,082
              
              
              5,794,082Diluted
              
              
              5,056,133
              
              
              13,168,398
              
              
              5,549,451
              
              
              14,648,352
              
              
              5,794,082
              
              
              15,382,247**Earnings
                  per share**Basic
              
              $
              0.01
              
              $
              0.38
              
              $
              0.02
              
              $
              0.12
              
              $
              0.03
              
              $
              0.45Diluted
              
              $
              0.01
              
              $
              —
              
              $
              0.02
              
              $
              0.01
              
              $
              0.03
              
              $
              0.01




2.  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





*Basis
      of Presentation*





The
      financial statements include the accounts of the Company. The Company has not
      commenced operations effective December 31, 2005. All activity through December
      31, 2005, is related to the Company’s formation and preparation of the Offering.
      The Company has selected December 31 as its fiscal year end.





*Use
      of Estimates*





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingencies at the date of the financial statements and the reported amounts
      of expenses during the reporting period. Actual amounts could differ from those
      estimates.





*Cash
      Equivalents*





The
      Company considers all highly liquid investments with original maturities of
      three months or less to be cash equivalents.





*Concentration
      of Credit Risk*





Financial
      instruments that potentially subject the Company to credit risk consist of
      cash
      and cash equivalents. The Company’s policy is to limit the amount of credit
      exposure to any one financial institution and place investments with financial
      institutions evaluated as being creditworthy, or in short-term money market
      funds which are exposed to minimal interest rate and credit risk.





F-7




*Income
      Taxes*





The
      Company recognizes deferred tax assets and liabilities for the expected future
      tax consequences of events that have been recognized in the Company’s financial
      statements or tax returns. Under this method, deferred tax assets and
      liabilities are determined based on the difference between the financial
      statement carrying amounts and the tax bases of assets and liabilities using
      enacted tax rates in effect in the years in which the differences are expected
      to reverse.





Warrant
      liability





The
      Company has outstanding warrants, which provides for the Company to register
      the
      shares underlying the warrants and is silent as to the penalty to be incurred
      in
      the absence of the Company’s ability to deliver registered shares to the warrant
      holders upon warrant exercise. Under EITF No. 00-19 *“Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock”* (“EITF
      No. 00-19”), registration of the common stock underlying the Company’s warrants
      is not within the Company’s control. As a result, the Company must assume that
      it could be required to settle the warrants on a net-cash basis, thereby
      necessitating the treatment of the potential settlement obligation as a
      liability. Further EITF No. 00-19, requires the Company to record the potential
      settlement liability at each reporting date using the current estimated fair
      value of the warrants, with any changes being recorded through the Company’s
      statement of operations. The potential settlement obligation related to the
      warrants will continue to be reported as a liability until such time that the
      warrants are exercised, expire, or the Company is otherwise able to modify
      the
      registration requirements in the warrant agreement to remove the provisions
      which require this treatment. The fair value of the warrant liability is
      determined using the trading value of the warrants.





*Earnings
      per Common Share*





Basic
      earnings per share (“EPS”) is computed by dividing net income applicable to
      common stock by the weighted average common shares outstanding during the
      period. Diluted EPS reflects the additional dilution for all potentially
      dilutive securities such as stock warrants. The Company’s outstanding warrants
      had a dilutive share impact of - and 9,588,165 for the years ended December
      31,
      2004 and 2005, respectively, and 6,991,263 for the period since inception
      through December 31, 2005.





*Recently
      Issued Accounting Standards*





On
      December 16, 2004, FASB issued Statement No. 123R (revised 2004), “Share-Based
      Payment,” (FAS 123R) that addresses the accounting for share-based payment
      transactions in which a company receives employee services in exchange for
      either equity instruments of the company or liabilities that are based on the
      fair value of the company’s equity instruments or that may be settled by the
      issuance of such equity instruments. FAS 123R eliminates the ability to account
      for share-based compensation transactions using the intrinsic method and
      requires that such transactions be accounted for using a fair-value-based method
      and recognized as expense in the consolidated statement of operations. The
      effective date of FAS 123R is for interim and annual periods beginning after
      December 15, 2005. The provisions of FAS 123R do not have an impact on the
      Company’s results of operations at the present time.





In
      May 2005, the FASB issued Statement of Financial Accounting Standards
      No.154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces
      APB Opinion No. 20, “Accounting Changes,” and supersedes FASB Statement
      No. 3, “Reporting Accounting Changes in Interim Financial Statements—an
      amendment of APB Opinion No. 28.” SFAS 154 requires retrospective
      application to prior periods’ financial statements of changes in accounting
      principle, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. When it is impracticable to
      determine the period-specific effects of an accounting change on one or more
      individual prior periods presented, SFAS 154 requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings for that period rather than being reported in an income
      statement. When it is impracticable to determine the cumulative effect of
      applying a change in accounting principle to all prior periods, SFAS 154
      requires that the new accounting principle be applied as if it were adopted
      prospectively from the earliest date practicable. SFAS 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The Company does not expect the provisions of SFAS
      154 to have a significant impact on its results of operations.





F-8




In
      July 2005, the FASB published an Exposure Draft of a proposed
      Interpretation, “Accounting for Uncertain Tax Positions.” The Exposure Draft
      seeks to reduce the significant diversity in practice associated with
      recognition and measurement in the accounting for income taxes. It would apply
      to all tax positions accounted for in accordance with SFAS 109, “Accounting for
      Income Taxes.” The Exposure Draft requires that a tax position meet a “probable
      recognition threshold” for the benefit of the uncertain tax position to be
      recognized in the financial statements. This threshold is to be met assuming
      that the tax authorities will examine the uncertain tax position. The Exposure
      Draft contains guidance with respect to the measurement of the benefit that
      is
      recognized for an uncertain tax position, when that benefit should be
      recognized, and other matters. This proposed Interpretation would clarify the
      accounting for uncertain tax positions in accordance with SFAS 109. The FASB
      staff is considering the comment letters that have been received and is
      determining the plan for deliberations. The Board expects to issue a final
      Interpretation, which would include amendments to SFAS 109, in the first quarter
      of 2006. The Company is currently evaluating the impact this proposed
      Interpretation would have on its results of operations.





