U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                   FORM 10-KSB

[X]  Annual report under Section 13 or 15 (d) of the Securities  Exchange Act of
     1934 for the fiscal year ended December 31, 2004

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

                        Commission File Number: 000-51155

                      COASTAL BANCSHARES ACQUISITION CORP.
                 (Name of Small Business Issuer in Its Charter)


       Delaware                                            20-1191778
(State or Other Jurisdiction of                         (I.R.S. Employer
Incorporation or Organization)                          Identification No.)


9821 Katy Freeway, Suite 500
Houston, Texas                                                77024
(Address of Principal Executive Offices)                   (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  [   ]

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]

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  28,  2005,  was  approximately
$27,103,200. 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 March 28,  2005,  6,520,000  shares of common  stock,  par value  $.01 per
share, were issued and outstanding.

Transitional Small Business Disclosure Format: Yes [   ]  No [X]


<PAGE>

                      COASTAL BANCSHARES ACQUISITION CORP.

<TABLE>
<CAPTION>
                                                                                                                Page
<S>                                                                                                             <C>
PART I     .......................................................................................................1
   Item 1.  Description of Business...............................................................................1
   Item 2.  Description of Property..............................................................................20
   Item 3.  Legal Proceedings....................................................................................20
   Item 4.  Submission of Matters to a Vote of Security Holders..................................................20

PART II     .....................................................................................................20
   Item 5.  Market for Common Equity and Related Stockholder Matters.............................................20
   Item 6.  Management's Discussion and Analysis or Plan of Operation............................................22
   Item 7.  Financial Statements.................................................................................22
   Item 8.  Changes In and Disagreements With Accountants or Accounting and Financial Disclosure.................32
   Item 8A. Controls and Procedures..............................................................................32

PART III     ....................................................................................................32
   Item 9.   Directors, Executive Officers, Promoters and Control Persons........................................32
   Item 10.  Executive Compensation..............................................................................35
   Item 11.  Security Ownership of Certain Beneficial Owners and Management......................................35
   Item 12.  Certain Relationships and Related Transactions......................................................36

SIGNATURES

INDEX TO EXHIBITS

</TABLE>


<PAGE>

                                     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 net proceeds,  after
deducting the  underwriters  discount and offering  expenses,  and including the
sale  of  720,000  units  in  the  underwriters   over-allotment   option,   was
$33,120,000.  $28,483,200  of these net proceeds has been 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.  There are more than 3,000
commercial  banks in the U.S.  with less than $500 million in assets;  more than
2,400 of which have less than $300  million in assets.  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:

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

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<PAGE>

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

     o    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:

     o    Expanding the branch network of a banking institution;

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

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

     o    Seeking  other  profitable  business  lines to add to the bank's  core
          business; and

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

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

     To date, we have not selected any target  business on which to  concentrate
our search for a business  combination.  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 established records 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.

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

                                       2
<PAGE>

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.  On March 8, 2005, we entered into a
Financial Advisory  Agreement with Sanders Morris Harris,  Inc., where that firm
will  assist  the  Company in its  efforts  to  identify a target for a business
combination and to provide related financial advisory services,  including:  due
diligence,  valuation analysis and assistance with negotiations. The Company has
agreed to pay a retainer fee and a finders fee in connection with such services.

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:

     o    financial condition and results of operation;

     o    growth potential;

     o    experience and skill of management;

     o    capital requirements;

     o    competitive position;

     o    stage of development;

     o    asset quality;

     o    valuation expectations; and

     o    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.

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

                                       3
<PAGE>

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:

     o    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

     o    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.

     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.

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<PAGE>

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.

     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.

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<PAGE>

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:

     o    our obligation to seek stockholder  approval of a business combination
          may delay the completion of a transaction;

     o    our obligation to convert into 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

     o    our  outstanding  redeemable  warrants  and  options,  and the  future
          dilution they  potentially  represent,  may not be 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, 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
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.

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.

