<PAGE>

                                  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 1934

         For the quarterly period ended JUNE 30, 2006

[   ]    TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

         For the transition period from                    to
                                        -------------------  -------------------

         Commission file number 0-51385
                                -------

                            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                 (I.R.S. Employer ID No.)
   incorporation or organization

                85 WEST BROAD STREET, BRIDGETON, NEW JERSEY 08302
                    (Address of principal executive offices)

                                 (856) 451-5800
                 (Issuer's telephone number including area code)

                                       N/A
      (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      [     ]     No
                     (2)     [ X ]    Yes      [     ]     No

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

State the number of shares outstanding of each of the issuer's classes of common
equity as of August 11, 2006.

           4,521,696 shares of common stock, par value $0.10 per share

Transitional Small Business Disclosure Format (check one),
                   [   ]     Yes          [ X ]     No


<PAGE>



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

PART I            FINANCIAL INFORMATION                                                   PAGE
------            ---------------------                                                   ----

<S>                                                                                       <C>
Item 1            Consolidated Statements of Financial Condition                            2
                  Consolidated Statements of Income                                         3
                  Consolidated Statements of Stockholders' Equity                           4
                  Consolidated Statements of Cash Flows                                     5
                  Notes to Consolidated Financial Statements                                7

Item 2            Management's Discussion and Analysis of Financial Condition              14
                      and Results of Operations

Item 3             Controls and Procedures                                                 23

PART II           OTHER INFORMATION
-------           -----------------

Item 1            Legal Proceedings                                                        23

Item 2            Unregistered Sales of Equity Securities and Use of Proceeds              23

Item 3            Defaults Upon Senior Securities                                          23

Item 4            Submission of Matters to Vote of Security Holders                        24

Item 5            Other Information                                                        24

Item 6            Exhibits                                                                 24

                  Signatures                                                               25

Exhibit 31.1      Certification of Chief Executive Officer Pursuant to Section 302 of      26
                  Sarbanes-Oxley Act of 2002

Exhibit 31.2      Certification of Chief Financial Officer Pursuant to Section 302 of      27
                  Sarbanes-Oxley Act of 2002

Exhibit 32        Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002      28



</TABLE>



                                       1

<PAGE>



PART I       FINANCIAL INFORMATION
----------------------------------
ITEM 1.  FINANCIAL STATEMENTS

COLONIAL BANKSHARES, INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT JUNE 30, 2006 AND DECEMBER 31, 2005
<TABLE>
<CAPTION>

                                                                                  June 30,           December 31,
                                                                                    2006                2005
                                                                                  ---------           ---------
                                                                                 (unaudited)         (audited)
                                                                                 (Dollars In Thousands, Except
                                                                                         Per Share Data)
                                    ASSETS
<S>                                                                               <C>                 <C>
       Cash and amounts due from banks                                            $  10,168           $  10,669
       Certificates of deposit in other financial institutions                          700                --
       Investment securities available for sale                                     135,910             139,256
       Investment securities held to maturity                                        16,713              17,474
       Loans receivable, net of allowance for loan losses of $1,290 at
            June 30, 2006 and $1,168 at December 31, 2005                           182,084             157,774
       Federal Home Loan Bank stock, at cost                                          1,193               1,021
       Office properties and equipment, net                                           5,094               4,535
       Investment in life insurance                                                   2,440               2,397
       Accrued interest receivable and other assets                                   4,781               3,726
                                                                                  ---------           ---------

            TOTAL ASSETS                                                          $ 359,083           $ 336,852
                                                                                  =========           =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
       LIABILITIES
            Deposits:
                 Noninterest-bearing                                              $  15,459           $  13,638
                 Interest-bearing                                                   289,297             271,087
                                                                                  ---------           ---------
                   Total deposits                                                   304,756             284,725
            Short-term borrowings                                                    10,630              15,415
            Federal Home Loan Bank borrowings                                         7,000                --
            Advances from borrowers for taxes and insurance                             750                 505
            Accrued interest payable and other liabilities                              540                 346
                                                                                  ---------           ---------