3.  PUBLIC
      OFFERING





On
      February 18, 2005, the Company sold 4,800,000 units (“Units”) in a public
      offering, which included granting the underwriters’ an over-allotment option to
      purchase up to an additional 720,000 Units. On February 18, 2005, the
      underwriters exercised the entire amount of the option. Each Unit consisted
      of
      one share of the Company’s common stock, $0.01 par value, and two Redeemable
      Common Stock Purchase Warrants (“Warrants”). Each Warrant entitles the holder to
      purchase from the Company one share of common stock at an exercise price of
      $5.00 commencing on the later of the completion of a Business Combination or
      February 13, 2006, and expiring February 13, 2010. The Warrants are redeemable
      by the Company at a price of $0.01 per Warrant upon 30 days’ notice after the
      Warrants become exercisable, only in the event that the last sale price of
      the
      common stock is at least $8.50 per share for any 20 trading days within a 30
      trading day period ending on the third day prior to the date on which notice
      of
      the redemption is given. In connection with the Offering, the Company issued
      an
      option for $100 to the underwriters’ to purchase 325,000 Units at an exercise
      price of $7.50 per Unit. The Units issuable upon exercise of this option are
      identical to those included in the Offering except that exercise price of the
      Warrants included in these units will be $6.65 per share.





4.  TREASURY
      SECURITIES





Treasury
      securities are classified as trading securities and are carried at fair value,
      with gains or losses resulting from changes in fair value recognized currently
      in earnings.





5.  DEFERRED
      COMPENSATION





On
      April
      7, 2005, the Company made a restricted stock grant of 40,000 shares to a
      director. The shares are subject to forfeiture in the event that the Company
      does not consummate a Business Combination within 18 months from the date of
      the
      consummation of the Offering, or 24 months from the consummation of the Offering
      if certain extension criteria have been satisfied. The grant was recorded based
      on the closing price of the Company’s common stock on the date of the grant and
      is being amortized as compensation expense over the period from the date of
      the
      grant through the date that is 18 months after consummation of the
      Offering.





6.  INCOME
      TAXES





The
      difference between income taxes computed at statutory rates and the
      Company’s provision is as follows:




**Period
                  from May 19, 2004 (inception)to December 31,****Year
                  EndedDecember 31, 2005**
              
              **2004**
              
              **2005**Pre-tax
                  income (loss)
              
              $
              2,726,265
              
              $
              (2,454
              )
              $
              2,723,811Income
                  tax (benefit) computed at statutory rates
              
              
              926,900
              
              
              (800
              )
              
              926,100Permanent
                  difference related to warrant liability income
              
              
              (825,800
              )
              
              —
              
              
              (825,800
              )Effect
                  of timing difference related to deductibility of:Net-operating
                  loss carryforward
              
              
              (800
              )
              
              800
              
              
              —Deferred
                  compensation
              
              
              35,900
              
              
              —
              
              
              35,900Other
              
              
              (13,200
              )
              
              —
              
              
              (13,200
              )$
              123,000
              
              $
              —
              
              $
              123,000




F-9





The
      components of the Company’s deferred tax assets and liabilities is as
      follows:





**As
                of December 31,****Deferred
                tax assets:**
            
            
            **2004**
            
            
            **2005**Effect
                of net operating loss carry-forward
            
            $
            (834
            )
            $
            —Effect
              of deferred compensation
            
            
            —
            
            
            35,900Less
                reserve
            
            
            834
            
            
            (35,900
            )Total
            
            $
            —
            
            $
            —**Deferred
                tax liabilities:**
            
            $
            —
            
            $
            —




7.  COMMITMENT





The
      Company presently occupies office space provided by an affiliate of an Initial
      Stockholder. Such affiliate has agreed that, until the acquisition of a target
      business by the Company, it will make such office space, as well as certain
      office and secretarial services, available to the Company, as may be required
      by
      the Company from time to time. The Company has agreed to pay such affiliate
      $7,500 per month for such services commencing on the effective date of the
      Offering and continuing until the later of the consummation of the first
      Business Combination or liquidation of the Company.





8.  NOTE
      PAYABLE





Coastal
      Acquisition, LLC, a stockholder and an affiliate of Mr. Grossman and Mr.
      Brunson, entered into a non-interest bearing revolving credit agreement with
      the
      Company in the amount of $75,000. Advances under the credit facility amounted
      to
      $55,000 at December 31, 2004. The loan was repaid on February 18, 2005 out
      of
      the net proceeds of the Offering.




9.  COMMON
      STOCK




At
      December 31, 2004 and 2005, 50,000,000 shares of $0.01 par value common stock
      were authorized. At December 31, 2004 and 2005, 1,000,000 and 6,520,000,
      respectively, of shares were outstanding. Of the common stock outstanding,
      1,103,448 shares are subject to the right by shareholders’ to convert their
      shares into cash. The conversion amount per shares is determined by dividing
      the
      balance in the trust account on the date when the right of conversion occurs
      by
      5,520,000 shares. As of December 31, 2005, the conversion amount would have
      been
      $5.30 per share.




10.  PREFERRED
      STOCK





The
      Company is authorized to issue 5,000,000 shares of preferred stock with such
      designations, voting and other rights and preferences as may be determined
      from
      time to time by the Board of Directors.





F-10





11.  PROPOSED
      BUSINESS COMBINATION





On
      April 5, 2006, the
      Company and its wholly-owned subsidiary Coastal Merger Corp., a Texas
      corporation (“Merger Sub”), entered into a definitive Agreement
      and Plan of Merger with Intercontinental
      Bank Shares Corporation, a Texas corporation (“Intercontinental”), pursuant to
      which Merger Sub will merge with and into Intercontinental in a cash-for-stock
      trans action
      (the “Merger”). At the effective time of the Merger, Intercontinental will be
      the surviving corporation and become a wholly-owned subsidiary of Coastal.
      Intercontinental is the parent company of Intercontinental National Bank, based
      in San Antonio, Texas (the "Bank").