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<PAGE>

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
<PAGE>

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, 2004 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:

     o    may significantly reduce the equity interest of our stockholders;

     o    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

     o    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:

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

     o    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;

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

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

     o    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
<PAGE>

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 affiliated with
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:

     o    make a special written suitability determination for the purchaser;

     o    receive the purchaser's  written  agreement to a transaction  prior to
          sale;

     o    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

     o    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  $28.5 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:

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

                                       9
<PAGE>

     o    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
<PAGE>


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:

     o    restrictions on the nature of our investments; and

     o    restrictions on the issuance of securities,

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

                                       11
<PAGE>

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

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

     o    adoption of a specific form of corporate structure; and

     o    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
<PAGE>

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

     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.

     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.

                                       13
<PAGE>

     Capital  Adequacy.  The  Federal  Reserve has  adopted  risk-based  capital
guidelines,  which 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).

     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.

     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,  require  Federal  Reserve  approval prior to any person or company
acquiring "control" of a bank holding company.  Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company.

                                       14
<PAGE>

     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:

     o    factoring accounts receivable;

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

     o    leasing personal or real property;

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

     o    trust company functions;

     o    financial and investment advisory activities;

     o    conducting discount securities brokerage activities;

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

     o    providing specified management consulting and counseling activities;

     o    performing selected data processing services and support services;

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

     o    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.

     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:

     o    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;

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

                                       15
<PAGE>

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

     o    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.

     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.

     Sound banking practice.  Bank holding companies are not permitted to engage
in unsound banking practices.  For example,  the Federal Reserve's  Regulation Y
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

                                       16
<PAGE>

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.

     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.

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

                                       17
<PAGE>

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.

     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.

     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.

     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.

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.

                                       18
<PAGE>

     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

     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.

     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.

     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.

     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

                                       19
<PAGE>

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:

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

     o    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;

     o    creating  a reserve  range  within  which a bank's  reserve  ratio can
          float;

     o    increasing insurance coverage limits for municipal deposits;

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

     o    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 last fiscal year.

                                     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.

                                       20
<PAGE>

<TABLE>
<CAPTION>

                                                             OTC
                                                        BULLETIN BOARD
                                                          BID PRICE

                                   UNITS                       COMMON STOCK                      WARRANTS
                       ------------------------------- ------------------------------ -------------------------------

         2005               HIGH            LOW             HIGH            LOW            HIGH            LOW
  -------------------- --------------- --------------- --------------- -------------- --------------- ---------------
<S>                    <C>             <C>             <C>              <C>           <C>              <C>
  First Quarter*           $6.65           $6.00           $5.15           $5.00          $0.76           $0.64
</TABLE>

*Through March 15, 2005

     As of March 15, 2005,  we had one (1) holder of record of our units,  seven
(7) holders of record of our common  stock,  and one (1) 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:

<TABLE>
<CAPTION>
                  Stockholders                           Number of Shares
                  ------------                           ----------------
<S> <C>                                                  <C>
    Cary M. Grossman...................................        282,500
    Coastal Acquisition, LLC...........................        300,000
    W. Donald Brunson..................................        242,500
    Scott Clingan......................................         85,000
    Fred S. Zeidman....................................         40,000
    Jeffrey P. Sangalis................................         50,000
</TABLE>

     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.

     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

                                       21
<PAGE>

$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.

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.

     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.

     Over the 24-month period subsequent to the consummation of the Offering, we
anticipate  approximately  $250,000 of expenses for legal,  accounting and other
expenses  attendant  to  the  due  diligence  investigations,   structuring  and
negotiating  of a  business  combination,  $75,000  of  expenses  in  legal  and
accounting  fees  relating to our SEC  reporting  obligations  and  $587,400 for
general  working  capital  that  will be used  for  miscellaneous  expenses  and
reserves,  including  approximately  $180,000 for director and officer liability
insurance premiums.  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. 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


                                       22
<PAGE>

             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  February  18,  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 from January 1, 2005 through  February
18, 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 February 18, 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 from
January  1,  2005  through  February  18,  2005 in  conformity  with  accounting
principles generally accepted in the United States of America.