            TOTAL LIABILITIES                                                       323,676             300,991

       STOCKHOLDERS' EQUITY
            Preferred stock, 1,000,000 shares authorized and unissued                  --                  --
            Common stock, par value $0.10 per share; authorized
                10,000,000 shares;
                issued and outstanding 4,521,696 shares at June 30, 2006
                and December 31, 2005                                                   452                 452
            Paid-in capital                                                          19,414              19,414
            Unearned shares held by Employee Stock Ownership Plan                    (1,548)             (1,548)
            Retained earnings                                                        18,976              18,252
            Accumulated other comprehensive loss                                     (1,887)               (709)
                                                                                  ---------           ---------

                TOTAL STOCKHOLDERS' EQUITY                                           35,407              35,861
                                                                                  ---------           ---------

                TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $ 359,083           $ 336,852
                                                                                  =========           =========

</TABLE>



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
                                       2
 <PAGE>



COLONIAL BANKSHARES, INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)

<TABLE>
<CAPTION>

                                                            Three Months Ended June 30,       Six Months Ended June 30,
                                                           ----------------------------       --------------------------
                                                                2006             2005              2006            2005
                                                           -------------   ------------       -------------   ----------
                                                                   (Dollars in Thousands, Except Per Share Data)
<S>                                                         <C>              <C>              <C>            <C>
INTEREST INCOME
     Loans, including fees                                  $    2,664       $    1,981       $    5,051       $  3,822
     Mortgage-backed securities                                    624              477            1,232            942
     Securities:
       Taxable                                                     840              764            1,682          1,476
       Tax-exempt                                                  343              319              680            636
                                                            -------------   ------------      -------------   ----------
         TOTAL INTEREST INCOME                                   4,471            3,541            8,645          6,876
                                                            -------------   ------------      -------------   ----------
INTEREST EXPENSE
     Deposits                                                    2,172            1,576            4,168          2,964
     Borrowings                                                    211                3              353             56
                                                            -------------   ------------      -------------   ----------
         TOTAL INTEREST EXPENSE                                  2,383            1,579            4,521          3,020
                                                            -------------   ------------      -------------   ----------
         NET INTEREST INCOME                                     2,088            1,962            4,124          3,856
PROVISION FOR LOAN LOSSES                                           36               75               99            182
                                                            -------------   ------------      -------------   ----------
         NET INTEREST INCOME AFTER PROVISION FOR LOAN            2,052            1,887            4,025          3,674
              LOSSES                                        -------------   ------------      -------------   ----------

NON-INTEREST INCOME
     Fees and service charges                                      215              160              410            321
     Gain on sale of loans                                           8               --               23             --
     Net gain on sales and calls of securities                      --               22               --             22
     Earnings on life insurance                                     22               21               43             41
     Other                                                           8                9               13             19
                                                            -------------   ------------      -------------   ----------
         TOTAL NON-INTEREST INCOME                                 253              212              489            403
                                                            -------------   ------------      -------------   ----------
NON-INTEREST EXPENSES
     Compensation and benefits                                   1,068              695            2,122          1,578
     Occupancy and equipment                                       220              224              453            420
     Data processing                                               151              158              302            282
     Office supplies                                                29               42               54             66
     Professional fees                                              88               32              169             54
     Other                                                         320              260              555            498
                                                            -------------   ------------      -------------   ----------
         TOTAL NON-INTEREST EXPENSES                             1,876            1,411            3,655          2,898
                                                            -------------   ------------      -------------   ----------
         INCOME BEFORE INCOME TAXES                                429              688              859          1,179

INCOME TAXES                                                        65              179              135            271
                                                            -------------   ------------      -------------   ----------
         NET INCOME                                         $      364       $      509       $      724     $      908
                                                            =============   ============      =============   ==========

PER SHARE DATA (SEE NOTE 4):
     Earnings per share - basic and diluted                 $     0.08               NA       $     0.17             NA
     Weighted average number of shares outstanding-          4,366,901               NA        4,366,901             NA
         basic and diluted

</TABLE>


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
                                        3

<PAGE>

COLONIAL BANKSHARES, INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)