At
      the
      effective time and as a result of the Merger ,
      the
      holders of Intercontinental
      common stock will
      receive approximately $16.8 million in cash in exchange for their shares, subject to adjustment
      based on certain conditions. Consummation
      of the Merger is subject to the approval of the Company’s shareholders and
      certain other conditions, including that the Merger cannot be consummated if
      holders of 20% or more of the Company’s common stock vote against the merger and
      demand that their shares of common stock of the Company be converted to cash.




F-11




**Item
      8. Changes In and Disagreements With Accountants or Accounting and Financial
      Disclosure**





None.





**Item
      8A. Controls and Procedures**







**Item
      8A. Controls and Procedures**





Under  the  supervision  and  with  the  participation  of
      our
      management, including our principal executive officers and principal financial
      officer, we have evaluated  the  effectiveness  of
      the
      design  and  operation  of
      our  disclosure
      controls and procedures as of December 31, 2005 (the  “Evaluation  Date”),
      and, based on their  evaluation,
      our principal executive officers and principal financial officer have concluded  that
      these controls and procedures  were
      effective as of the Evaluation Date. However, in connection with the preparation
      of Amendment No. 1 to our Proxy Statement related to the Agreement and Plan
      of
      Merger, dated as of April 5, 2006, by and among our company and our wholly-owned
      subsidiary Coastal Merger Corp., a Texas corporation and Intercontinental Bank
      Shares Corporation, a Texas corporation, in consultation with our independent
      registered accounting firm, Hein & Associates LLP (“Hein”), we determined
      that we needed to reclassify certain amounts in our financial statements to
      report the warrants issued as part of the units in our initial public offering
      as a liability. Hein based its conclusions upon a comment received from the
      Securities and Exchange Commission in connection with the preparation of the
      Registration Statement for another targeted acquisition company similar to
      ourselves and after further review of the relevant accounting literature. We
      addressed this concern by determining to restate our Form 10-KSB for the fiscal
      year ended December 31, 2005 and our Form 10-QSB for the period ended March
      31,
      2006 to reflect this reclassification. There were no significant changes in
      our
      internal controls or in other factors that could significantly affect these
      controls subsequent to the Evaluation Date. ****




**PART
      III**




**Item
      9. Directors, Executive Officers, Promoters and Control
      Persons**





**Directors
      And Executive Officers**




Our
      current directors and executive officers are as follows:




**Name**
              
              **Age**
              
              **Position**W.
                  Donald Brunson
              
              61
              
              Co-Chief
                  Executive Officer, President and DirectorCary
                  M. Grossman
              
              51
              
              Co-Chief
                  Executive Officer and Chairman of the Board of
                  DirectorsScott
                  Clingan
              
              45
              
              Senior
                  Vice President, Corporate DevelopmentLawrence
                  Fisher
              
              67
              
              DirectorJeffrey
                  P. Sangalis.
              
              47
              
              Director





**W.
      DONALD BRUNSON** has been
      our President, Co-Chief Executive Officer and a member of our Board of Directors
      since inception. Since January 2005, Mr. Brunson has served as a director and
      chairman of the board of the Bank of Houston, a bank that specializes in middle
      market lending. From 1996 through December 15, 2005 he was a shareholder and
      Senior Vice President at American Prudential Capital, Inc., an asset based
      lending organization. From 1994 through 1995, he was President, a Director,
      and
      member of the Executive Committee of Sunbelt National Bank in Houston, Texas.
      In
      1982, Mr. Brunson was the founding President and Chief Executive Officer of
      Southwest Bancorp of Texas, Inc. (NASDAQ: ABNK), currently an SEC reporting
      company. Southwest Bancorp of Texas is now the largest independent bank holding
      company in Houston, Texas, and one of the largest based in Texas, with more
      than
      $6.1 billion in assets. Mr. Brunson was the President and Chief Executive
      Officer of Southwest Bank of Texas through 1989, when it substantially increased
      its equity capital and changed its name from Northwest Crossing National Bank.
      After the changes, he was an Executive Vice President and Chief Financial
      Officer, a Board Member, member of the Executive Committee, and Chairman of
      the
      Asset/Liability Committee until his departure in 1994. From 1969 until 1982,
      Mr.
      Brunson was an executive officer at several other banking institutions in
      Houston, Texas. He began his career in public accounting at Price Waterhouse
      & Co. Mr. Brunson earned a Bachelor of Science in Accounting at Louisiana
      Tech University. He is a past Chairman of the American Institute of Banking
      and
      past board member of the Houston Clearing Association.