Hein & Associates LLP
Houston, Texas
February 22, 2005



                                       23
<PAGE>

                         Coastal Bancshares Acquisition
                    (A Corporation in the Development Stage)

<TABLE>
<CAPTION>
                                  BALANCE SHEET


                                                             December 31, 2004
                                                             -----------------
<S>                                                          <C>
ASSETS

Current assets:

Cash and cash equivalents...................................         $21,711

Trust Fund..................................................              --

Prepaid expenses............................................              --

   Total current assets.....................................          21,711

Deferred offering costs.....................................          63,532
                                                                     -------
Total Assets................................................         $85,243
                                                                     =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable and accrued expenses.......................         $ 7,697

Note payable, stockholder...................................          55,000
                                                                     -------
Total Liabilities...........................................         $62,697
                                                                     =======

STOCKHOLDERS' EQUITY:

Preferred stock, $0.01 par value

   Authorized 5,000,000 shares; none issued.................         $     -

Common stock, $0.01 par value

  Authorized 50,000,000 shares

  Issued and outstanding: 1,000,000 shares..................          10,000

Additional paid-in capital..................................          15,000

Deficit accumulated during the development stage............          (2,454)
                                                                     -------
Total Stockholders' Equity..................................          22,546
                                                                     -------
Total Liabilities and Stockholders' Equity..................         $85,243
                                                                     =======
</TABLE>


                See accompanying notes to financial statements.

                                       24

<PAGE>

                         Coastal Bancshares Acquisition
                    (A Corporation in the Development Stage)

<TABLE>
<CAPTION>
                             STATEMENT OF OPERATIONS



                                                       Period from May 19, 2004
                                                            (inception) to
                                                          December 31, 2004
                                                       ------------------------
<S>                                                    <C>
Formation and operating costs.....................            $  2,454
                                                              --------

Net Loss..........................................            $ (2,454)
                                                              ========

Weighted Average Shares Outstanding...............             650,442
                                                              ========

Net Loss Per Share (basic and diluted)............              $0.00
                                                                =====

</TABLE>



                See accompanying notes to financial statements.

                                       25

<PAGE>

                         Coastal Bancshares Acquisition
                    (A Corporation in the Development Stage)

<TABLE>
<CAPTION>
                        STATEMENT OF STOCKHOLDERS' EQUITY


                                                                                              Deficit
                                                                                             Accumulated
                                                  Common Stock               Additional         During
                                              ------------------------        Paid-In        Development        Stockholders'
                                                Shares         Amount         Capital           Stage              Equity
                                              -----------     --------      ----------       ------------      --------------
<S>                                           <C>             <C>           <C>              <C>               <C>
Common  shares  issued  August 6, 2004
at $0.025 per share.......................     1,000,000       $10,000         $15,000         $     --             $25,000

Net loss...............................              ---           ---             ---           (2,454)             (2,454)
                                                     ---           ---             ---         ---------            --------

Balance at December 31, 2004...........        1,000,000        10,000         $15,000         $  (2,454)           $22,546
                                               ---------        ------         -------         ----------           -------

</TABLE>


                See accompanying notes to financial statements.

                                       26

<PAGE>

                         Coastal Bancshares Acquisition
                    (A Corporation in the Development Stage)

<TABLE>
<CAPTION>
                             STATEMENT OF CASH FLOWS



                                                                 Period from May 19, 2004
                                                                      (inception) to
                                                                    December 31, 2004
                                                                 ------------------------
<S>                                                              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss....................................................            $(2,454)
  Increase in prepaid expenses................................                ---
  Increase in accounts payable and accrued expenses...........              7,697
                                                                          -------
Net Cash provided by Operating Activities.....................              5,243
                                                                          -------

CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in trust fund....................................                ---
                                                                          -------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from public offering of 5,520,000 units, net.......                ---
  Proceeds from sale of common stock to initial stockholders..             25,000
  Proceeds from loan from stockholder.........................             55,000
  Repayment (net of $20,000 advance) of stockholder loan......
  Deferred costs of the proposed public offering..............            (63,532)
                                                                          -------
Net Cash Provided by Financing Activities.....................             16,468
                                                                          -------

NET INCREASE IN CASH..........................................             21,711
CASH AT BEGINNING OF PERIOD...................................                ---
                                                                          -------

CASH AT END OF PERIOD.........................................            $21,711
                                                                          =======
</TABLE>


                See accompanying notes to financial statements.

                                       27
<PAGE>

                         Coastal Bancshares Acquisition
                    (A Corporation in the Development Stage)

                          NOTES TO FINANCIAL STATEMENTS
                     For the Period Ended December 31, 2004

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  $29.7  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 is
being held 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,  after  signing a definitive  agreement for the merger with or
acquisition of a target  business,  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 a
Business  Combination.  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).

