**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                OF
                1934For
                the quarterly period ended**June
                30, 2007**o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                OF
                1934For
                the transition period fromtoCommission
                file number0-51385




**COLONIAL
      BANKSHARES, INC.**


(Exact
      name of small business issuer as specified in its charter)




**United
                States of America**
            
            **90-0183739**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer ID No.)**2745
                  S. Delsea Drive, Vineland, New Jersey 08360**(Address
                of principal executive offices)




**(856)
      205-0058**


(Issuer’s
      telephone number including area code)




**85
        West Broad Street, Bridgeton, New Jersey 08302**


(Former
      name, address, and fiscal year, if changed since last report)





Indicate
      by check whether the issuer (1) has filed all reports required to be filed
      by
      Section 13 or 15(d) of the 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.





(1)
            x
                Yes
            o No(2)
            x
                Yes
            o No




Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange
      Act). o Yes         
      x No





Indicate
      the number of shares outstanding of each of the issuer’s classes of common stock
      as of the latest practicable date:




As
        of
        August 13, 2007, 4,433,071 shares of common stock, par value $0.10 per
        share





Transitional
      Small Business Disclosure Format (check one),  oYes         
      xNo











**TABLE
      OF CONTENTS**







**PART
              I**
            **FINANCIAL
              INFORMATION**
            **PAGE**Item
                1
            Consolidated
                Statements of Financial Condition
            2Consolidated
                Statements of Income
            3Consolidated
                Statements of Stockholders’ Equity
            4Consolidated
                Statements of Cash Flows
            5Notes
                to Consolidated Financial Statements
            6


Item
                2
            Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
            15Item
                3
            Controls
                and Procedures
            24**PART
                II**
            **OTHER
                INFORMATION**Item
                1
            Legal
                Proceedings
            25Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            25Item
                3
            Defaults
                Upon Senior Securities
            25Item
                4
            Submission
                of Matters to Vote of Security Holders
            25Item
                5
            Other
                Information
            25Item
                6
            Exhibits
            26Signatures
            27





1




**PART
        I********FINANCIAL
        INFORMATION**
 **Item
        1.**  **Financial
        Statements**
 
 ***Colonial
        Bankshares, Inc.***





Consolidated
        Statements of Financial Condition
 At June
        30,
        2007 and December 31, 2006
  June30, 2007
              
              December
                  31,
                2006(Dollars
                  In Thousands, Except Per Share Data)AssetsCash
                  and amounts due from banks
              
              $
              14,277
              
              $
              13,257Interest-bearing
                  time deposits in banks
              
              
              725
              
              
              717Investment
                  securities available for sale
              
              
              155,092
              
              
              136,925Investment
                  securities held to maturity(fair value at June 30, 2007 - $18,789;
                at
                  December 31, 2006 - $19,500)
              
              
              18,369
              
              
              18,722Loans
                  receivable, net of allowance for loan losses of $1,456
                  at June 30, 2007 and $1,373 at December 31, 2006
              
              
              223,791
              
              
              198,519Loans
                  available for sale
              
              
              288
              
              
              -Federal
                  Home Loan Bank stock, at cost
              
              
              1,398
              
              
              775Office
                  properties and equipment, net
              
              
              10,193
              
              
              7,337Bank-ownedlife insurance
              
              
              2,531
              
              
              2,485Accrued
                  interest
                  receivable
              
              
              2,003
              
              
              1,781Other
                  assets
              
              
              3,615
              
              
              3,079Total
                  Assets
              
              $
              432,282
              
              $
              383,597Liabilities
                  and Stockholders’ EquityLiabilitiesDeposits:Noninterest-bearing
              
              $
              19,335
              
              $
              18,055Interest-bearing
              
              
              354,175
              
              
              319,199Total
                  deposits
              
              
              373,510
              
              
              337,254Federal
                  Home Loan Bank short-term borrowings
              
              
              13,735
              
              
              1,450Federal
                  Home Loan Bank long-term borrowings
              
              
              6,719
              
              
              6,874Advances
                  from borrowers for taxes and insurance
              
              
              735
              
              
              793Accrued
                  interest payable and other liabilities
              
              
              1,297
              
              
              563Total
                  Liabilities
              
              
              395,996
              
              
              346,934Stockholders’
                  EquityPreferred
                  stock, 1,000,000 shares authorized and unissued
              
              
              -
              
              
              -Common
                  stock, par value $0.10 per share; authorized 10,000,000
                  shares;
                issued
                  4,521,696 shares; outstanding 4,433,071 shares in 2007 and
                  2006
              
              
              452
              
              
              452Additional
                  paid-in
                  capital
              
              
              19,704
              
              
              19,519Unearned
                  shares held by Employee Stock Ownership Plan (“ESOP”)
              
              
              (1,432
              )
              
              (1,432
              )Treasury
                  stock, at cost, 88,625 shares
              
              
              (1,189
              )
              
              (1,189
              )Retained
                  earnings
              
              
              20,548
              
              
              19,863Accumulated
                  other comprehensive loss
              
              
              (1,797
              )
              
              (550
              )Total
                  Stockholders’ Equity
              
              
              36,286
              
              
              36,663Total
                  Liabilities and Stockholders’ Equity
              
              $
              432,282
              
              $
              383,597


See
      notes
      to consolidated financial statements


2





***Colonial
        Bankshares, Inc.***


Consolidated
          Statements of Income
 Three and
          Six
          Months Ended June 30, 2007 and 2006 (unaudited)
  Three
                    Months Ended June 30,
                
                Six
                    Months Ended June 30,2007
                
                2006
                
                2007
                
                2006(Dollars
                    in Thousands, Except Per Share Data)Interest
                    IncomeLoans,
                    including fees
                
                $
                3,406
                
                $
                2,664
                
                $
                6,584
                
                $
                5,051Mortgage-backed
                    securities
                
                
                765
                
                
                624
                
                
                1,505
                
                
                1,232Securities:Taxable
                
                
                1,069
                
                
                840
                
                
                2,021
                
                
                1,682Tax-exempt
                
                
                360
                
                
                343
                
                
                718
                
                
                680Total
                    Interest Income
                
                
                5,600
                
                
                4,471
                
                
                10,828
                
                
                8,645Interest
                    ExpenseDeposits
                
                
                3,407
                
                
                2,172
                
                
                6,491
                
                
                4,168Borrowings
                
                
                53
                
                
                211
                
                
                128
                
                
                353Total
                    Interest Expense
                
                
                3,460
                
                
                2,383
                
                
                6,619
                
                
                4,521Net
                    Interest Income
                
                
                2,140
                
                
                2,088
                
                
                4,209
                
                
                4,124Provision
                    for Loan Losses
                
                
                15
                
                
                36
                
                
                84
                
                
                99Net
                    Interest Income after Provision for Loan Losses
                
                
                2,125
                
                
                2,052
                
                
                4,125
                
                
                4,025Non-Interest
                    IncomeFees
                    and service charges
                
                
                234
                
                
                215
                
                
                478
                
                
                410Gain
                    on sale of loans
                
                
                12
                
                
                8
                
                
                23
                
                
                23Net
                    loss on calls of securities
                
                
                (2
                )
                
                -
                
                
                (2
                )
                
                -Earnings
                    on life insurance
                
                
                23
                
                
                22
                
                
                46
                
                
                43Other
                
                
                7
                
                
                8
                
                
                17
                
                
                13Total
                    Non-Interest Income
                
                
                274
                
                
                253
                
                
                562
                
                
                489Non-Interest
                    ExpensesCompensation
                    and benefits
                
                
                1,319
                
                
                1,068
                
                
                2,486
                
                
                2,122Occupancy
                    and equipment
                
                
                270
                
                
                220
                
                
                517
                
                
                453Data
                    processing
                
                
                186
                
                
                151
                
                
                360
                
                
                302Office
                    supplies
                
                
                58
                
                
                29
                
                
                91
                
                
                54Professional
                    fees
                
                
                92
                
                
                88
                
                
                167
                
                
                169Other
                
                
                394
                
                
                320
                
                
                672
                
                
                555Total
                    Non-Interest Expenses
                
                
                2,319
                
                
                1,876
                
                
                4,293
                
                
                3,655Income
                    before Income Taxes
                
                
                80
                
                
                429
                
                
                394
                
                
                859Income
                    Taxes (Benefit)
                
                
                (193
                )
                
                65
                
                
                (291
                )
                
                135Net
                    Income
                
                $
                273
                
                $
                364
                
                $
                685
                
                $
                724Per
                    Share Data (See Note 3):Earnings
                    per share - basic
                
                $
                0.06
                
                $
                0.08
                
                $
                0.16
                
                $
                0.17Earnings
                    per share - diluted
                
                $
                0.06
                
                $
                0.08
                
                $
                0.16
                
                $
                0.17Weighted
                    average number of shares outstanding - basic
                
                
                4,289,879
                
                
                4,366,901
                
                
                4,289,879
                
                
                4,366,901Weighted
                    average number of shares outstanding - diluted
                