30




**CARY
      M. GROSSMAN** has been
      our Chairman and Co-Chief Executive Officer since inception. Since August 2004,
      Mr. Grossman has been the Executive Vice President and Chief Financial Officer
      of Gentium, S.p.A, an Italy based biopharmaceutical company. Since April 2004,
      Mr. Grossman has been a Director of Sand Hill IT Security Acquisition Corp.
      (OTCBB: SHQC), a blank check company formed to acquire a business in the IT
      security industry and an SEC reporting company. Since December 2004, he has
      been
      a Director of I-Sector Corp. (AMEX: ISR), which provides network infrastructure
      and Internet protocol telephony solutions. Prior to January 10, 2005,
      Mr. Grossman was also Chief Financial Officer of Sand Hill IT Security
      Acquisition Corp. From 2002 until 2003 he served as Executive Vice President
      and
      Chief Financial Officer at U S Liquids, Inc, at the time, an AMEX listed
      environmental services company. Mr. Grossman left U S Liquids, Inc. in 2003
      as a result of the acquisition of three of its businesses by a private equity
      firm and was President and Chief Executive Officer of the acquiring company,
      ERP
      Environmental Services until November 2003. From 1997 until 2002, Mr. Grossman
      served Pentacon, Inc., at the time, an NYSE listed company, a provider of
      inventory management services and distributor of components to Fortune 50
      original equipment manufacturers, as a board member and in several senior
      executive positions including: Chairman of the Board of Directors, Acting Chief
      Financial Officer (2001-2002) and Lead Director (1998-2001) from the time that
      Pentacon went public in March 1998 until becoming Chairman in 2001. Pentacon
      acquired five businesses when it completed its initial public offering and
      subsequently acquired four other businesses. Pentacon and substantially all
      of
      its subsidiaries filed a Joint Chapter 11 Plan of Debtors in 2002. The
      bankruptcy plan was confirmed by the United States Bankruptcy Court for the
      Southern District Court of Texas (Corpus Christi) in 2002. In September 2002,
      Pentacon was sold to Amixter International. Beginning in February 2000, Mr.
      Grossman was the Chief Executive Officer of MGI2, Inc., a company formed to
      register as a closed-end investment company focusing on e-commerce seed capital
      investments. MGI2 filed a registration statement with the SEC in February 2000;
      however, with the onset of the technology industry decline, the company
      determined not to commence operations and subsequently dissolved in May 2000.
      From 1991 until 2002, Mr. Grossman was the Managing Partner of McFarland,
      Grossman & Company, Inc., an investment banking and financial advisory firm
      he co-founded in 1991. Prior to that, Mr. Grossman practiced public accounting
      for 15 years. He earned a Bachelor of Business Administration in Accounting
      from
      The University of Texas, and is a Certified Public Accountant.





**SCOTT
      CLINGAN** has been
      our Senior Vice President, Corporate Development since our inception. Since
      2003, he has managed Clingan & Co., LLC, a consultancy providing corporate
      finance and restructuring advice. From 2000 until 2003, he was Vice President,
      Corporate Development of Encompass Services Corporation (PNK: ESVN.PK), a $4
      billion specialty contracting and services business, reporting to its Chairman
      and CEO. He managed a divestiture program that involved negotiating and closing
      more than 50 transactions in five months as part of a bankruptcy restructuring
      filed in November 2002. While at Encompass, he also served on the Board of
      Directors of Oakleaf Waste Management, LLC, an equity investment of Encompass.
      From 1994 until 2000, Mr. Clingan was employed by BNP Paribas and its
      predecessors, an $800 billion financial institution, as a Director in its
      Corporate Finance Group. In that capacity, he was responsible for initiating
      and
      underwriting large syndicated credit facilities. From 1982 until 1994, he was
      employed by Bank One, Texas (a predecessor to JPMorgan Chase) and its
      predecessors, a $275 billion financial institution. At Bank One, he was a Vice
      President in the Metropolitan Banking Group, where he was responsible for new
      business development and then a Vice President, Unit Manager where he was
      responsible for managing a group of lending officers. From 1990 to 1992, he
      was
      Vice President and Assistant to the Chairman where he was responsible for
      special projects including sales management software development and sales
      management training. Mr. Clingan earned a Bachelor of Science in Finance from
      Arizona State University in 1982.




31




**LAWRENCE
      FISHER** ,
      a
      Director, is a private investor. Mr. Fisher was a partner of Orrick, Herrington
      & Sutcliffe LLP from December 1995 through December 2005. He served as a
      member of the firm’s Executive Committee from 2000 to 2002, and as
      Partner-in-charge of the firm’s New York office from 1997 to 2000. Mr. Fisher
      was previously a partner of Kelley Drye & Warren LLP from 1985 to 1995 and
      before that, with Parker Chapin Flattau, & Klimpl LLP. He was a member of
      the Executive Committee of both firms. Mr. Fisher has served as a director
      of
      Financial Federal Corp. (NYSE: FIF), an equipment finance company, since 1992.
      He is also a director and Audit Committee Member of National Bank of New York
      City, a privately owned commercial bank. Mr. Fisher earned a B.A. in Political
      Science from Columbia University, attended the London School of Economics,
      and
      earned his L.L.B. from Columbia University School of Law.





**JEFFREY
      P. SANGALIS** ,
      a
      Director, has extensive principal experience with all types of debt and equity
      investments. Mr. Sangalis is a Managing Partner of RSTW Partners (formerly
      Rice
      Sangalis Toole & Wilson), a private equity firm he co-founded in 1989. RSTW
      Partners has raised and managed three funds totaling $870 million. RSTW has
      invested in over 50 transactions providing junior capital to middle market
      companies throughout the United States. Prior to co-founding RSTW in 1989,
      Mr.
      Sangalis was a Vice President with the First Texas Merchant Banking Group from
      1987 to 1989 and a Vice President with Bankers Trust Company (now Deutsche
      Bank)
      from 1984 to 1987. Prior to that, Mr. Sangalis was employed by Bank of America
      (formerly NationsBank and InterFirst Bank Dallas) in various commercial lending
      capacities from 1981 to 1984. In addition to serving as a director or advisory
      director of numerous RSTW portfolio companies, Mr. Sangalis is a current board
      member of both the Houston Private Equity Association (past two-term President)
      and the Association for Corporate Growth. Mr. Sangalis received a B.S. from
      the
      Indiana University Kelley School of Business and an M.B.A. from the University
      of Wisconsin-Madison. Mr. Sangalis is a Chartered Financial Analyst.





The
      Company is not aware of any “family relationships” among directors, executive
      officers, or persons nominated or chosen by the Company to become directors
      or
      executive officers.





The
      Company is not aware of any event (as listed in Item 401(d) of Regulation S-B
      promulgated by the Securities and Exchange Commission) that occurred during
      the
      past five years that are material to an evaluation of the ability or integrity
      of any director, person nominated to become a director, executive officer,
      promoter or control person of the Company.





*Section
      16(a) Beneficial Ownership Reporting Compliance*





Section
      16(a) of the Exchange Act requires the Company’s officers and directors, and
      persons who own more than 10% of a registered class of the Company’s equity
      securities (the “10% Stockholders”) to file reports of ownership and changes of
      ownership with the Securities and Exchange Commission (“SEC”). Officers,
      directors and 10% Stockholders of the Company are required by SEC regulations
      to
      furnish the Company with copies of all Section 16(a) forms so filed. Based
      solely on correspondence with, and a review of copies of Section 16(a) forms
      received from executive officers and directors and 10% Stockholders (if any),
      the Company does not believe that, during the last fiscal year any of the
      Reporting Persons was deficient in filing reports of ownership or changes in
      ownership with the SEC.