<TABLE>
<CAPTION>


                                                                    Unearned                     Accumulated
                          Common                                     Shares                          Other             Total
                          Shares        Common       Paid-in-        Held By       Retained      Comprehensive      Stockholders'
                          Issued         Stock       Capital          ESOP         Earnings      Income (Loss)         Equity
--------------------  --------------  ------------  ------------   -----------  -------------  ------------------  ------------
                                                          (In Thousands, Except Share Data)
<S>                     <C>           <C>            <C>            <C>           <C>             <C>               <C>
Balance,
January 1, 2006         4,521,696     $     452      $  19,414      $  (1,548)    $  18,252       $    (709)        $  35,861

Comprehensive
income (loss):
   Net income               --              --             --             --            724             --                724

   Net change in
   unrealized loss
   on securities
   available for
   sale, net of
   tax benefit of
   $783                     --              --             --             --            --           (1,178)           (1,178)
                                                                                                                   ------------

    Comprehensive
    loss                    --              --             --             --            --              --               (454)
                      --------------  ------------  ------------   -----------  -------------  ------------------  ------------

Balance,
June 30, 2006           4,521,696     $     452      $  19,414      $  (1,548)    $  18,976       $  (1,887)        $  35,407
                      ==============  ============  ============   ===========  =============  ==================  ============


Balance,
January 1, 2005               100     $       -      $       5      $      -      $  16,483       $     360         $  16,848

Issuance of Common
Stock, net of
offering costs of
$940                    4,521,596           452         19,403         (1,664)          --              --             18,191

Comprehensive
income (loss):
   Net income               --              --             --             --            908             --                908

   Net change in
   unrealized gain
   on securities
   available for
   sale, net of
   tax expense of
   $71                      --              --             --             --            --              106               106
                                                                                                                   ------------

    Comprehensive
    income                  --              --             --             --            --              --              1,014
                      --------------  ------------  ------------   -----------  -------------  ------------------  ------------

Balance,
June 30, 2005           4,521,696     $     452      $  19,408      $  (1,664)    $  17,391       $     466         $  36,053
                      ==============  ============  ============   ===========  =============  ==================  =============

</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
                                        4



<PAGE>

COLONIAL BANKSHARES, INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                  Six Months Ended June 30,
                                                                                 ---------------------------
                                                                                     2006            2005
                                                                                 -------------  ------------
<S>                                                                                       <C>           <C>
       CASH FROM OPERATING ACTIVITIES                                                    (In Thousands)
       Net income                                                                   $    724       $     908
       Adjustments to reconcile net income to net cash provided by operating
       activities:
             Provision for loan losses                                                    99            182
             Depreciation expense                                                        199            167
             Deferred income taxes                                                      (494)          (178)
             Net earnings on bank-owned life insurance                                   (43)           (41)
             Net gain on sales and calls of investment securities                          -            (22)
             Loans originated for sale                                                (1,122)             -
             Proceeds from sale of loans                                               1,145              -
             Gain on sale of loans                                                       (23)             -
             Net amortization of loan fees                                                (3)            (2)
             Amortization of premium and discount on investment securities, net         (105)            48
             Decrease in other assets                                                    223            244
             Increase in other liabilities                                               194             71
                                                                                 -------------  ------------
                      Net cash provided by operating activities                          794          1,377
       CASH FLOWS FROM INVESTING ACTIVITIES
             Proceeds from calls and maturities of:
                 Investment securities available for sale                                706          4,280
                 Investment securities held to maturity                                1,300          2,000
             Proceeds from sales of:
                 Investment securities available for sale                                  -            994
                 Investment securities held to maturity                                    -               -
             Purchase of:
                 Investment securities available for sale                             (2,733)        (2,106)
                 Investment securities held to maturity                               (1,174)              -
                 Mortgage-backed securities available for sale                        (5,261)        (3,006)
                 Office properties and equipment                                        (758)          (477)
             Principal repayments from:
                 Investment securities                                                 1,564          2,204
                 Mortgage-backed securities                                            7,848          6,336
             Net increase in Federal Home Loan Bank stock                               (172)          (352)
             Purchase of interest-bearing time deposits                                 (700)             -
             Net increase in loans receivable                                        (24,406)       (12,980)
                                                                                 -------------  ------------
                      Net cash used for investing activities                         (23,786)        (3,107)
       CASH FLOWS FROM FINANCING ACTIVITIES
             Net increase in deposits                                                 20,031         18,474
             Net decrease in short-term borrowings                                    (4,785)       (13,890)
             Increase in Federal Home Loan Bank borrowings                             7,000              -
             Increase in advances from borrowers for taxes and insurance                 245            127
             Net proceeds from issuance of common stock                                    -         18,191
             Excess stock subscriptions to be refunded                                     -          2,620
                                                                                 -------------  ------------
                      Net cash provided by financing activities                       22,491         25,522
                                                                                 -------------  ------------
                      (Decrease) increase in cash and cash equivalents                  (501)        23,792
       CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                               10,669          5,282
                                                                                 -------------  ------------
       CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   $ 10,168       $ 29,074
                                                                                 =============  ============
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
                                       5
<PAGE>
COLONIAL BANKSHARES, INC.
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)