                                       28
<PAGE>

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, 2004. All activity through
December 31, 2004, 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.

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.  At December 31, 2004, a deferred  income tax asset  relating to the
Company's net operating loss is offset by a full valuation  allowance based upon
a lack of earnings history for the Company.

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.

Recently Issued Accounting Standards

     In April of 2003, FASB issued SFAS No. 149,  "Amendment of Statement 133 on
Derivative  Instruments  and  Hedging  Activities."  This  statement  amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including  derivative  instruments  embedded  in  other  contracts  and  hedging
activities  under SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities."  This statement  requires that  contracts with  comparable
characteristics  be  accounted  for  similarly  and is effective  for  contracts
entered into or modified  after June 30,  2003.  SFAS No. 149 is not expected to
have an impact on the financial statements.

     In May,  2003,  FASB  issued  Statement  No. 150,  "Accounting  for Certain
Financial  Instruments  with  Characteristics  of both  Liabilities  and Equity"
("SFAS  150").  SFAS 150  requires  an  issuer  to  classify  certain  financial
instruments, such as mandatorily redeemable shares and obligations to repurchase

                                       29
<PAGE>

                         Coastal Bancshares Acquisition
                    (A Corporation in the Development Stage)

                    NOTES TO FINANCIAL STATEMENTS (Continued)
                     For the Period Ended December 31, 2004

the issuer's  equity  shares,  as  liabilities.  The  guidance is effective  for
financial  instruments  entered into or modified subsequent to May 31, 2003, and
otherwise is effective at the beginning of the first  interim  period after June
15, 2003. SFAS 150 did not have a material impact on the financial  condition or
results of operations.

     In November 2003,  FASB issued FASB Staff Position No. 150-3 ("FASB 150-3")
which deferred the effective dates for applying  certain  provisions of SFAS 150
related to mandatorily  redeemable  financial  instruments of certain non-public
entities and certain mandatorily redeemable non-controlling interests for public
and  non-public  companies.  For  public  entities,  SFAS 150 is  effective  for
mandatorily  redeemable financial instruments entered into or modified after May
31, 2003 and is effective for all other  financial  instruments  as of the first
interim  period  beginning  after  June 15,  2003.  For  mandatorily  redeemable
non-controlling interests that would not have to be classified as liabilities by
a  subsidiary  under the  exception  in  paragraph  9 of SFAS 150,  but would be
classified as  liabilities by the parent,  the  classification  and  measurement
provisions of SFAS 150 are deferred indefinitely.  The measurement provisions of
SFAS  150 are  also  deferred  indefinitely  for  other  mandatorily  redeemable
non-controlling  interests  that were issued before  November 4, 2003. For those
instruments,  the measurement guidance for redeemable shares and non-controlling
interests  in other  literature  shall apply  during the  deferral  period.  The
Company  adopted the  provisions of SFAS 150 effective June 30, 2004, and unless
new transactions are entered into, SFAS 150 is not expected to have an impact on
the financial statements.

     In November  2004,  FASB issued  Statement No. 151,  "Inventory  Costs - an
amendment  of ARB No. 43". The new standard  requires  amounts of idle  facility
expense,   freight,  handling  costs,  and  wasted  material  (spoilage)  to  be
recognized as current-period  charges.  . In addition,  this Statement  requires
that allocation of fixed production overhead to the costs of conversion be based
on the normal  capacity of the  production  facilities.  The  provisions of this
Statement  are  effective  for  inventory  costs  incurred  during  fiscal years
beginning  after June 15, 2005. The adoption of the provisions of FAS 151 is not
expected to have an impact on our financial statements.

     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
June 15, 2005. The provisions of FAS 123R do not have an impact on the Company's
results of operations at the present time.

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 consists of
one share of the Company's  common stock,  $0.01 par value,  and two  Redeemable
Common  Stock  Purchase  Warrants  ("Warrants").  Each  Warrant will entitle 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
will be  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 the units will be $6.65 per share.