*Audit
      Committee*





We
      do not
      have a standing audit committee or an audit committee financial expert serving
      on our board of directors. As our plan of operations involves identifying a
      target business and completing a business combination with such business, we
      presently do not have material operations and do not experience complex
      accounting issues. Accordingly, our board of directors has determined that
      it is
      not necessary for us to have a standing audit committee or an audit committee
      financial expert at this time.





32


*Code
      of Ethics*





In
      April
      2005, our board of directors adopted a code of business conduct and ethics
      that
      applies to our directors, officers and employees as well as those of our
      subsidiaries. A copy of our code of ethics has been filed as an exhibit to
      our
      Quarterly Report on Form 10-QSB for the quarter ended March 31,
      2005.





**Item
      10. Executive Compensation**





No
      executive officer has received any cash compensation for services rendered.
      Commencing on February 14, 2005 through the acquisition of a target
      business, we will pay Coastal Acquisition, LLC, an affiliate of Messrs. Grossman
      and Brunson, a fee of $7,500 per month for providing us with office space and
      certain office and secretarial services. Other than this $7,500 per-month fee,
      no compensation of any kind, including finder’s and consulting fees, will be
      paid to any of our initial stockholders, or any of their respective affiliates
      for services rendered to us prior to or with respect to a business combination.
      However, our initial stockholders will be reimbursed for any out-of-pocket
      expenses incurred in connection with activities on our behalf such as
      identifying potential target businesses and performing due diligence on suitable
      business combinations. There is no limit on the amount of these out-of-pocket
      expenses and there will be no review of the reasonableness of the expenses
      by
      anyone other than our board of directors, which includes persons who may seek
      reimbursement, or a court of competent jurisdiction if such reimbursement is
      challenged.





**Item
      11. Security Ownership of Certain Beneficial Owners and Management**





The
      following table sets forth information regarding the beneficial ownership of
      our
      common stock as of February 1, 2006 by:





·
            each
                person known by us to be the beneficial owner of more than 5% of
                our
                outstanding shares of common stock;


·
            each
                of our officers and directors; and


·
            all
                our officers and directors as a
                group.





Unless
      otherwise indicated, we believe that all persons named in the table have sole
      voting and investment power with respect to all shares of common stock
      beneficially owned by them.




**Name
                and Address of Beneficial****Owner****(1)**
            
            **Amount
                andNature of Beneficial****Ownership**
            
            **Approximate
                Percentage of Outstanding****Common Stock**Cary
                M. Grossman(2)(3)
            
            
            282,500
            
            
            4.3
            %Coastal
                Acquisition, LLC(4)
            
            
            300,000
            
            
            4.6
            %W.
                Donald Brunson
            
            
            242,500
            
            
            3.7
            %Scott
                Clingan
            
            
            85,000
            
            
            1.3
            %Lawrence
                Fisher
            
            
            40,000
            
            
            *Jeffrey
                P. Sangalis
            
            
            50,000
            
            
            *All
                directors and executive officers as a group (5
                individuals)
            
            
            1,000,000
            
            
            15.3
            %Sapling,
                LLC(5)
            
            
            356,623
            
            
            5.5
            %Amaranth,
                LLC(6)
            
            
            640,000
            
            
            9.8
            %




33





*
      less
      than 1%.





(1)
            Unless
                otherwise indicated, the business address of each of the following
                is 9821
                Katy Freeway, Suite 500, Houston, Texas
                77024.




(2)
            Mr.
                Grossman’s shares are held by Grossman Family Limited Partnership, of
                which Mr. Grossman is a general
                partner.




(3)
            The
                shares do not include 300,000 shares held by Coastal
                Acquisition, LLC, of which Mr. Grossman is the sole manager and
                has sole voting and disposition
                power.




(4)
            Mr.
                Grossman, the sole manager of Coastal Acquisition, LLC, has sole
                voting
                and disposition power with respect to such
                shares.




(5)
            The
                business address for Sapling, LLC is 535 Fifth Ave., 31stFloor, New York, New York 10003.




(6)
            The
                business address for Amaranth, LLC is is One American Lane, Greenwich,
                Connecticut 06831.





All
      of
      the shares of our common stock owned by the initial stockholders have been
      placed in escrow with Continental Stock Transfer & Trust Company, as escrow
      agent, until the earliest of:





·
            February
                18, 2008;


·
            our
                liquidation; or


·
            the
                consummation of a liquidation, merger, stock exchange or other similar
                transaction that results in all of our stockholders having the right
                to
                exchange their shares of common stock for cash, securities or other
                property subsequent to our consummating a business combination with
                a
                target business.





During
      the escrow period, the holders of these shares will not be able to sell or
      transfer their securities except to their spouses and children, trusts or family
      partnerships established for their benefit, or to a transferee that does not
      affect beneficial ownership but will retain all other rights as our
      stockholders, including, without limitation, the right to vote their shares
      of
      common stock and the right to receive cash dividends, if declared. If dividends
      are declared and payable in shares of common stock, such dividends will also
      be
      placed in escrow. If we are unable to effect a business combination and
      liquidate, none of our initial stockholders will receive any portion of the
      liquidation proceeds with respect to common stock owned by them prior to the
      Offering.





Messrs.
      Grossman and Brunson may be deemed to be our “parent” and “promoter,” as these
      terms are defined under the federal securities law.