<TABLE>
<CAPTION>

       SUPPLEMENTAL CASH FLOW DISCLOSURES                                         Six Months Ended June 30,
       ----------------------------------------------------------------        ------------------------------
                                                                                     2006            2005
       Cash Paid:                                                              --------------   -------------

<S>                                                                                   <C>            <C>
            Interest                                                                  $4,382         $3,025
            Income Taxes                                                              $  330         $  235


</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
                                       6

<PAGE>


                            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. On March 25,
        2005, the Company filed a  Registration  Statement on Form SB-2 with the
        Securities  and Exchange  Commission  in  connection  with the Company's
        offer and sale of shares of its common stock in a public  offering.  The
        Registration  Statement  was declared  effective by the  Securities  and
        Exchange  Commission on May 16, 2005. The offering was completed on June
        30, 2005.  In the  offering,  the Company sold  2,079,980  shares of its
        common  stock at a price of $10.00 per share,  and issued an  additional
        2,441,716  shares of its common stock to Colonial  Bankshares,  MHC; the
        Company's federally chartered mutual holding company.

        The consolidated  financial  statements include the accounts of Colonial
        Bankshares,  Inc. and its wholly-owned  subsidiary,  Colonial Bank, FSB.
        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 to
        a fair statement 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,  2006   (unaudited)  are  not  necessarily
        indicative  of the  results  that may be  expected  for the year  ending
        December 31, 2006.

        The balance sheet at December 31, 2005 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.

        Certain   reclassifications  have  been  made  to  the  previous  year's
        financial statements to conform to the current year's presentation.

        The Bank  maintains its executive  offices and main branch in Bridgeton,
        New Jersey with branches in 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.
        ------------------------------------------------------------------------
                                        7
<PAGE>

2.      RECENT ACCOUNTING PRONOUNCEMENTS

        In February  2006,  the Financial  Accounting  Standards  Board ("FASB")
        issued  Statement of Financial  Accounting  Standards  ("SFAS") No. 155,
        "Accounting  for Certain  Hybrid  Financial  Instruments".  SFAS No. 155
        amends FASB  Statement No. 133 and FASB  Statement No. 140, and improves
        the  financial  reporting of certain  hybrid  financial  instruments  by
        requiring more  consistent  accounting  that  eliminates  exemptions and
        provides  a means to  simplify  the  accounting  for these  instruments.
        Specifically,  SFAS No.  155  allows  financial  instruments  that  have
        embedded  derivatives  to be accounted for as a whole  (eliminating  the
        need to bifurcate the derivative  from its host) if the holder elects to
        account for the whole instrument on a fair value basis.  SFAS No. 155 is
        effective  for all  financial  instruments  acquired or issued after the
        beginning of an entity's  first fiscal year that begins after  September
        15, 2006.  The Company is required to adopt the  provisions  of SFAS No.
        155, as applicable,  beginning in fiscal year 2007. The Company does not
        believe the adoption of SFAS No. 155 will have a material  impact on the
        Company's financial position and results of operations.