4.   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

                                       30
<PAGE>


                         Coastal Bancshares Acquisition
                    (A Corporation in the Development Stage)

                    NOTES TO FINANCIAL STATEMENTS (Continued)
                     For the Period Ended December 31, 2004

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.

5.   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.

6.   COMMON STOCK

     At December  31,  2004,  50,000,000  shares of $0.01 par value common stock
were authorized and 1,000,000 shares were outstanding.

7.   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.


                                       31

<PAGE>


ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  OR  ACCOUNTING  AND
FINANCIAL DISCLOSURE

     None.

ITEM 8A. CONTROLS AND PROCEDURES

     Under  the  supervision  and  with  the  participation  of our  management,
including  our chief  executive  officer and chief  financial  officer,  we have
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls and procedures as of December 31, 2004 (the  "Evaluation  Date"),  and,
based on their  evaluation,  our chief  executive  officer  and chief  financial
officer have concluded  that these controls and procedures  were effective as of
the Evaluation Date. 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:

<TABLE>
<CAPTION>
                     Name             Age       Position
                     ----             ---       --------
<S>      <C>                          <C>       <C>
         W. Donald Brunson..........   60       Co-Chief Executive Officer,
                                                President and Director

         Cary M. Grossman...........   51       Co-Chief Executive Officer and
                                                Chairman of the Board of Directors

         Scott Clingan..............   44       Senior Vice President, Corporate Development

         Fred S. Zeidman............   58       Director

         Jeffrey P. Sangalis........   46       Director

</TABLE>

W.  DONALD  BRUNSON has been our  President,  Co-Chief  Executive  Officer and a
member of our  Board of  Directors  since  inception.  Since  1996 he has been a
shareholder and Senior Vice President at American Prudential  Capital,  Inc., an
asset based lending organization.  Since January 2005, Mr. Brunson has served as
a director  and  chairman of the board of the Bank of Houston,  a bank that will
specialize in middle market lending.  Bank of Houston has applied for a State of
Texas Bank charter and FDIC insurance and anticipates  commencing  operations on
March 24, 2005. 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.

                                       32
<PAGE>

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 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.

FRED S. ZEIDMAN, a Director,  is currently the Chairman of Seitel,  Inc. (OTCBB:
SELA.OB), one of the largest seismic data services company serving the oil & gas
exploration  industry and an SEC reporting company; and is a partner in WoodRock
& Co., a Houston, Texas based  investment-banking  firm. He is also the Chairman
of the  United  States  Holocaust  Memorial  Council  in  Washington,  D.C.,  an
appointment  made by  President  George W. Bush.  Mr.  Ziedman is a director  of
Prosperity  Bancshares,  a $2.5 billion regional bank holding company and an SEC
reporting  company.  During a business career that spans more than 34 years, Mr.
Zeidman's  previous business  experience  includes:  President,  Chief Executive
Officer and Director of InterSystems, Inc. (an SEC reporting company, now called
Equifin Inc.) a plastic and material handling manufacturing  business, from 1994
until its sale in 1999;  President  and Chief  Executive  Officer of  Enterprise
Capital,  a federally licensed SBIC venture capital fund specializing in private
financing;  President and Chief  Operating  Officer of Service  Enterprise,  the
largest  home  maintenance  company in the U.S. at the time of its sale in 1993;
Chairman  of the Board and  President  of  Parking,  Inc.,  owner of an  offsite
airport parking facility until its sale in 1998; Chairman of the Board of Unibar
Corporation, one of the largest domestic independent drilling fluid companies at
the time of its sale to Anchor  Drilling  Fluids in 1991;  and Vice President of
Alliance Business Investment Company, a federally licensed SBIC, from 1972-1980.
He began his career as an Associate in the Corporate Finance  Department at Dean

                                       33
<PAGE>

Witter & Company where he was employed from 1969-1972. Mr. Zeidman has served as
a director or trustee of more than 25 charitable and educational  organizations.
In addition to the United States Holocaust Memorial Council, he currently serves
as Texas Chairman,  State of Israel Bonds;  Chancellor  Advisor,  Board of Texas
Christian  University;  and he was a  founder  of the  Houston  Venture  Capital
Association.  He earned a Bachelor  of Science in Business  Administration  from
Washington  University  and a Master of  Business  Administration  from New York
University.

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 Venture Capital  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.