**Item
      12.**  **Certain
      Relationships and Related Transactions**





Prior
      to
      the Offering, we issued 1,000,000 shares of our common stock to the individuals
      set forth below for $25,000 in cash, at an average purchase price of
      approximately $0.025 per share, as follows:





**Name**
            
            **Number
                of Shares**
            
            **Relationship
                To Us**Cary
                M. Grossman
            
            
            282,500
            
            
            Co-Chief
                Executive Officer and
              Chairman
                of the Board of DirectorsCoastal
                Acquisition, LLC
            
            
            300,000
            
            
            Affiliate
                of Cary M. Grossman and W.
              Donald
                BrunsonW.
                Donald Brunson
            
            
            242,500
            
            
            Co-Chief
                Executive Officer, President
              and
                DirectorScott
                Clingan
            
            
            85,000
            
            
            Senior
                Vice President, Corporate
              DevelopmentJeffrey
                P. Sangalis
            
            
            50,000
            
            
            DirectorFred
                S. Zeidman
            
            
            40,000
            
            
            Director




34




The
      holders of the majority of these shares are entitled to make up to two demands
      that we register these shares pursuant to an agreement executed in connection
      with the Offering. The holders of the majority of these shares may elect to
      exercise these registration rights at any time after the date on which these
      shares of common stock are released from escrow. In addition, these stockholders
      have certain “piggy-back” registration rights on registration statements filed
      subsequent to the date on which these shares of common stock are released from
      escrow. We will bear the expenses incurred in connection with the filing of
      any
      such registration statements.





Coastal
      Acquisition, LLC, an affiliate of certain of our directors and executive
      officers, has agreed that, commencing February 14, 2005 through the acquisition
      of a target business, it will make available to us a small amount of office
      space and certain office and secretarial services, as we may require from time
      to time. We have agreed to pay Coastal Acquisition, LLC $7,500 per month for
      these services. In
      addition, in May 2004, Coastal Acquisition, LLC advanced an aggregate of $75,000
      to us, on a non-interest bearing basis, for payment of offering expenses on
      our
      behalf. This amount was repaid in February 2005 out of the proceeds of the
      Offering.





We
      will
      reimburse our officers and directors for any reasonable out-of-pocket business
      expenses incurred by them in connection with certain activities on our behalf
      such as identifying and investigating possible target businesses and business
      combinations. There is no limit on the amount of accountable out-of-pocket
      expenses reimbursable by us, which will be reviewed only by our board or a
      court
      of competent jurisdiction if such reimbursement is challenged.





On
      April
      7, 2005, Fred S. Zeidman resigned as a Class A member of the Board of Directors
      of the Company and forfeited his ownership of 40,000 shares of common stock
      of
      the Company. On April 7, 2005, the Board of Directors of the Company appointed
      Lawrence Fisher as a Class A member of the Board of Directors to fill the
      vacancy created by Mr. Zeidman's resignation and the Board granted 40,000
      restricted shares of the Company's common stock to Mr. Fisher. In connection
      with the stock grant, Mr. Fisher executed a Lock-up Agreement and an Insider
      Letter, in substantially the same form as the agreements executed by the initial
      stockholders of the Company in connection with the Offering.





Other
      than the $7,500 per month administrative fee and reimbursable out-of-pocket
      expenses payable to our officers and directors, no compensation or fees of
      any
      kind, including finders and consulting fees, will be paid to any of our initial
      stockholders, officers or directors who owned our common stock prior to the
      Offering, or to any of their respective affiliates for services rendered to
      us
      prior to or with respect to the business combination.





All
      ongoing and future transactions between us and any of our officers and directors
      or their respective affiliates will be on terms believed by us to be no less
      favorable than are available from unaffiliated third parties and will require
      prior approval in each instance by a majority of the members of our board who
      do
      not have an interest in the transaction. **




35


**Item
      13. Exhibits**





(a)  The
      following exhibits are filed as part of this report:




**Exhibit
                No.**
            
            **Description**1.1
            
            Underwriting
                Agreement by and between the Company, I-Bankers Securities Incorporated
                and Newbridge Securities Corporation dated February 14, 2005 (filed
                as
                Exhibit 1.1 to the Company’s Form 10-KSB for the fiscal year ended
                December 31, 2004, and incorporated herein by
                reference)3.1
            
            Certificate
                of Incorporation (incorporated by reference to Exhibit 3.1 of the
                Company’s Registration Statement on Form S-1, registration
                no. 333-118294, filed with the Securities and Exchange
                Commission)3.2
            
            By-laws
                (incorporated by reference to Exhibit 3.2 of the Company’s
                Registration Statement on Form S-1, registration no. 333-118294,
                filed with the Securities and Exchange Commission)4.1
            
            Specimen
                Unit Certificate (incorporated by reference to Exhibit 4.1 of the
                Company’s Registration Statement on Form S-1, registration
                no. 333-118294, filed with the Securities and Exchange
                Commission)4.2
            
            Specimen
                Common Stock Certificate (incorporated by reference to Exhibit 4.2 of
                the Company’s Registration Statement on Form S-1, registration
                no. 333-118294, filed with the Securities and Exchange
                Commission)4.3
            
            Specimen
                Warrant Certificate (incorporated by reference to Exhibit 4.3 of the
                Company’s Registration Statement on Form S-1, registration
                no. 333-118294, filed with the Securities and Exchange
                Commission)4.4
            
            Unit
                Purchase Option dated February 18, 2005, granted to I-Bankers Securities
                Corporation and Newbridge Securities Corporation (filed as
                Exhibit 4.4 to the Company’s Form 10-KSB for the fiscal year ended
                December 31, 2004, and incorporated herein by
                reference)4.5
            
            Warrant
                Agreement between American Stock Transfer & Trust Company and the
                Registrant (filed as Exhibit 4.5 to the Company’s Form 10-KSB for the
                fiscal year ended December 31, 2004, and incorporated herein by
                reference)10.1
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and Cary M. Grossman (filed as
                Exhibit 10.1 to the Company’s Form 10-KSB for the fiscal year ended
                December 31, 2004, and incorporated herein by
                reference)