        In March 2006, the FASB issued SFAS No. 156,  "Accounting  for Servicing
        of Financial  Assets - An Amendment of FASB Statement No. 140". SFAS 156
        requires that all separately  recognized  servicing assets and servicing
        liabilities be initially  measured at fair value,  if  practicable.  The
        statement permits, but does not require,  the subsequent  measurement of
        servicing  assets and servicing  liabilities at fair value.  SFAS 156 is
        effective  as of the  beginning  of an entity's  fiscal year that begins
        after  September  15,  2006,  which  for the  Company  will be as of the
        beginning of fiscal 2007. The Company does not believe that the adoption
        of SFAS 156 will have a significant effect on its financial statements.

        In February  2006,  the FASB issued FASB Staff  Position No. FAS 123R-4,
        "Classification  of Options  and Similar  Instruments  Issue as Employer
        Compensation  That Allow for Cash  Settlement  upon the  Occurrence of a
        Contingent  Event".  The position amends SFAS 123R to incorporate that a
        cash  settlement  feature that can be exercised only upon the occurrence
        of a contingent  event that is outside the  employee's  control does not
        meet certain  conditions in SFAS 123R until it becomes probable that the
        event will  occur.  The  guidance in this FASB Staff  Position  shall be
        applied  upon  initial  adoption  of  Statement  123R.  The  Company  is
        currently evaluating the impact that the adoption of SFAS 123R will have
        on its financial statements.

        In July 2006, the FASB issued FASB  Interpretation  No. 48,  "Accounting
        for  Uncertainty in Income Taxes - an  interpretation  of FASB Statement
        No. 109" (FIN 48), which clarifies the accounting for uncertainty in tax
        positions.  This  interpretation  requires that  companies  recognize in
        their  financial  statements  the  impact  of a tax  position,  if  that
        position is more likely than not of being  sustained on audit,  based on
        the  technical  merits of the  position.  The  provisions  of FIN 48 are
        effective for fiscal years  beginning  after December 15, 2006, with the
        cumulative effect of the change in accounting  principle  recorded as an
        adjustment to opening retained earnings. We are currently evaluating the
        impact of adopting FIN 48 on our financial statements.

--------------------------------------------------------------------------------
                                       8
<PAGE>


3.      PRIOR PERIOD ADJUSTMENT

        During the third quarter of 2005, as a result of the Company's  internal
        accounting  review,  the Company identified an error that resulted in an
        overstatement of interest income earned on investment  securities.  As a
        result of the  overstatement  of interest  income  earned on  investment
        securities,  a prior period  adjustment  was necessary for the Company's
        financial  results as  previously  reported in the  Company's  Quarterly
        Reports on Form 10-QSB for the Quarter Ended June 30, 2005.  The effects
        of the accounting error on the respective categories of the Consolidated
        Statements  of Income are noted in the  following  table.  Earnings  per
        share was not  meaningful  as the  Company had no  publicly-held  shares
        outstanding for the respective periods.
<TABLE>
<CAPTION>

                                                                        Three          Six
                                                                        Months        Months
                                                                        Ended         Ended
                                                                       June 30,      June 30,
                                                                         2005          2005
                                                                       -------        -------
                                                                           (In Thousands)
<S>                                                                          <C>          <C>
                  Total interest income (as originally reported)       $ 3,623        $ 7,031
                  Effect of accounting error on total interest
                  income                                                   (82)          (155)
                                                                       -------        -------
                  Total interest income (restated)                     $ 3,541        $ 6,876
                                                                       =======        =======

                  Net interest income (as originally reported)         $ 2,044        $ 4,011
                  Effect of accounting error on net interest
                  income                                                   (82)          (155)
                                                                       -------        -------
                  Total net interest income (restated)                 $ 1,962        $ 3,856
                                                                       =======        =======

                  Income before income taxes (as originally
                  reported)                                            $   770        $ 1,334
                  Effect of accounting error on income before
                  income taxes                                             (82)          (155)
                                                                       -------        -------
                  Total income before income taxes (restated)          $   688        $ 1,179
                                                                       =======        =======

                  Income taxes (as originally reported)                $   212        $   333
                  Effect of accounting error on income taxes               (33)           (62)
                                                                       -------        -------
                  Income taxes (restated)                              $   179        $   271
                                                                       =======        =======