                
                4,330,242
                
                
                4,366,901
                
                
                4,325,991
                
                
                4,366,901
 See
        notes
        to consolidated financial statements


3


***Colonial
        Bankshares, Inc.***


Consolidated
          Statements of Stockholders’ Equity
 Six Months
          Ended June 30, 2007 and 2006 (unaudited)
  
 Common
                    Stock
                
                Additional
                    Paid-in Capital
                
                Unearned
                    Shares
                  Held
                    by ESOP
                
                Retained
                    Earnings
                
                Treasury
                    Stock
                
                Accumu-lated
                  Other
                    Compre-hensive (Loss)
                
                Total
                  Stock-holders’
                    Equity(Dollars
                    in Thousands)Balance,
                    January 1, 2007
                
                $
                452
                
                $
                19,519
                
                $
                (1,432
                )
                $
                19,863
                
                $
                (1,189
                )
                $
                (550
                )
                $
                36,663Comprehensive
                    loss:Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                685
                
                
                -
                
                
                -
                
                
                685Net
                    change in unrealized loss on securities available for sale, net
                    of tax
                    benefit of $654 and reclassification adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,247
                )
                
                (1,247
                )Total
                    Comprehensive Loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (562
                )Amortization
                    of restricted stock awards
                
                
                -
                
                
                111
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                111Amortization
                    of stock options
                
                
                -
                
                
                74
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                74Balance,
                    June 30, 2007
                
                $
                452
                
                $
                19,704
                
                $
                (1,432
                )
                $
                20,548
                
                $
                (1,189
                )
                $
                (1,797
                )
                $
                36,286Balance,
                    January 1, 2006
                
                $
                452
                
                $
                19,414
                
                $
                (1,548
                )
                $
                18,252
                
                $
                -
                
                $
                (709
                )
                $
                35,861Comprehensive
                    loss:Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                724
                
                
                -
                
                
                -
                
                
                724Net
                    change in unrealized loss on securities available for sale, net
                    of tax
                    benefit of $783
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,178
                )
                
                (1,178
                )Total
                    Comprehensive Loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (454
                )Balance,
                    June 30, 2006
                
                $
                452
                
                $
                19,414
                
                $
                (1,548
                )
                $
                18,976
                
                $
                -
                
                $
                (1,887
                )
                $
                35,407
  See
        notes
        to consolidated financial statements


4





***Colonial
      Bankshares, Inc.***





Consolidated
        Statements of Cash Flows
 Six Months
        Ended June 30, 2007 and 2006 (unaudited)
  Six
                  Months Ended June 30,2007
              
              2006Cash
                  Flows from Operating Activities:
              
              (In
                  Thousands)Net
                  income
              
              $
              685
              
              $
              724Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activities:Provision
                  for loan losses
              
              
              84
              
              
              99Depreciation
                  expense
              
              
              213
              
              
              199Stock-based
                  compensation expense
              
              
              185
              
              
              -Deferred
                  income taxes
              
              
              (373
              )
              
              (494
              )Net
                  earnings on bank-owned life insurance
              
              
              (46
              )
              
              (43
              )Loans
                  originated for sale
              
              
              (1,487
              )
              
              (1,122
              )Proceeds
                  from sale of loans
              
              
              1,222
              
              
              1,145Gain
                  on sale of loans
              
              
              (23
              )
              
              (23
              )Net
                  amortization of loan fees
              
              
              (11
              )
              
              (3
              )Loss
                  on calls of investment securities
              
              
              (2
              )
              
              -Amortization
                  (accretion) of premium and discount on investment securities,
                  net
              
              
              (272
              )
              
              (105
              )Increase
                  in accrued interest receivable
              
              
              (222
              )
              
              (93
              )Decrease
                  in other assets
              
              
              491
              
              
              316Increase
                  in accrued interest payable and other liabilities
              
              
              734
              
              
              194Net
                  cash provided by operating activities
              
              
              1,178
              
              
              794Cash
                  Flows from Investing Activities:Proceeds
                  from calls and maturities of:Investment
                  securities available for sale
              
              
              1,835
              
              
              706Investment
                  securities held to maturity
              
              
              706
              
              
              1,300Purchase
                  of:Investment
                  securities available for sale
              
              
              (17,257
              )
              
              (2,733
              )Investment
                  securities held to maturity
              
              
              -
              
              
              (1,174
              )Mortgage-backed
                  securities available for sale
              
              
              (11,879
              )
              
              (5,261
              )Mortgage-backed
                  securities held to maturity
              
              
              (719
              )
              
              -Office
                  properties and equipment
              
              
              (3,069
              )
              
              (758
              )Principal
                  repayments from:Investment
                  securities
              
              
              1,118
              
              
              1,564Mortgage-backed
                  securities
              
              
              6,755
              
              
              7,848Net
                  increase in Federal Home Loan Bank stock
              
              
              (623
              )
              
              (172
              )Purchase
                  of interest-bearing time deposits in banks
              
              
              (208
              )
              
              (700
              )Maturity
                  of interest-bearing time deposits in banks
              
              
              200
              
              
              -Net
                  increase in loans receivable
              
              
              (25,345
              )
              
              (24,406
              )Net
                  cash used for investing activities
              
              
              (48,486
              )
              
              (23,786
              )Cash
                  Flows from Financing Activities:Net
                  increase in deposits
              
              
              36,256
              
              
              20,031(Decrease)
                  increase in Federal Home Loan Bank short-term borrowings
              
              
              12,285
              
              
              (4,785
              )Increase
                  in Federal Home Loan Bank long-term borrowings
              
              
              -
              
              
              7,000Repayment
                  of Federal Home Loan Bank long-term borrowings
              
              
              (155
              )
              
              -(Decrease)
                  increase in advances from borrowers for taxes and
                  insurance
              
              
              (58
              )
              
              245Net
                  cash provided by financing activities
              
              
              48,328
              
              
              22,491Increase
                  (decrease) in cash and cash equivalents
              
              
              1,020
              
              
              (501
              )CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              13,257
              
              
              10,669CASH
                  AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              14,277
              
              $
              10,168Supplemental
                  Cash Flow Disclosures:Cash
                  paid:Interest
              
              $
              6,323
              
              $
              4,382Income
                  taxes
              
              $
              -
              
              $
              330




See
        notes
        to consolidated financial statements


5




**COLONIAL
      BANKSHARES, INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**




**1.**
            **Organization
                and Basis of Presentation** 
 Colonial
        Bankshares, Inc. (the “Company”) was organized in January 2003 to serve as the
        mid-tier stock holding company of Colonial Bank, FSB. Colonial Bankshares,
        Inc.
        is a federally chartered corporation and owns 100% of the outstanding common
        stock of Colonial Bank, FSB (the “Bank”). Colonial Bank, FSB is a federally
        chartered capital stock savings bank. Colonial Bankshares, MHC, a federally
        chartered mutual holding company, is the parent of the Company and owns
        approximately 54% of the Company’s outstanding common stock. The Bank is a
        wholly owned subsidiary of the Company. In September 2006, after receiving
        regulatory approval, the Bank established a Delaware corporation, CB Delaware
        Investments, Inc. (the “Operating Subsidiary”) whose purpose is to invest in and
        manage securities. The Operating Subsidiary was funded by the Bank with cash
        and
        investment securities with an approximate value of $134.0 million in exchange
        for all the outstanding common stock of the Operating Subsidiary.
 
 The
        consolidated financial statements include the accounts of Colonial Bankshares,
        Inc. Colonial Bank, FSB and CB Delaware Investments, Inc. All material
        intercompany transactions and balances have been eliminated. The Company
        prepares its financial statements on the accrual basis and in conformity
        with
        accounting principles generally accepted in the United States of America
        (“US
        GAAP”). The unaudited information furnished herein reflects all adjustments
        (consisting of normal recurring accruals) that are, in the opinion of
        management, necessary for a fair presentation of the results for the interim
        periods presented. They do not include all of the information and footnotes
        required by US GAAP for complete financial statements. Operating results
        for the
        three and six months ended June 30, 2007 (unaudited) are not necessarily
        indicative of the results that may be expected for the year ending December
        31,
        2007.
 
 The
        balance sheet at December 31, 2006 has been derived from the audited
        consolidated financial statements at that date but does not include all of
        the
        information and footnotes required by US GAAP for complete financial
        statements.
 
 The
        preparation of financial statements in conformity with US GAAP requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of income and
        expenses during the reporting period. Actual results could differ from those
        estimates. Material estimates that are particularly susceptible to significant
        change in the near term relate to the determination of the allowance for
        loan
        losses, evaluation of other-than-temporary impairment of investment securities
        and the realizability of deferred tax assets.
 