36




10.2
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and W. Donald Brunson (filed as Exhibit 10.2
                to the Company’s Form 10-KSB for the fiscal year ended December 31,
                2004, and incorporated herein by reference)10.3
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and Scott Clingan (filed as Exhibit 10.3 to
                the Company’s Form 10-KSB for the fiscal year ended December 31,
                2004, and incorporated herein by reference)10.4
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and Lawrence Fisher10.5
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and Jeffrey P. Sangalis (filed as
                Exhibit 10.5 to the Company’s Form 10-KSB for the fiscal year ended
                December 31, 2004, and incorporated herein by
                reference)10.8
            
            Investment
                Management Trust Agreement between American Stock Transfer & Trust
                Company and the Registrant (filed as Exhibit 10.8 to the Company’s
                Form 10-KSB for the fiscal year ended December 31, 2004, and
                incorporated herein by reference)10.9
            
            Stock
                Escrow Agreement between the Registrant, Continental Stock Transfer
&
                Trust Company and the Initial Stockholders (filed as Exhibit 10.9 to
                the Company’s Form 10-KSB for the fiscal year ended December 31,
                2004, and incorporated herein by reference)10.9.1
            
            Amendment
                to Stock Escrow Agreement, dated as of April 7, 2005, between the
                Registrant, Continental Stock Transfer & Trust Company, the
                Initial Stockholders and Lawrence Fisher (filed as Exhibit 10.3 to
                the 2005 First Quarter 10-QSB and incorporated herein by
                reference)10.10
            
            Registration
                Rights Agreement among the Registrant and the Initial Stockholders
                (filed
                as Exhibit 10.10 to the Company’s Form 10-KSB for the fiscal year
                ended December 31, 2004, and incorporated herein by
                reference)10.10.1
            
            Amendment
                to Registration Rights Agreement among the Registrant, the Initial
                Stockholders and Lawrence Fisher (filed as Exhibit 10.2 to the
                Company’s Form 10-QSB for the quarter ended March 31, 2005 (the
                “2005 First Quarter 10-QSB”) and incorporated herein by
                reference




37




10.11
            
            Letter
                Agreement between Coastal Acquisition, LLC and Registrant regarding
                administrative support (filed as Exhibit 10.11 to the Company’s Form
                10-KSB for the fiscal year ended December 31, 2004, and incorporated
                herein by reference)10.12
            
            Revolving
                Credit Agreement in the principle amount of $75,000 between the Registrant
                and Coastal Acquisition, LLC (filed as Exhibit 10.12 to the
                Company’s Form 10-KSB for the fiscal year ended December 31, 2004,
                and incorporated herein by reference)10.13
            
            Warrant
                Purchase Agreement among Cary M. Grossman, W. Donald Brunson and
                I-Bankers
                Securities Incorporated and Newbridge Securities Corporation (incorporated
                by reference to Exhibit 10.13 of the Company’s Registration Statement
                on Form S-1, registration no. 333-118294, filed with the
                Securities and Exchange Commission)10.14
            
            Resignation
                and Forfeiture Agreement, effective as of April 7, 2005, executed by
                Fred S. Zeidman and acknowledged and agreed to by the Company (filed
                as Exhibit 10.4 to the First Quarter 10-QSB and incorporated herein
                by reference)10.15
            
            Financial
                Advisory Agreement dated as of February 17, 2005, by and between the
                Company and Sanders Morris Harris Inc. (filed as Exhibit 10.1 to
                the 2005 First Quarter 10-QSB and incorporated herein by
                reference)14
            
            Code
                of Ethics (filed as Exhibit 14 of the 2005 First Quarter 10-QSB and
                incorporated herein by reference)23.1
            
            Consent
                of Independent Registered Public Accounting Firm**31.1
            
            Certification
                of Chief Executive Officer and Chairman pursuant to Section 302 of
                the
                Sarbanes-Oxley Act of 2002*32.1
            
            Certification
                of President pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002*32.1
            
            Certification
                of Chief Executive Officer and President pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002*





*
      filed
      herewith





**
      previously filed




(b)  *Reports
      on Form 8-K*


1. Form
        8-K
        filed on February 6, 2006, including items 4.02 and 9.01
 2. Form
        8-K
        filed on February 2, 2006, including item 4.02
 3. Form
        8-K
        filed on December 8, 2005, including item 1.02




38
  4. Form
        8-K
        filed on April 11, 2005, including items 1.01, 1.02, 5.02, 8.01 and
        9.01


5. Form
        8-K
        filed on March 11, 2005, including items 1,01, 8.01 and 9.01


6. Form
        8-K
        filed on February 28, 2005, including items 8.01 and 9.01


7. Form
        8-K
        filed on February 24, 2005, including item 1.01





**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES.**





The
      firm
      of Hein & Associates LLP acts as our principal accountant. The following is
      a summary of fees paid to our principal accountant for services
      rendered.





**AUDIT
      FEES**





During
      2005, we paid $31,852 in fees to our principal accountant in connection with
      our
      initial public offering.





**AUDIT-RELATED
      FEES**





During
      2005, our principal accountant did not render assurance and related services
      reasonably related to the performance of the audit or review of financial
      statements.





**TAX
      FEES**





During
      2005, our principal accountant did not render assurance and related services
      reasonably related to the performance of the audit or review of financial
      statements.





**ALL
      OTHER FEES**





During
      2005, there were no fees billed for products and services provided by the
      principal accountant other than those set forth above.





**AUDIT
      COMMITTEE APPROVAL**





We
      currently do not have an audit committee.




39


**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant has duly caused this annual report on Form 10-KSB/A to be signed
      on
      its behalf by the undersigned thereto duly authorized.