                  Net income (as originally reported)                  $   558        $ 1,001
                  Effect of accounting error on net income                 (49)           (93)
                                                                       -------        -------
                  Net income (restated)                                $   509        $   908
                                                                       =======        =======

</TABLE>

4.      EARNINGS PER SHARE

        Basic  earnings per common share is calculated by dividing net income by
        the  weighted-average  number  of  shares  outstanding  for the  period.
        Diluted  earnings per common share is  calculated by dividing net income
        by the weighted  average number of shares  outstanding  and common share
        equivalents  ("CSEs")  that would  arise from the  exercise  of dilutive
        securities.  During the three and six months  ended June 30,  2006,  the
        Company did not issue and did not have  outstanding  any CSEs.  Earnings
        per share is not  meaningful for the three and six months ended June 30,
        2005,  as the Company  had no  publicly-held  shares  during the period.
--------------------------------------------------------------------------------
                                        9
<PAGE>

5.      STOCK BASED COMPENSATION

        In  December  2004,  the FASB  issued  SFAS  No.  123R  (revised  2004),
        "Share-Based Payment",  which revised SFAS No 123, "Accounting for Stock
        Based Compensation",  and supersedes APB Opinion No. 25, "Accounting for
        Stock  Issued  to  Employees".  This  Statement  requires  an  entity to
        recognize the cost of employee services required in share-based  payment
        transactions  and measure the cost on the  grant-date  fair value of the
        award.  That cost will be  recognized  over the period  during  which an
        employee is required to provide  service in exchange  for the award.  In
        March 2005, the SEC issued SAB No. 107, which expresses the views of the
        SEC  regarding  the  interaction  between  SFAS No. 123R and certain SEC
        rules and  regulations.  SAB No. 107  provides  guidance  related to the
        valuation of  share-based  payment  arrangements  for public  companies,
        including assumptions such as expected volatility and expected term. The
        provisions of SFAS No. 123R are effective for the Company for its fiscal
        year beginning on January 1, 2006.

        The Company's Board of Directors and stockholders  have adopted the 2006
        Colonial Bankshares,  Inc.  Stock-Based  Incentive 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.  No shares  have been  granted  under the plan.  The  impact on
        operations in future  periods will be the value imputed on future option
        grants and awards using the methods  prescribed  in SFAS No.  123R.  The
        Company  had no  stock-based  compensation  for the three or six  months
        ended June 30, 2006.

        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 $36  thousand  and $0 for the three  months ended June 30, 2006
        and 2005,  respectively and $68 thousand and $0 for the six months ended
        June 30, 2006 and 2005, respectively.

        The following table presents the components of the ESOP shares:

                                                                  June 30,
                                                                   2006
                                                                ----------
                   Shares released for allocation                  11,603
                   Unreleased shares                              154,795
                                                                ----------
                        Total ESOP shares                         166,398
                                                                ==========
--------------------------------------------------------------------------------
                                       10
<PAGE>



6.      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 three and six months  ended June 30,
        2006 and 2005 was as follows:
<TABLE>
<CAPTION>

                                                                     Three Months Ended          Six Months Ended
                                                                          June 30,                   June 30,
                                                                 -------------------------    -------------------------
                                                                     2006         2005           2006        2005
                                                                 ----------     ----------    ----------   ------------
                                                                                   (In Thousands)
<S>                                                               <C>            <C>            <C>           <C>
    Other comprehensive gain (loss):
      Unrealized holding gains (losses) on available for
        sale securities                                           $  (986)       $ 1,449        $(1,961)      $   199
      Reclassification adjustment for net gains realized in
        net income                                                     --            (22)           --            (22)
      Net unrealized gains (losses)                                  (986)         1,427         (1,961)          177
    Income tax expense (benefit)                                     (393)           571           (783)           71
                                                                 ----------     ----------    ----------   ------------
      Net of tax amount                                           $  (593)       $   856        $(1,178)      $   106
                                                                 ==========     ==========    ==========   ============
</TABLE>

7.      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.