 The
        Bank
        maintains a newly opened executive office and main branch in Vineland, New
        Jersey with branches in Bridgeton, Mantua, Millville, Upper Deerfield, Vineland
        and Sewell, New Jersey. The Bank’s principal business consists of attracting
        customer deposits and investing these deposits primarily in investments and
        single-family residential, commercial and consumer loans.
  6
  **2.**
            **Recent
                Accounting Pronouncements**  In
        May
        2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of
        Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides
        guidance on how to determine whether a tax position is effectively settled
        for
        the purpose of recognizing previously unrecognized tax benefits. FSP FIN
        48-1 is
        effective retroactively to January 1, 2007. The implementation of this standard
        did not have a material impact on our consolidated financial position or
        results
        of operations.
  In
        March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for
        Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11
        requires companies to recognize the income tax benefit realized from dividends
        or dividend equivalents that are charged to retained earnings and paid to
        employees for nonvested equity-classified employee share-based payment awards
        as
        an increase to additional paid-in capital. EITF 06-11 is effective for fiscal
        years beginning after September 15, 2007. The Company does not expect EITF
        06-11 will have a material impact on its financial position, results of
        operations or cash flows.
 
 In
        March
        2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting
        for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10).
        EITF 06-10 provides guidance for determining a liability for the postretirement
        benefit obligation as well as recognition and measurement of the associated
        asset on the basis of the terms of the collateral assignment agreement. EITF
        06-10 is effective for fiscal years beginning after December 15, 2007. The
        Company is currently assessing the impact of EITF 06-10 on its consolidated
        financial position and results of operations.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities-Including an amendment of FASB
        Statement No. 115. SFAS No. 159 permits entities to choose to measure many
        financial instruments and certain other items at fair value. Unrealized gains
        and losses on items for which the fair value option has been elected will
        be
        recognized in earnings at each subsequent reporting date. SFAS No. 159 is
        effective for our Company on January 1, 2008. The Company is evaluating the
        impact that the adoption of SFAS No, 159 will have on our consolidated financial
        statements.
  In
        September 2006, the FASB issued FASB Statement No. 157, Fair Value
        Measurements, which defines fair value, establishes a framework for measuring
        fair value under GAAP, and expands disclosures about fair value measurements.
        FASB Statement No. 157 applies to other accounting pronouncements that
        require or permit fair value measurements. The new guidance is effective
        for
        financial statements issued for fiscal years beginning after November 15,
        2007, and for interim periods within those fiscal years. We are currently
        evaluating the potential impact, if any, of the adoption of FASB Statement
        No. 157 on our consolidated financial position, results of operations and cash
        flows.
  7
  On
        September 7, 2006, the Task Force reached a conclusion on EITF Issue
        No. 06-5, “Accounting for Purchases of Life Insurance - Determining the
        Amount That Could Be Realized in Accordance with FASB Technical Bulletin
        No. 85-4, Accounting for Purchases of Life Insurance” (“EITF 06-5”). The
        scope of EITF 06-5 consists of six separate issues relating to accounting
        for
        life insurance policies purchased by entities protecting against the loss
        of
“key persons.” The six issues are clarifications of previously issued guidance
        on FASB Technical Bulletin No. 85-4. EITF 06-5 is effective for fiscal
        years beginning after December 15, 2006. The adoption of EITF 06-5 had no
        effect on the Company’s consolidated financial statements.
  In
        September 2006, FASB ratified the consensus reached by the EITF in Issue
        06-4,
        Accounting for Deferred Compensation and Postretirement Benefit Aspects of
        Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 applies to
        life
        insurance arrangements that provide an employee with a specified benefit
        that is
        not limited to the employee’s active service period, including certain
        bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to
        recognize a liability and related compensation costs for future benefits
        that
        extend to postretirement periods. EITF 06-4 is effective for fiscal years
        beginning after December 31, 2007, with earlier application permitted. The
        Company is continuing to evaluate the impact of this consensus, which may
        require it to recognize an additional liability and compensation expense
        related
        to its BOLI policies.
 
 In
        September 2006, FASB ratified Emerging Issues Task Force Issue
        No. 06-1, Accounting for Consideration Given by a Service Provider to
        Manufacturers or Resellers of Equipment Necessary for an End-Customer to
        Receive
        Service from the Service Provider (“EITF 06-1”). This guidance requires the
        application of EITF 01-9, *Accounting
        for Consideration Given by a Vendor to a Customer* (“EITF
        01-9”), when consideration is given to a reseller or manufacturer for benefit
        to
        the service provider’s end customer. EITF 01-9 requires the consideration given
        be recorded as a liability at the time of the sale of the equipment and also
        provides guidance for the classification of the expense. EITF 06-1 is effective
        for the first annual reporting period beginning after June 15, 2007. The
        Company
        is currently reviewing the requirements of EITF-06-1 and has not yet determined
        the impact, if any, on its financial position or results of
        operations.
 
 **3.**
            **Earnings
                Per Share** 
 There
        are
        no convertible securities which would affect the net income (numerator) in
        calculating basic and diluted earnings per share; therefore, for purposes
        of
        this calculation, the net income for the six months ended June 30, 2007 is
        $685
        thousand and the net income for the six months ended June 30, 2006 is $724
        thousand. For the three months ended June 30, 2007, net income is $273 thousand
        and for the three months ended June 30, 2006, net income is $364 thousand.
        Basic
        and diluted earnings per share data are based on the weighted-average number
        of
        common shares outstanding during each period. Diluted earnings per share
        are
        further adjusted for potential common shares that were dilutive and outstanding
        during the period. Potential common shares consist of stock options outstanding
        and non-vested stock grants under the stock-based incentive plans. The dilutive
        effect of potential common shares is computed using the treasury stock method.
        All stock options and non-vested stock grants are assumed to be 100% vested
        for
        purposes of the earnings per share computations.
  8
  The
        following table sets forth the composition of the weighted average common
        shares
        (denominator) used in the basic and diluted earnings per share
        computation.
 
 For
                  the Three Months Ended
                June
                  30,
              
              For
                  the Six Months Ended
                June
                  30,2007
              
              2006
              
              2007
              
              2006Net
                  Income
              
              $
              273,000
              
              $
              364,000
              
              $
              685,000
              
              $
              724,000Weighted
                  average common shares issued
              
              
              4,521,696
              
              
              4,521,696
              
              
              4,521,696
              
              
              4,521,696Average
                  unearned ESOP shares
              
              
              (143,192
              )
              
              (154,795
              )
              
              (143,192
              )
              
              (154,795
              )Average
                  treasury stock shares
              
              
              (88,625
              )
              
              -
              
              
              (88,625
              )
              
              -Weighted
                  average common shares outstanding - basic
              
              
              4,289,879
              
              
              4,366,901
              
              
              4,289,879
              
              
              4,366,901Effect
                  of dilutive non -vested shares and stock options
                  outstanding
              
              
              40,363
              
              
              -
              
              
              36,113
              
              
              -Weighted
                  average common shares outstanding - diluted
              
              
              4,330,242
              
              
              4,366,901
              
              
              4,325,992
              
              
              4,366,901Basic
                  earnings per share
              
              $
              0.06
              
              $
              0.08
              
              $
              0.16
              
              $
              0.17Diluted
                  earnings per share
              
              $
              0.06
              
              $
              0.08
              
              $
              0.16
              
              $
              0.17
  **4.**
              **Stock
                  Based Compensation**
 The
        Company’s Board of Directors and stockholders have adopted the 2006 Colonial
        Bankshares, Inc. Stock-Based Incentive Plan (the “2006 Plan”). The Stock-Based
        Incentive Plan provides for the grant of shares of common stock and the grant
        of
        stock options to officers, employees and directors of the Company. Under
        the
        2006 Plan, the Company may grant options to purchase 221,563 shares of Company
        stock and may grant up to 88,625 shares of common stock as restricted stock
        awards.
 
 The
        2006
        Plan enables the Board of Directors to grant stock options to executives,
        other
        key employees and nonemployee directors. The options granted under the Plan
        may
        be either non-qualified stock options (NQOs) or incentive stock options (ISOs).
        Only NQOs may be granted to nonemployee directors under this plan and ISOs
        may
        be granted to employees. The Company has reserved 221,563 shares of common
        stock
        for issuance upon the exercise of options granted under the 2006 Plan. The
        2006
        Plan will terminate ten years from the grant date. Options may not be granted
        with an exercise price that is less than 100% of the fair market value of
        the
        Company’s common stock on the date of grant. Options may not be granted with a
        term longer than 10 years. Stock options granted under the Incentive Plan
        are
        subject to limitations under Section 422 of the Internal Revenue Code. The
        number of shares available under the 2006 Plan, the number of shares subject
        to
        outstanding options and the exercise price of outstanding options will be
        adjusted to reflect any stock dividend, stock split, merger, reorganization
        or
        other event generally affecting the number of the Company’s outstanding shares.
        At June 30, 2007, there are 25,095 shares available for option grants under
        the
        2006 Plan.
 