Coastal
                Bancshares Acquisition Corp.
              (Registrant)Date:
              June 22, 2006
            By:
            /s/ Cary
              M.
              GrossmanCary M. Grossman
              Chief Executive
                Officer


S-1


**INDEX
      TO EXHIBITS**




**Exhibit
                No.**
            
            **Description**1.1
            
            Underwriting
                Agreement by and between the Company, I-Bankers Securities Incorporated
                and Newbridge Securities Corporation dated February 14, 2005 (filed
                as
                Exhibit 1.1 to the Company’s Form 10-KSB for the fiscal year ended
                December 31, 2004, and incorporated herein by
                reference)3.1
            
            Certificate
                of Incorporation (incorporated by reference to Exhibit 3.1 of the
                Company’s Registration Statement on Form S-1, registration
                no. 333-118294, filed with the Securities and Exchange
                Commission)3.2
            
            By-laws
                (incorporated by reference to Exhibit 3.2 of the Company’s
                Registration Statement on Form S-1, registration no. 333-118294,
                filed with the Securities and Exchange Commission)4.1
            
            Specimen
                Unit Certificate (incorporated by reference to Exhibit 4.1 of the
                Company’s Registration Statement on Form S-1, registration
                no. 333-118294, filed with the Securities and Exchange
                Commission)4.2
            
            Specimen
                Common Stock Certificate (incorporated by reference to Exhibit 4.2 of
                the Company’s Registration Statement on Form S-1, registration
                no. 333-118294, filed with the Securities and Exchange
                Commission)4.3
            
            Specimen
                Warrant Certificate (incorporated by reference to Exhibit 4.3 of the
                Company’s Registration Statement on Form S-1, registration
                no. 333-118294, filed with the Securities and Exchange
                Commission)4.4
            
            Unit
                Purchase Option dated February 18, 2005, granted to I-Bankers Securities
                Corporation and Newbridge Securities Corporation (filed as
                Exhibit 4.4 to the Company’s Form 10-KSB for the fiscal year ended
                December 31, 2004, and incorporated herein by
                reference)4.5
            
            Warrant
                Agreement between American Stock Transfer & Trust Company and the
                Registrant (filed as Exhibit 4.5 to the Company’s Form 10-KSB for the
                fiscal year ended December 31, 2004, and incorporated herein by
                reference)10.1
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and Cary M. Grossman (filed as
                Exhibit 10.1 to the Company’s Form 10-KSB for the fiscal year ended
                December 31, 2004, and incorporated herein by
                reference)




S-2




10.2
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and W. Donald Brunson (filed as Exhibit 10.2
                to the Company’s Form 10-KSB for the fiscal year ended December 31,
                2004, and incorporated herein by reference)10.3
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and Scott Clingan (filed as Exhibit 10.3 to
                the Company’s Form 10-KSB for the fiscal year ended December 31,
                2004, and incorporated herein by reference)10.4
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and Lawrence Fisher10.5
            
            Letter
                Agreement among the Registrant, Newbridge Securities and I-Bankers
                Securities Incorporated and Jeffrey P. Sangalis (filed as
                Exhibit 10.5 to the Company’s Form 10-KSB for the fiscal year ended
                December 31, 2004, and incorporated herein by
                reference)10.8
            
            Investment
                Management Trust Agreement between American Stock Transfer & Trust
                Company and the Registrant (filed as Exhibit 10.8 to the Company’s
                Form 10-KSB for the fiscal year ended December 31, 2004, and
                incorporated herein by reference)10.9
            
            Stock
                Escrow Agreement between the Registrant, Continental Stock Transfer
&
                Trust Company and the Initial Stockholders (filed as Exhibit 10.9 to
                the Company’s Form 10-KSB for the fiscal year ended December 31,
                2004, and incorporated herein by reference)10.9.1
            
            Amendment
                to Stock Escrow Agreement, dated as of April 7, 2005, between the
                Registrant, Continental Stock Transfer & Trust Company, the
                Initial Stockholders and Lawrence Fisher (filed as Exhibit 10.3 to
                the 2005 First Quarter 10-QSB and incorporated herein by
                reference)10.10
            
            Registration
                Rights Agreement among the Registrant and the Initial Stockholders
                (filed
                as Exhibit 10.10 to the Company’s Form 10-KSB for the fiscal year
                ended December 31, 2004, and incorporated herein by
                reference)10.10.1
            
            Amendment
                to Registration Rights Agreement among the Registrant, the Initial
                Stockholders and Lawrence Fisher (filed as Exhibit 10.2 to the
                Company’s Form 10-QSB for the quarter ended March 31, 2005 (the
                “2005 First Quarter 10-QSB”) and incorporated herein by
                reference




S-3




10.11
            
            Letter
                Agreement between Coastal Acquisition, LLC and Registrant regarding
                administrative support (filed as Exhibit 10.11 to the Company’s Form
                10-KSB for the fiscal year ended December 31, 2004, and incorporated
                herein by reference)10.12
            
            Revolving
                Credit Agreement in the principle amount of $75,000 between the Registrant
                and Coastal Acquisition, LLC (filed as Exhibit 10.12 to the
                Company’s Form 10-KSB for the fiscal year ended December 31, 2004,
                and incorporated herein by reference)10.13
            
            Warrant
                Purchase Agreement among Cary M. Grossman, W. Donald Brunson and
                I-Bankers
                Securities Incorporated and Newbridge Securities Corporation (incorporated
                by reference to Exhibit 10.13 of the Company’s Registration Statement
                on Form S-1, registration no. 333-118294, filed with the
                Securities and Exchange Commission)10.14
            
            Resignation
                and Forfeiture Agreement, effective as of April 7, 2005, executed by
                Fred S. Zeidman and acknowledged and agreed to by the Company (filed
                as Exhibit 10.4 to the First Quarter 10-QSB and incorporated herein
                by reference)10.15
            
            Financial
                Advisory Agreement dated as of February 17, 2005, by and between the
                Company and Sanders Morris Harris Inc. (filed as Exhibit 10.1 to
                the 2005 First Quarter 10-QSB and incorporated herein by
                reference)14
            
            Code
                of Ethics (filed as Exhibit 14 of the 2005 First Quarter 10-QSB and
                incorporated herein by reference)23.1
            
            Consent
                of Independent Registered Public Accounting Firm**31.1
            
            Certification
                of Chief Executive Officer and Chairman pursuant to Section 302 of
                the
                Sarbanes-Oxley Act of 2002*32.1
            
            Certification
                of President pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002*32.1
            
            Certification
                of Chief Executive Officer and President pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002*





*
      filed
      herewith





**
      previously filed





S-4