Code of Ethics

     We have not yet  adopted  a code of  ethics.  However,  we intend to adopt,
during  fiscal  2005,  a code  of  ethics  that  complies  with  the  applicable
guidelines issued by the SEC.

                                       34
<PAGE>

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, 2005 by:

     o    each person known by us to be the beneficial  owner of more than 5% of
          our outstanding shares of common stock;
     o    each of our officers and directors; and
     o    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.

<TABLE>
<CAPTION>
                                                 Amount and       Approximate
                                                 Nature of       Percentage of
                                                 Beneficial       Outstanding
  Name and Address of Beneficial Owner(1)        Ownership        Common Stock
-------------------------------------------    -------------     -------------
<S>                                            <C>               <C>
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%
Fred S. Zeidman............................         40,000                 *
Jeffrey P. Sangalis........................         50,000                 *
All directors and executive officers as a
group (5 individuals)......................      1,000,000              15.3%
____________________
</TABLE>
      * less than 1%.

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

                                       35
<PAGE>

     (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.

     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:

     o    February 18, 2008;

     o    our liquidation; or

     o    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:

<TABLE>
<CAPTION>
               Name                    Number of Shares      Relationship To Us
               ----                    ----------------      ------------------
<S>  <C>                               <C>                   <C>
     Cary M. Grossman...............        282,500          Co-Chief Executive Officer and Chairman
                                                             of the Board of Directors

     Coastal Acquisition, LLC.......        300,000          Affiliate of Cary M. Grossman and
                                                             W. Donald Brunson

     W. Donald Brunson..............        242,500          Co-Chief Executive  Officer,
                                                             President and Director

     Scott Clingan..................         85,000          Senior Vice President, Corporate
                                                             Development

     Jeffrey P. Sangalis............         50,000          Director

     Fred S. Zeidman ...............         40,000          Director
</TABLE>

     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

                                       36
<PAGE>

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.

     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.


                                       37
<PAGE>

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*

             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*

             4.5              Warrant   Agreement   between   Continental  Stock
                              Transfer & Trust Company and the Registrant*

             10.1             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and Cary M. Grossman (incorporated by reference to
                              Exhibit   10.1  of  the   Company's   Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

             10.2             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and W. Donald Brunson  (incorporated  by reference
                              to  Exhibit  10.2  of the  Company's  Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

             10.3             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and Scott  Clingan  (incorporated  by reference to
                              Exhibit   10.3  of  the   Company's   Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

                                       38
<PAGE>


             10.4             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and Fred S. Zeidman  (incorporated by reference to
                              Exhibit   10.4  of  the   Company's   Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

            10.5              Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and Jeffrey P. Sangalis (incorporated by reference
                              to  Exhibit  10.5  of the  Company's  Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

             10.8             Investment   Management  Trust  Agreement  between
                              Continental Stock Transfer & Trust Company and the
                              Registrant*

             10.9             Stock  Escrow  Agreement  between the  Registrant,
                              Continental Stock Transfer & Trust Company and the
                              Initial Stockholders*

             10.10            Registration Rights Agreement among the Registrant
                              and the Initial Stockholders*

             10.11            Letter Agreement between Coastal Acquisition,  LLC
                              and Registrant regarding administrative support*

             10.12            Revolving Credit Agreement in the principle amount
                              of $75,000  between  the  Registrant  and  Coastal
                              Acquisition, LLC*

             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)

             31.1             Certification  of Co-Chief  Executive  Officer and
                              Chairman   pursuant   to   Section   302   of  the
                              Sarbanes-Oxley Act of 2002*

             31.2             Certification  of Co-Chief  Executive  Officer and
                              President   pursuant   to   Section   302  of  the
                              Sarbanes-Oxley  Act of 2002*

             32.1             Certification  of  Co-Chief   Executive   Officers
                              pursuant to Section 906 of the  Sarbanes-Oxley Act
                              of 2002*

--------------
* filed herewith


(b) Reports on Form 8-K

     Form 8-K  filed on March 22,  2005,  including  Item 8 and Item 9  (Audited
Financial  Statements for the periods from May 19, 2004  (inception) to December
31, 2004 and May 19, 2004 to February 18, 2005).