 On
        October 19, 2006, 88,625 shares of restricted stock were awarded. The restricted
        shares awarded had a grant date fair value of $12.47 per share. The restricted
        stock awarded will vest 20% annually beginning October 19, 2007. For the
        six and
        three months ended June 30, 2007, $111 thousand and $55 thousand, respectively,
        in compensation expense was recognized on restricted stock awards with a
        related
        tax benefit of $38 thousand and $19 thousand, respectively. As of June 30,
        2007,
        there was $949 thousand of unrecognized compensation expense related to the
        restricted stock awards which is expected to be recognized over a period
        of 4.25
        years. At June 30, 2006, there was no compensation expense recognized as
        the
        Company did not have any stock-based incentive plans.
 
 9
 Activity
        in issued but unvested Award Shares during the six months ended June 30,
        2007,
        was as follows:
 
 Award
                  Shares
              
              Award
                Shares
              
              Weighted
                  Average Grant Date Fair ValueUnvested
                  awards, beginning of period
              
              
              88,625
              
              $
              12.47Granted
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Forfeitures
              
              
              -
              
              
              -Unvested
                  awards, end of period
              
              
              88,625
              
              $
              12.47
 
 On
        October 19, 2006, options to purchase 196,468 shares of common stock at $12.47
        per share were awarded. The options awarded will vest 20% annually beginning
        October 19, 2007. The following is a summary of the Company’s stock option
        activity for the six months ended June 30, 2007:
 
 Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Remaining
                  Contractual
                Term
              
              Aggregate
                Intrinsic
                Value
                (in
                thousands)Options
                  outstanding, beginning of period
              
              
              196,468
              
              $
              12.47
              
              
              9.25
                  yearsGranted
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Forfeitures
              
              
              -
              
              
              -Options
                  outstanding, end of period
              
              
              196,468
              
              $
              12.47
              
              
              9.25
                  years
              
              $
              350Exercisable
                  at end of period
              
              
              -
              
              $
              12.47
              
              
              9.25
                  years
              
              $
              -
 
 
 The
        fair
        value of each option grant is estimated on the date of grant using the
        Black-Sholes option-pricing model with the following weighted average
        assumptions for options granted in 2006: dividend yield of 0%, risk-free
        interest rate of 4.79%, expected life of 6.5 years, and expected volatility
        of
        15.00%. The calculated fair value of options granted in 2006 was $3.79 per
        option.
 
 Stock-based
        compensation expense related to stock options for the six and three months
        ended
        June 30, 2007 was $74 thousand and $37 thousand, respectively, with a related
        tax benefit of $9 thousand and $4 thousand, respectively. As of June 30,
        2007,
        there was approximately $639 thousand of unrecognized compensation cost related
        to unvested stock options granted in 2006. The cost will be recognized on
        a
        graded vesting method over a period of 4.25 years. At June 30, 2006, there
        was
        no compensation expense recognized as the Company did not have any stock-based
        incentive plans.
 
 10
  The
        Company has an Employee Stock Ownership Plan (“ESOP”) for the benefit of
        employees who meet the eligibility requirements as defined in the plan. The
        ESOP
        trust purchased 166,398 shares of common stock in the initial public offering
        using proceeds of a loan from the Company. The Bank will make cash contributions
        to the ESOP on an annual basis sufficient to enable the ESOP to make the
        required loan payments to the Company. The loan bears an interest rate of
        6.00%
        with principal and interest payable annually in equal installments over fifteen
        years. The loan is secured by the shares of the stock purchased.
 
 As
        the
        debt is repaid, shares are released from the collateral and allocated to
        qualified employees. Accordingly, the shares pledged as collateral are reported
        as unearned ESOP shares in the Consolidated Statements of Financial Condition.
        As shares are released from collateral, the Company reports compensation
        expense
        equal to the current market price of the shares, and the shares become
        outstanding for earnings per share computations. The compensation expense
        is
        recorded on a monthly basis. The Company’s contribution expense for the ESOP was
        $83 thousand and $68 for the six months ended June 30, 2007 and 2006,
        respectively, and $42 thousand and $36 thousand, respectively, for the three
        months ended June 30, 2007 and 2006.
 
 The
        following table presents the components of the ESOP shares:
 
 June
                  30, 2007
              
              June
                  30, 2006Shares
                  released for allocation
              
              23,206
              
              11,603Unreleased
                  shares
              
              143,192
              
              154,795Total
                  ESOP shares
              
              166,398
              
              166,398
 **5.**
                **Comprehensive
                    Income**
 Comprehensive
        income for the Company consists of net income and unrealized gains and losses
        on
        available for sale securities. Other comprehensive gain (loss) for the six
        months and three months ended June 30, 2007 and 2006 was as
        follows:
 
 Three
                  Months Ended
                June
                  30,
              
              Six
                  Months Ended
                June
                  30,2007
              
              2006
              
              2007
              
              2006(In
                  Thousands)Other
                  comprehensive gain (loss):Unrealized
                  holding gains (losses) on available for sale securities
              
              $
              (2,001
              )
              $
              (986
              )
              $
              (1,903
              )
              $
              (1,961
              )Reclassification
                  adjustment for net losses realized in net income
              
              
              2
              
              
              -
              
              
              2
              
              
              -Net
                  unrealized gains (losses)
              
              
              (1,999
              )
              
              (986
              )
              
              (1,901
              )
              
              (1,961
              )Income
                  tax expense (benefit)
              
              
              (686
              )
              
              (393
              )
              
              (654
              )
              
              (783
              )Net
                  of tax amount
              
              $
              (1,313
              )
              $
              (593
              )
              $
              (1,247
              )
              $
              (1,178
              )
  **6.**
                **Contingent
                    Liabilities and Guarantees**
 In
        the
        normal course of business, there are various outstanding commitments and
        contingent liabilities, such as commitments to extend credit and standby
        letters
        of credit that are not reflected in the accompanying financial statements.
        No
        material losses are anticipated as a result of those transactions on either
        a
        completed or uncompleted basis.
  11
  The
        Company does not issue any guarantees that would require liability recognition
        or disclosure, other than its standby letters of credit. Standby letters
        of
        credit are conditional commitments issued by the Company to guarantee the
        performance of a customer to a third party. Generally, all letters of credit,
        when issued, have expiration dates within one year. The credit risk involved
        in
        issuing letters of credit is essentially the same as those that are involved
        in
        extending loan facilities to customers. The Company generally holds collateral
        and/or personal guarantees supporting those commitments. The Company had
        $1.4
        million of standby letters of credit outstanding as of June 30, 2007. Management
        believes that the proceeds obtained through a liquidation of collateral and
        the
        enforcement of guarantees would be sufficient to cover the potential amount
        of
        future payment required under the corresponding guarantees.
 
 During
        the three months ended June 30, 2007, the Bank sold loans in the amount of
        $645
        thousand that contained recourse provisions. The Bank is required to repurchase
        the loan if the first or second payment that is due is 30 or more days late.
        During the three months ended June 30, 2007, the Bank did not repurchase
        any
        previously sold loans. Also, no liability has been recorded on loans sold
        with
        the recourse provisions.
 **7.**
                  **Investment
                      Securities**
 
 The
        following table sets forth the composition of our securities portfolio at
        the
        dates indicated.
 
 At
                  June 30, 2007
              
              At
                  December 31, 2006Amortized
                Cost
              
              Fair
                  Value
              
              Amortized
                Cost
              
              Fair
                  Value(Dollars
                  in Thousands)Securities
                  available-for-sale:Mortgage-backed
              
              $
              59,272
              
              $
              58,216
              
              $
              53,646
              
              $
              53,229U.
                  S. Government agency
              
              
              42,447
              
              
              41,707
              
              
              29,534
              
              
              29,128Corporate
              
              
              8,953
              
              
              8,376
              
              
              8,956
              
              
              8,660Mutual
                  funds
              
              
              14,299
              
              
              14,016
              
              
              13,942
              
              
              13,716Municipal
              
              
              24,249
              
              
              24,064
              
              
              23,927
              
              
              24,259SBA
                  pools
              
              
              8,612
              
              
              8,713
              
              
              7,759
              
              
              7,933Total
                  securities available-for-sale
              
              $
              157,832
              
              $
              155,092
              
              $
              137,764
              
              $
              136,925Securities
                  held-to-maturity:Mortgage-backed
              
              $
              4,224
              
              $
              4,240
              
              $
              3,972
              
              $
              4,064U.
                  S. Government agency
              
              
              1,416
              
              
              1,392
              
              
              1,412
              
              
              1,369Corporate
              
              
              1,186
              
              
              1,269
              
              
              1,698
              
              
              1,828Municipal
              
              
              11,543
              
              
              11,888
              
              
              11,640
              
              
              12,239Total
                  securities held-to-maturity
              
              $
              18,369
              
              $
              18,789
              
              $
              18,722
              
              $
              19,500
  
 12
  **8.**
                    **Loans**
 
 The
        components of loans at June 30, 2007 and December 31, 2006 are as
        follows:
 
 At
                  June 30, 2007
              
              At
                  December 31, 2006Amount
              
              Percent
              
              Amount
              
              Percent(Dollars
                  in Thousands)Real
                  estate loans:One-
                  to four-family residential
              
              $
              108,206
              
              
              48.0
              %
              $
              102,328
              
              
              51.1
              %Home
                  equity loans and lines of credit
              
              
              39,447
              
              
              17.5
              
              
              38,074
              
              
              19.0Multi-family
              
              
              2,803
              
              
              1.2
              
              
              2,492
              
              
              1.2Commercial
              
              
              51,533
              
              
              22.9
              
              
              39,186
              
              
              19.6Construction
              
              
              10,186
              
              
              4.5
              
              
              8,371
              
              
              4.2Commercial
              
              
              10,828
              
              
              4.8
              
              
              7,337
              
              
              3.7Consumer
                  and other
              
              
              2,556
              
              
              1.1
              
              
              2,427
              
              
              1.2Total
                  loans receivable
              
              $
              225,559
              
              
              100.0
              %
              $
              200,215
              
              
              100.0
              %Deferred
                  loan fees
              
              
              (312
              )
              
              
              
              
              (323
              )Allowance
                  for loan losses
              
              
              (1,456
              )
              
              
              
              
              (1,373
              )Total
                  loans receivable, net
              
              $
              223,791
              
              
              
              
              $
              198,519
 
 Nonaccrual
        loans amounted to approximately $1.4 million and $233 thousand at June 30,
        2007 and
        December 31, 2006 ,
        respectively.
  **9.**
                      **Deposits**
 Deposit
        accounts, by type, at June 30, 2007 and December 31, 2006 are summarized
        as
        follows:
 
 At
                  June 30, 2007
              
              At
                  December 31, 2006Balance
              
              Percent
              
              Wtd.
                Avg.
                Rate
              
              Balance
              
              Percent
              
              Wtd.
                Avg.
                Rate(Dollars
                  in Thousands)**Deposit
                  type:**Non-interest
                  bearing demand.
              
              $
              19,335
              
              
              5.18
              %
              
              -
              %
              $
              18,055
              
              
              5.35
              %
              
              -
              %Savings......
              
              
              57,278
              
              
              15.33
              
              
              2.12
              
              
              57,260
              
              
              16.98
              
              
              1.72NOW
                  accounts
              
              
              45,105
              
              
              12.08
              
              
              2.26
              
              
              36,740
              
              
              10.89
              
              
              1.89Super
                  NOW accounts
              
              
              14,280
              
              
              3.82
              
              
              1.73
              
              
              14,200
              
              
              4.21
              
              
              1.71Money
                  market accounts
              
              
              17,999
              
              
              4.82
              
              
              3.33
              
              
              20,553
              
              
              6.10
              
              
              3.54Total
                  transaction accounts
              
              
              153,997
              
              
              41.23
              
              
              2.00
              
              
              146,808
              
              
              43.53
              
              
              1.81Certificates
                  of deposit
              
              
              219,513
              
              
              58.77
              
              
              4.87
              
              
              190,446
              
              
              56.47
              
              
              4.74Total
                  deposits
              
              $
              373,510
              
              
              100.00
              %
              
              3.69
              %
              $
              337,254
              
              
              100.00
              %
              
              3.46
              %
  13
   **10.**
            **Federal
                Home Loan Bank Borrowings** 
 The
        following table sets forth information concerning advances with the Federal
        Home
        Loan Bank (“FHLB”) of New York, at June 30, 2007 and December 31,
        2006:
 
 Description
              
              Maturity
                Date
              
              Interest
                Rate
              
              June
                  30, 2007
              
              December
                  31, 2006(Dollars
                  in Thousands)Fixed
                  rate amortizing
              
              
              06/30/2021
              
              
              5.57
              %
              
              6,719
              
              
              6,874Short-term
                  borrowing
              
              
              01/02/2007
              
              
              5.39
              %
              
              -
              
              
              1,450Short-term
                  borrowing
              
              
              07/02/2007
              
              
              5.49
              %
              
              13,735
              
              
              -$
              20,454
              
              $
              8,324
 
 At
        June
        30, 2007, the Bank had a borrowing capacity of $75.2 million available from
        the
        FHLB of New York, which is based on the amount of FHLB stock held or levels
        of
        other assets, including investment securities, which are available for
        collateral. At June 30, 2007, the Bank had $20.5 million in outstanding
        borrowings from the FHLB of New York.
  14
  **Item
        2.** **Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations**
  **Forward-Looking
        Statements**
 
 This
        report contains forward-looking statements within the meaning of the Private
        Securities Litigation Reform Act of 1995, including statements about anticipated
        operating and financial performance, such as loan originations, operating
        efficiencies, loan sales, charge-offs and loan loss provision, growth
        opportunities, interest rates and deposit growth. Words such as “may,” “could,”
“should,” “would,” “will,” ”will likely result,” ”believe,” ”expect,” ”plan,”
”will continue,” ”is anticipated,” ”estimate,” ”intend,” ”project,” and similar
        expressions are intended to identify these forward-looking statements. We
        wish
        to caution readers not to place undue reliance on any such forward-looking
        statements, each of which speaks only as of the date made. Such statements
        are
        subject to certain risks and uncertainties that could cause actual results
        to
        differ materially from historical earnings than those presently anticipated
        or
        projected.
 
 **Critical
        Accounting Policies**
 
 Critical
        accounting policies are those that involve significant judgments and assumptions
        by management and that have, or could have, a material impact on our income
        or
        the carrying value of our assets. Our critical accounting policies are those
        related to our allowance for loan losses, the evaluation of other than temporary
        impairment of investment securities and the valuation and realizability of
        deferred tax assets.
  **Allowance
        for Loan Losses** .
        The
        allowance for loan losses is calculated with the objective of maintaining
        an
        allowance sufficient to absorb estimated probable loan losses inherent in
        the
        loan portfolio. Management's determination of the adequacy of the allowance
        is
        based on periodic evaluations of the loan portfolio and other relevant factors.
        However, this evaluation is inherently subjective, as it requires an estimate
        of
        the loss content for each risk rating and for each impaired loan, an estimate
        of
        the amounts and timing of expected future cash flows, and an estimate of
        the
        value of collateral.
  We
        have
        established a systematic method of periodically reviewing the credit quality
        of
        the loan portfolio in order to establish an allowance for losses on loans.
        The
        allowance for losses on loans is based on our current judgments about the
        credit
        quality of individual loans and segments of the loan portfolio. The allowance
        for losses on loans is established through a provision for loan losses based
        on
        our evaluation of the losses inherent in the loan portfolio, and considers
        all
        known internal and external factors that affect loan collectibility as of
        the
        reporting date. Our evaluation, which includes a review of all loans on which
        full collectibility may not be reasonably assured, considers among other
        matters, the estimated net realizable value or the fair value of the underlying
        collateral, economic conditions, historical loan loss experience, our knowledge
        of inherent losses in the portfolio that are probable and reasonably estimable
        and other factors that warrant recognition in providing an appropriate loan
        loss
        allowance. Management believes this is a critical accounting policy because
        this
        evaluation involves a high degree of complexity and requires us to make
        subjective judgments that often require assumptions or estimates about various
        matters. Historically, we believe our estimates and assumptions have proven
        to
        be relatively accurate. Nevertheless, because a small number of non-performing
        loans could result in net charge-offs significantly in excess of the estimated
        losses inherent in our loan portfolio, additional provisions to the allowance
        for loan losses may be required that would adversely impact earnings for
        future
        periods.
  15
  The
        allowance for loan losses consists of specific, general and unallocated
        components. Specific allocations are made for loans that are determined to
        be
        impaired. Impairment is measured by determining the present value of expected
        future cash flows or, for collateral-dependent loans, the fair value of the
        collateral adjusted for market conditions and selling expenses. The general
        allocation is determined by segregating the remaining loans by type of loan,
        risk weighting (if applicable) and payment history. We also analyze delinquency
        trends, general economic conditions and geographic and industry concentrations.
        The unallocated component of the allowance reflects the margin of imprecision
        inherent in the underlying assumptions used in the methodologies for estimating
        specific and general losses in the portfolio. At June 30, 2007 and December
        31,
        2006, the allowance did not include an unallocated component.
 
 **Other-Than-Temporary
        Impairment.** In
        estimating other-than-temporary impairment of investment securities, securities
        are evaluated on at least a quarterly basis, to determine whether a decline
        in
        their value is other-than-temporary. To determine whether a loss in value
        is
        other-than-temporary, management reviews criteria such as the reasons underlying
        the decline, the magnitude and duration of the decline and the intent and
        ability of the Company to retain its investment in the security for a period
        of
        time sufficient to allow for an anticipated recovery in the fair value or
        until
        maturity. Once a decline in value is determined to be other-than-temporary,
        the
        value of the security is reduced and a corresponding charge to earnings is
        recognized.
 