                                       39
<PAGE>

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 2004, we paid $14,600 fees to our principal accountant in connection
with our initial  public  offering.  As of February  18,  2005,  we have paid an
additional  $17,252  for the  service  our  principal  accountant  performed  in
connection with our initial public offering,  including the financial statements
included  in the  Current  Report  on Form 8-K  filed  with the  Securities  and
Exchange Commission on February 18, 2005.

AUDIT-RELATED FEES

     During 2004, 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 2004, 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 2004,  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.



                                       40
<PAGE>

                                   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 to be
signed on its behalf by the undersigned thereto duly authorized.

                                        Coastal Bancshares Acquisition Corp.
                                        (Registrant)


Date: March 29, 2005                   By:  /s/ Cary M. Grossman
                                        ---------------------------------------
                                        Cary M. Grossman
                                        Co-Chief Executive Officer


                                        By:  /s/ W. Donald Brunson
                                        ---------------------------------------
                                        W. Donald Brunson
                                        Co-Chief Executive Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
annual report on Form 10-KSB has been signed below by the  following  persons on
behalf of the registrant and in the capacities and on the dates indicated.


     Signature             Title                               Date
     ---------             -----                               -----

                           Co-Chief Executive Officer and
                           Director (Principal Executive
                           Officer and Principal Financial
/s/ Cary M. Grossman       and Accounting Officer)             March 29, 2005
-----------------------
Cary M. Grossman


                           Co-Chief Executive Officer,
                           President and Director
/s/ W. Donald Brunson      (Principal Executive Officer)       March 29, 2005
------------------------
W. Donald Brunson


                           Senior Vice President,
/s/ Scott Clingan          Corporate Development               March 29, 2005
------------------------
Scott Clingan



/s/ Jeffrey P. Sangalis    Director                            March 29, 2005
------------------------
Jeffrey P. Sangalis


/s/ Fred S. Zeidman        Director                            March 29, 2005
------------------------
Fred S. Zeidman

                                       41

<PAGE>

                               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

             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

             4.5              Warrant   Agreement   between   Continental  Stock
                              Transfer & Trust Company and the Registrant

             10.1             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and Cary M. Grossman (incorporated by reference to
                              Exhibit   10.1  of  the   Company's   Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

             10.2             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and W. Donald Brunson  (incorporated  by reference
                              to  Exhibit  10.2  of the  Company's  Registration
                              Statement   on  Form  S-1,   registration   number
                              333-118294, filed with the Securities and Exchange
                              Commission)

             10.3             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and Scott  Clingan  (incorporated  by reference to
                              Exhibit   10.3  of  the   Company's   Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

                                       42
<PAGE>


             10.4             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and Fred S. Zeidman  (incorporated by reference to
                              Exhibit   10.4  of  the   Company's   Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

             10.5             Letter  Agreement among the Registrant,  Newbridge
                              Securities and I-Bankers  Securities  Incorporated
                              and Jeffrey P. Sangalis (incorporated by reference
                              to  Exhibit  10.4  of the  Company's  Registration
                              Statement   on   Form   S-1,    registration   no.
                              333-118294, filed with the Securities and Exchange
                              Commission)

             10.8             Investment   Management  Trust  Agreement  between
                              Continental Stock Transfer & Trust Company and the
                              Registrant

             10.9             Stock  Escrow  Agreement  between the  Registrant,
                              Continental Stock Transfer & Trust Company and the
                              Initial Stockholders

             10.10            Registration Rights Agreement among the Registrant
                              and the Initial Stockholders

             10.11            Letter Agreement between Coastal Acquisition,  LLC
                              and Registrant regarding administrative support

             10.12            Revolving Credit Agreement in the principle amount
                              of $75,000  between  the  Registrant  and  Coastal
                              Acquisition, LLC

             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)

             31.1             Certification  of Co-Chief  Executive  Officer and
                              Chairman   pursuant   to   Section   302   of  the
                              Sarbanes-Oxley Act of 2002

             31.2             Certification  of Co-Chief  Executive  Officer and
                              President   pursuant   to   Section   302  of  the
                              Sarbanes-Oxley  Act of 2002

             32.1             Certification  of  Co-Chief   Executive   Officers
                              pursuant to Section 906 of the  Sarbanes-Oxley Act
                              of 2002

                                       43