 **Valuation
        of Deferred Tax Assets.** In
        evaluating our ability to realize deferred tax assets, management considers
        all
        positive and negative information, including our past operating results and
        our
        forecast of future taxable income. In determining future taxable income,
        management utilizes a budget process that makes business assumptions and
        the
        implementation of feasible and prudent tax planning strategies. These
        assumptions require us to make judgments about our future taxable income
        and are
        consistent with the plans and estimates we use to manage our business. Any
        reduction in estimated future taxable income may require us to record a
        valuation allowance against our deferred tax assets which would result in
        additional income tax expense in the period.
 
 
 **Comparison
        of Financial Condition at June 30, 2007 and December 31,
        2006**
  Total
        assets increased $48.7 million, or 12.7%, to $432.3 million at June 30, 2007,
        from $383.6 million at December 31, 2006. The increase was the result of
        increases in all asset categories except investment securities held to
        maturity.
  Net
        loans
        receivable increased by $25.3 million, or 12.7%, to $223.8 million at June
        30,
        2007 from $198.5 million at December 31, 2006. One- to four-family residential
        real estate loans increased $5.9 million, or 5.7%, to $108.2 million at June
        30,
        2007 from $102.3 million at December 31, 2006. Commercial real estate loans
        increased $12.3 million, or 31.4%, to $51.5 million at June 30, 2007 from
        $39.2
        million at December 31, 2006.
  16
  Securities
        available for sale increased $18.2 million, or 13.3%, to $155.1 million at
        June
        30, 2007 from $136.9 million at December 31, 2006. The increase was the result
        of purchases in the amount of $29.1 million offset by $7.4 million in principal
        amortization, $1.8 million in calls and maturities and $1.9 million in
        unrealized losses in the available for sale portfolio. Management considers
        the
        change in the fair value of the portfolio to be temporary and primarily
        resulting from changes in the interest rate environment. In addition, securities
        held to maturity decreased by $353 thousand, to $18.4 million at June 30,
        2007
        from $18.7 million at December 31, 2006. This decrease was the result of
        purchases of $719 thousand offset by principal amortization of $474 thousand
        and
        calls and maturities of $706 thousand.
  Office
        properties and equipment increased $2.9 million to $10.2 million at June
        30,
        2007 from $7.3 million at December 31, 2006. This increase was the result
        of
        investment in our branch network as we completed construction of our new
        administrative headquarters/full-service branch in Vineland, New
        Jersey.
  Deposits
        increased $36.2 million, or 10.7%, to $373.5 million at June 30, 2007 from
        $337.3 million at December 31, 2006. The largest increase was in certificates
        of
        deposit, which increased $29.1 million, or 15.3%, to $219.5 million at June
        30,
        2007 from $190.4 million at December 31, 2006. Non-interest bearing demand
        accounts increased $1.3 million, or 7.1%. Money-market deposit accounts
        decreased by $2.6 million. NOW accounts increased by $8.4 million, or 22.8%.
        Super-NOW accounts increased by $80 thousand and savings accounts increased
        by
        $18 thousand.
  Federal
        Home Loan Bank borrowings increased $12.2 million to $20.5 million at June
        30,
        2007 from $8.3 million at December 31, 2006. We increased our outstanding
        borrowings because our net increase in deposits and the proceeds received
        from
        the maturities and pay downs of securities, discussed above, did not provide
        sufficient cash to fund loan originations and the purchase of investment
        securities and fixed assets.
  Total
        stockholders’ equity decreased $377 thousand to $36.3 million at June 30, 2007
        from $36.7 million at December 31, 2006. This decrease was mainly attributable
        to an increase in the unrealized losses on investment securities available
        for
        sale in the amount of $1.2 million offset by net income of $685 thousand
        and
        $185 thousand increase in additional paid-in-capital related to stock-based
        compensation. Because of interest rate volatility, unrealized losses on
        investment securities available for sale could materially fluctuate for future
        interim periods and years depending on economic and interest rate conditions.
  
 **Comparison
        of Operating Results for the Three Months Ended June 30, 2007 and June 30,
        2006**
 
 ***General.*** Net
        income decreased $91 thousand, or 25.0%, to $273 thousand for the three months
        ended June 30, 2007 from $364 thousand for the three months ended June 30,
        2006.
        The principal reason for the decrease was a $73 thousand increase in net
        interest income after provision for loan losses, a $21 thousand increase
        in
        non-interest income and a reduction in income tax expense of $258 thousand
        offset by a $443 thousand increase in non-interest expense.
  ***Interest
        Income*** *.* Interest
        income increased $1.1 million, or 24.4%, to $5.6 million for the three
        months ended June 30, 2007 from $4.5 million for the three months ended
        June 30, 2006. The increase in interest income resulted from a $742 thousand
        increase in interest income on loans and a $387 thousand increase in interest
        income on securities.
  17
  Interest
        income on loans increased $742 thousand, or 27.5%, to $3.4 million for the
        three months ended June 30, 2007 from $2.7 million for the three months
        ended June 30, 2006. The average balance of loans increased $42.3 million,
        or
        24.2%, to $216.9 million for the three months ended June 30, 2007 from $174.6
        million for the three months ended June 30, 2006. In addition, the average
        yield
        increased to 6.28% for the three months ended June 30, 2007 from 6.10% for
        the
        three months ended June 30, 2006. The increase in the average balance of
        loans
        resulted primarily from increases across all loan categories: mortgage,
        commercial and consumer loans.
  Interest
        income on securities increased $387 thousand, or 21.5% to $2.2 million for
        the
        three months ended June 30, 2007 from $1.8 million for the three months ended
        June 30, 2006. This increase was due to an increase in the average balance
        of
        investment securities to $163.8 million for the three months ended June 30,
        2007
        from $154.9 million for the three months ended June 30, 2006. Also, the average
        yield increased to 5.36% for the three months ended June 30, 2007 from 4.67%
        for
        the three months ended June 30, 2006.
  ***Interest
        Expense.*** ** Interest
        expense increased $1.1 million, or 45.8%, to $3.5 million for the three
        months ended June 30, 2007 from $2.4 million for the three months ended
        June 30, 2006.
  Interest
        expense on interest-bearing deposits increased by $1.2 million, or 54.5%,
        to
        $3.4 million for the three months ended June 30, 2007 from
        $2.2 million for the three months ended June 30, 2006. The increase in
        interest expense on interest-bearing deposits was due to a $69.8 million,
        or
        24.8%, increase in the average balance of interest-bearing deposits to
        $351.8 million for the three months ended June 30, 2007 from $282.0 million
        for the three months ended June 30, 2006. In addition, the average rate paid
        on
        interest-bearing deposits increased 79 basis points to 3.87% for the three
        months ended June 30, 2007 from 3.08% for the three months ended June 30,
        2006.
        We experienced increases in the average balances of certificates of deposits
        and
        NOW accounts and decreases in the savings account and money market account
        categories. The average cost of all deposit accounts increased for the three
        months ended June 30, 2007 compared to the three months ended June 30,
        2006.
  Interest
        expense on borrowings decreased $158 thousand to $53 thousand for the three
        months ended June 30, 2007 from $211 thousand for the three months ended
        June
        30, 2006. This decrease was primarily due to an $8.2 million decrease in
        the
        average balance of borrowings to $8.3 million for the three months ended
        June
        30, 2007 from $16.5 million for the three months ended June 30,
        2006.
  ***Provision
        for Loan Losses.*** We
        establish provisions for loan losses, which are charged to operations in
        order
        to maintain the allowance for loan losses at a level we consider sufficient
        to
        absorb estimated probable credit losses inherent in the loan portfolio. In
        determining the level of the allowance for loan losses, we consider past
        and
        current loss experience, evaluation of real estate collateral, current economic
        conditions, volume and type of lending, adverse situations that may affect
        a
        borrower’s ability to repay a loan and the levels of nonperforming and other
        classified loans. The amount of the allowance is based on estimates and the
        ultimate losses may vary from such estimates as more information becomes
        available or later events change. We assess the allowance for loan losses
        on a
        quarterly basis and make provisions for loan losses in order to maintain
        the
        allowance. We recorded a provision for loan losses of $15 thousand for the
        three
        months ended June 30, 2007 and a provision for loan losses of $36 thousand
        for
        the three months ended June 30, 2006. The provisions recorded reflected net
        charge-offs of $3 thousand for the three months ended June 30, 2007 and net
        recoveries of $6 thousand for the three months ended June 30, 2006. The
        allowance for loan losses as a percentage of total loans was 0.65% and 0.69%
        at
        June 30, 2007 and December 31, 2006, respectively. We used the same methodology
        in calculating the provision for loan losses during each of the three months
        ended June 30, 2007 and 2006.
  18
  ***Non-interest
        Income*** *.* Non-interest
        income was $274 thousand for the three months ended June 30, 2007 and $253
        thousand for the three months ended June 30, 2006. Fees and service charges
        on
        deposit accounts increased by $19 thousand to $234 thousand for the three
        months
        ended June 30, 2007 from $215 thousand for the three months ended June 30,
        2006.
        The increase in fees and service charges is attributed to increases in volume
        in
        overdraft fees and ATM fees and the implementation of new service charges
        on
        deposit accounts. Gains on sales of loans totaled $12 thousand for the three
        months ended June 30, 2007 compared to $8 thousand for the three months ended
        June 30, 2006.
  ***Non-interest
        Expense*** *.* Non-interest expense increased $443 thousand, or 23.3%, to $2.3 million for
        the
        three months ended June 30, 2007 from $1.9 million for the three months ended
        June 30, 2006. Compensation and benefits expense increased $251 thousand
        to $1.3
        million for the three months ended June 30, 2007 from $1.1 million for the
        three
        months ended June 30, 2006. Normal salary increases, the hiring of new personnel
        to staff our new administrative headquarters, increases in medical benefit
        costs, increases in payroll taxes and the $92 thousand expense of the
        stock-based compensation plan, implemented in the fourth quarter of 2006,
        account for the increase in compensation and benefit expense. Occupancy and
        equipment expense increased $50 thousand mainly due to increases in heat,
        light
        and utilities, real estate tax expense, maintenance expense and depreciation
        due
        to the opening of our new administrative headquarters/full-service branch
        in
        Vineland, New Jersey. Data processing expense increased $35 thousand due
        to the
        growth of loan and deposit accounts. Professional fees increased $4 thousand.
        This increase was mainly due to an increase in accounting and audit fees.
        The
        Company expects professional fees to increase in the future due to increased
        accounting, audit and legal expenses associated with complying with the
        Sarbanes-Oxley Act of 2002. Other miscellaneous non-interest expense increased
        $74 thousand. This was due to increases in employee training expense, loan
        processing expenses, postage expense, correspondent bank expense and advertising
        and promotion expense associated with the grand opening of our new
        administrative and branch office in Vineland, New Jersey.
  ***Income
        Tax Expense (Benefit)*** *.* ****** We
        recorded a benefit for income taxes of $193 thousand for the three months
        ended
        June 30, 2007, compared to an expense of $65 thousand for the three months
        ended
        June 30, 2006. The income tax benefit is primarily attributable to the formation
        of the Delaware operating subsidiary in September 2006 which has resulted
        in the
        Bank being in a net operating loss position for state tax purposes. A tax
        benefit of approximately $327 thousand has been recorded for this
        loss.
 
 
 **Comparison
        of Operating Results for the Six Months Ended June 30, 2007 and June 30,
        2006**
 
 ***General.*** Net
        income decreased $39 thousand, or 5.4%, to $685 thousand for the six months
        ended June 30, 2007 from $724 thousand for the six months ended June 30,
        2006.
        The principal reason for the decrease was a $100 thousand increase in net
        interest income after provision for loan losses, a $73 thousand increase
        in
        non-interest income and a reduction in income tax expense of $426 thousand
        offset by a $638 thousand increase in non-interest expense.
  19
  ***Interest
        Income*** *.* Interest
        income increased $2.2 million, or 25.6%, to $10.8 million for the six
        months ended June 30, 2007 from $8.6 million for the six months ended June
        30, 2006. The increase in interest income resulted from a $1.5 million increase
        in interest income on loans and a $650 thousand increase in interest income
        on
        securities.
  Interest
        income on loans increased $1.5 million, or 29.4%, to $6.6 million for the
        six months ended June 30, 2007 from $5.1 million for the six months ended
        June 30, 2006. The average balance of loans increased $42.3 million, or 25.2%,
        to $210.3 million for the six months ended June 30, 2007 from $168.0 million
        for
        the six months ended June 30, 2006. In addition, the average yield increased
        to
        6.26% for the six months ended June 30, 2007 from 6.01% for the six months
        ended
        June 30, 2006. The increase in the average balance of loans resulted primarily
        from increases across all loan categories: mortgage, commercial and consumer
        loans.
  Interest
        income on securities increased $650 thousand, or 18.1% to $4.4 million for
        the
        six months ended June 30, 2007 from $3.6 million for the six months ended
        June
        30, 2006. This increase was due to an increase in the average balance of
        investment securities to $161.5 million for the six months ended June 30,
        2007
        from $156.1 million for the six months ended June 30, 2006. Also, the average
        yield increased to 5.25% for the six months ended June 30, 2007 from 4.60%
        for
        the six months ended June 30, 2006.
  ***Interest
        Expense.*** ** Interest
        expense increased $2.1 million, or 46.7%, to $6.6 million for the six
        months ended June 30, 2007 from $4.5 million for the six months ended June
        30, 2006.
  Interest
        expense on interest-bearing deposits increased by $2.3 million, or 54.8%,
        to
        $6.5 million for the six months ended June 30, 2007 from $4.2 million
        for the six months ended June 30, 2006. The increase in interest expense
        on
        interest-bearing deposits was due to a $61.7 million, or 22.1%, increase
        in the
        average balance of interest-bearing deposits to $340.6 million for the six
        months ended June 30, 2007 from $278.9 million for the six months ended June
        30,
        2006. In addition, the average rate paid on interest-bearing deposits increased
        82 basis points to 3.81% for the six months ended June 30, 2007 from 2.99%
        for
        the six months ended June 30, 2006. We experienced increases in the average
        balances of certificates of deposits, NOW accounts and the money market accounts
        and a decrease in the savings account category. The average cost of all deposit
        accounts increased for the six months ended June 30, 2007 compared to the
        six
        months ended June 30, 2006.
  Interest
        expense on borrowings decreased $225 thousand to $128 thousand for the six
        months ended June 30, 2007 from $353 thousand for the six months ended June
        30,
        2006. This decrease was primarily due to a $5.8 million decrease in the average
        balance of borrowings to $8.6 million for the six months ended June 30, 2007
        from $14.4 million for the six months ended June 30, 2006.
  ***Provision
        for Loan Losses.*** We
        recorded a provision for loan losses of $84 thousand for the six months ended
        June 30, 2007 and a provision for loan losses of $99 thousand for the six
        months
        ended June 30, 2006. The provisions recorded reflected net charge-offs of
        $1
        thousand for the six months ended June 30, 2007 and net recoveries of $23
        thousand for the six months ended June 30, 2006. The allowance for loan losses
        as a percentage of total loans was 0.65% and 0.69% at June 30, 2007 and December
        31, 2006, respectively. We used the same methodology in calculating the
        provision for loan losses during each of the six months ended June 30, 2007
        and
        2006.
  20
  ***Non-interest
        Income*** *.* Non-interest
        income was $562 thousand for the six months ended June 30, 2007 and $489
        thousand for the six months ended June 30, 2006. Fees and service charges
        on
        deposit accounts increased by $68 thousand to $478 thousand for the six months
        ended June 30, 2007 from $410 thousand for the six months ended June 30,
        2006.
        The increase in fees and service charges is attributed to increases in volume
        in
        overdraft fees and ATM fees and the implementation of new service charges
        on
        deposit accounts. Gains on sales of loans totaled $23 thousand for the six
        months ended June 30, 2007 compared to $23 thousand for the six months ended
        June 30, 2006.
  ***Non-interest
        Expense*** *.* Non-interest expense increased $638 thousand, or 17.2%, to $4.3 million for
        the
        six months ended June 30, 2007 from $3.7 million for the six months ended
        June
        30, 2006. Compensation and benefits expense increased $364 thousand to $2.5
        million for the six months ended June 30, 2007 from $2.1 million for the
        six
        months ended June 30, 2006. Normal salary increases, the hiring of new personnel
        to staff our new administrative headquarters, increases in medical benefit
        costs, increases in payroll taxes, increases in pension expense and the $185
        thousand expense of the stock-based compensation plan, implemented in the
        fourth
        quarter of 2006, account for the increase in compensation and benefit expense.
        Occupancy and equipment expense increased $64 thousand mainly due to increases
        in heat, light and utilities, real estate tax expense, repair and maintenance
        expense and depreciation due to the opening of our new administrative
        headquarters/full-service branch in Vineland, New Jersey. Data processing
        expense increased $58 thousand due to the growth of loan and deposit accounts.
        Professional fees decreased $2 thousand. The Company expects professional
        fees
        to increase in the future due to increased accounting, audit and legal expenses
        associated complying with the Sarbanes-Oxley Act of 2002. Other miscellaneous
        non-interest expense increased $117 thousand. This was due to increases in
        employee training expense, loan processing expenses, postage expense,
        correspondent bank expense and advertising and promotion expense associated
        with
        the grand opening of our new administrative and branch office in Vineland,
        New
        Jersey.
  ***Income
        Tax Expense (Benefit)*** *.* ****** We
        recorded a benefit for income taxes of $291 thousand for the six months ended
        June 30, 2007, compared to an expense of $135 thousand for the six months
        ended
        June 30, 2006. The income tax benefit is primarily attributable to the formation
        of the Delaware operating subsidiary in September 2006 which has resulted
        in the
        Bank being in a net operating loss position for state tax purposes. A tax
        benefit of approximately $327 thousand has been recorded for this loss.
 
 
 **Liquidity
        and Capital Resources**
 
 Liquidity
        is the ability to meet current and future financial obligations of a short-term
        nature. Our primary sources of funds consist of deposit inflows, loan repayments
        and maturities and sales of securities. While maturities and scheduled
        amortization of loans and securities are predictable sources of funds, deposit
        flows and mortgage prepayments are greatly influenced by general interest
        rates,
        economic conditions and competition.
 
 We
        regularly adjust our investments in liquid assets based upon our assessment
        of
        expected loan demand, expected deposit flows, yields available on
        interest-earning deposits and securities, and the objectives of our
        asset/liability management program. Excess liquid assets are invested generally
        in interest-earning deposits and short- and intermediate-term
        securities.
  21
  Our
        most
        liquid assets are cash and cash equivalents. The levels of these assets are
        dependent on our operating, financing, lending and investing activities during
        any given period. At June 30, 2007, cash and cash equivalents totaled $14.3
        million. Securities classified as available-for-sale, which provide additional
        sources of liquidity, totaled $155.1 million at June 30, 2007. In addition,
        at June 30, 2007, we had the ability to borrow a total of approximately
        $75.2 million from the Federal Home Loan Bank of New York. On that date, we
        had $20.5 million in advances outstanding.
 
 At
        June
        30, 2007, loan commitments outstanding totaled $13.0 million and commitments
        to
        purchase securities totaled $4.5 million. In addition to commitments to
        originate loans, we had $21.7 million in unadvanced funds to borrowers. Retail
        certificates of deposit due within one year of June 30, 2007 totaled $129.7
        million. Total certificates of deposit within one year of June 30, 2007
        represent 34.5% of total deposits. If these deposits do not remain with us,
        we
        will be required to seek other sources of funds, including other certificates
        of
        deposit and Federal Home Loan Bank advances. Depending on market conditions,
        we
        may be required to pay higher rates on such deposits or other borrowings
        than we
        currently pay on the certificates of deposit due on or before June 30, 2008.
        We
        believe based on past experience that a significant portion of our certificates
        of deposit will remain with us. We have the ability to attract and retain
        deposits by adjusting the interest rates offered.
 
 We
        have
        no material commitments or demands that are likely to affect our liquidity
        other
        than set forth below. In the event loan demand were to increase at a pace
        greater than expected, or any unforeseen demand or commitment were to occur,
        we
        would access our borrowing capacity with the Federal Home Loan Bank of New
        York.
 
 Our
        primary investing activities are the origination of loans and the purchase
        of
        securities. For the six months ended June 30, 2007, we originated
        $47.9 million of loans and purchased $29.9 million of securities. For the
        six months ended June 30, 2006, we originated $46.6 million of loans,
        purchased $4.7 million of securities and invested $700 thousand in
        interest-bearing time deposits.
 
 Financing
        activities consist primarily of activity in deposit accounts and Federal
        Home
        Loan Bank advances. We experienced a net increase in total deposits of $36.2
        million and $20.1 million for the six months ended June 30, 2007 and 2006,
        respectively. Deposit flows are affected by the overall level of interest
        rates,
        the interest rates and products offered by us and our local competitors and
        other factors. We generally manage the pricing of our deposits to be
        competitive.
 
 Total
        borrowings, which include Federal Home Loan Bank advances, increased
        $12.2 million, net for the six months ended June 30, 2007 and increased
        $2.2 million, net for the six months ended June 30, 2006. Federal Home Loan
        Bank
        advances have primarily been used to fund loan demand and purchase
        securities.
 
 In
        the
        second quarter of 2007, we completed construction and celebrated the grand
        opening of our new administrative headquarters/full-service office in Vineland,
        New Jersey. We have recorded fixed assets of $5.9 million as of June 30,
        2007,
        including $1.1 million in land costs. In July 2007, we made payments that
        totaled $66 thousand for additional purchases and change orders.
  22
  We
        have
        spent $283 thousand for the acquisition and development of land in Buena
        Township, New Jersey, $1.0 million for the acquisition and development of
        land
        in Harrison Township, New Jersey and $142 thousand for the acquisition of
        land
        in Millville, New Jersey as possible branch locations. However, because building
        these offices is subject to state and local government approval, we cannot
        assure you that we will be able to open these facilities, or that we will
        be
        able to complete construction even if we expend significant funds on the
        construction projects.
 
 Colonial
        Bank, FSB is subject to various regulatory capital requirements administered
        by
        the Office of Thrift Supervision, including a risk-based capital measure.
        The
        risk-based capital guidelines include both a definition of capital and a
        framework for calculating risk-weighted assets by assigning balance sheet
        assets
        and off-balance sheet items to broad risk categories. At June 30, 2007, Colonial
        Bank, FSB exceeded all of the Office of Thrift Supervision regulatory capital
        requirements. Colonial Bank, FSB is considered “well capitalized” under
        regulatory guidelines.
 
 The
        capital from the offering has significantly increased our liquidity and capital
        resources. The net proceeds from the initial public offering have been utilized
        for general corporate purposes, including the funding of lending activities
        and
        the purchase of investment securities. Our financial condition and results
        of
        operations have been enhanced by the capital from the offering, resulting
        in
        increased net interest-earning assets and net income. However, due to the
        increase in equity resulting from the capital raised in the offering, our
        return
        on equity has been adversely affected.
  23
  **Item
        3.** **Controls
        and Procedures**
 
 (a)  Evaluation
        of disclosure controls and procedures.
 
 Under
        the
        supervision and with the participation of our management, including our
        Principal Executive Officer and Principal Financial Officer, we evaluated
        the
        effectiveness of the design and operation of our disclosure controls and
        procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
        Act)
        as of the end of the period covered by this quarterly report. Based upon
        that
        evaluation, the Principal Executive Officer and Principal Financial Officer
        concluded that, as of the end of the period covered by this quarterly report,
        our disclosure controls and procedures were effective to ensure that information
        required to be disclosed in the reports that the Company files or submits
        under
        the Exchange Act is recorded, processed, summarized and reported within the
        time
        periods specified in the Securities and Exchange Commission’s rules and
        forms.
 
 (b)  Changes
        in internal control over financial reporting.
 
 There
        were no changes made in our internal control over financial reporting during
        the
        period covered by this report that have materially affected, or are reasonably
        likely to materially affect, our internal control over financial
        reporting.
  24
  **PART
        II - OTHER INFORMATION**
 
 **Item
        1.** **Legal
        Proceedings**
  The
        Company or the Bank is periodically involved in various claims and lawsuits
        in
        the ordinary course of business. Management of the Company believes that
        such
        proceedings will not have a material adverse effect on the Company’s financial
        condition, results of operations or cash flows.
  **Item
        2.** **Unregistered
        Sales of Equity Securities and Use of Proceeds**
  None
 
 **Item
        3.** **Defaults
        Upon Senior**  **Securities**
 
 None
 
 **Item
        4.** **Submission
        of Matters to Vote of Security Holders**
 
 On
        May
        17, 2007, the Company held its second Annual Meeting of Stockholders to obtain
        approval for two proposals submitted on behalf of the Company’s Board of
        Directors. Stockholders of record as of March 30, 2007, were eligible to
        vote on
        these proposals. The following is a summary of each proposal and the result
        of
        the vote.
 
 1.
            The
                following directors were elected by the requisite plurality of the
                votes
                cast to serve on the Company’s Board of Directors for a three-year
                term: 
 For
              
              WithheldEdward
                  J. Geletka
              
              3,691,083
              
              1,900Richard
                  S. Allen
              
              3,689,583
              
              3,400James
                  Quinn
              
              3,691,083
              
              1,900
 
 2.
            To
                ratify the appointment of Beard Miller Company LLP as the independent
                registered public accounting firm for the year ending December 31,
                2007: 
 For
              
              Against
              
              Abstain
              
              Broker
                  Non-Votes3,997,440
              
              1,800
              
              2,293
              
              431,538
 
 **Item
        5.** **Other
        Information**
  None
 
 25
   **Item
        6.** **Exhibits**


Exhibit
                31.1
              Certification
                  of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
                  Act
                  of 2002Exhibit
                31.2
              Certification
                  of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
                  Act
                  of 2002Exhibit
                32
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to Section
                  906 of Sarbanes-Oxley Act of
                  2002





26







**SIGNATURES**





In
      accordance with section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant has duly caused this Report to be signed on its behalf by the
      undersigned thereunto duly authorized.




**COLONIAL
              BANKSHARES, INC.**RegistrantDate:
                August 14, 2007
            
            By:
                /s/ Edward J. GeletkaEdward
                J. GeletkaPresident
                and Chief Executive Officer(Principal
                Executive Officer)


Date:
                  August 14, 2007
              
              By:
                /s/ L. Joseph Stella, III, CPAL.
                  Joseph Stella, III, CPAExecutive
                  Vice President and Chief Financial Officer(Principal
                Accounting
                and Financial Officer)








27