        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 $1.8
        million of standby  letters of credit  outstanding  as of June 30, 2006.
        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. The current amount of the liability as of June
        30, 2006 for  guarantees  under standby  letters of credit issued is not
        material.

--------------------------------------------------------------------------------
                                       11
<PAGE>
8.      INVESTMENT SECURITIES

        The following table sets forth the composition of our securities
        portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                  At June 30, 2006                At December 31, 2005
                                            -----------------------------      ----------------------------
                                             Amortized       Fair Value        Amortized          Fair
                                               Cost                               Cost           Value
                                            -----------    --------------      -----------    -------------
                                                                (Dollars in thousands)
<S>                                          <C>              <C>                <C>              <C>
         Securities available-for-sale:
            Mortgage-backed.................$ 51,863         $ 50,361           $ 53,771         $ 53,030
            U. S. Government agency.........  31,364           30,435             29,509           29,051
            Corporate ......................   8,960            8,581              9,341            9,263
            Mutual funds ...................  13,602           13,349             13,314           13,116
            Municipal ......................  24,315           24,067             23,902           24,061
            SBA pools ......................   8,949            9,117             10,597           10,735
                                            -----------    ------------        -----------    ------------
               Total securities             $139,053         $135,910           $140,434         $139,256
                  available-for-sale..      ===========    ============        ===========    ============

         Securities held-to-maturity:
            Mortgage-backed ................$  2,766         $  2,792           $  3,499         $  3,592
            U. S. Government agency ........     994              987              1,000              998
            Corporate ......................   2,680            2,763              2,964            3,130
            Municipal ......................  10,273           10,577             10,011           10,511
                                            -----------    ------------        -----------    ------------
               Total securities             $ 16,713         $ 17,119           $ 17,474         $ 18,231
                  held-to-maturity.         ===========    ============        ===========    ============
</TABLE>
9.       LOANS

         The components of loans at June 30, 2006 and December 31, 2005 are as
         follows:
<TABLE>
<CAPTION>
                                               At June 30, 2006                        At December 31, 2005
                                        -------------------------------         -------------------------------
                                          Amount              Percent             Amount             Percent
                                        ---------          ------------         ---------         -------------
                                                               (Dollars in thousands)
<S>                                     <C>              <C>                   <C>               <C>
    Real estate loans:
       One- to four-family
         residential                    $  92,817                  50.5%        $  77,738                 48.8%
       Home equity loans and
         lines of credit                   35,235                  19.2            33,067                 20.8
       Multi-family                         1,949                   1.1             1,676                  1.1
       Commercial                          37,529                  20.4            31,392                 19.7
       Construction                         7,219                   3.9             6,267                  3.9
    Commercial                              6,685                   3.7             6,880                  4.3
    Consumer and other                      2,273                   1.2             2,258                  1.4
                                        ---------           ------------         ---------         -------------
    Total loans receivable              $ 183,707                 100.0%        $ 159,278                100.0%
                                                            ============                           =============
    Deferred loan costs (fees)               (333)                                   (336)
    Allowance for loan losses              (1,290)                                 (1,168)
                                        ---------                               ----------
    Total loans receivable, net         $ 182,084                               $  157,774
                                        =========                               ==========
</TABLE>

        Nonaccrual loans amounted to approximately $123 thousand and $80
        thousand at June 30, 2006 and December 31, 2005, respectively.

--------------------------------------------------------------------------------
                                       12
<PAGE>

10.     DEPOSITS

        Deposit accounts, by type, at June 30, 2006 and December 31, 2005 are
        summarized as follows:
<TABLE>
<CAPTION>

                                                  At June 30, 2006                       At December 31, 2005
                                        -------------------------------------    --------------------------------------
                                                                    Weighted                                  Weighted
                                                                    Average                                    Average
                                         Balance       Percent        Rate        Balance      Percent          Rate
                                        ----------    ---------    ----------    ---------     ----------    ----------
                                                                    (Dollars in thousands)
<S>                                      <C>             <C>           <C>         <C>              <C>         <C>
         DEPOSIT TYPE:
         Non-interest bearing
           demand                       $ 15,459          5.08%         --%      $ 13,638          4.79%         --%
         Savings                          60,580         19.88        1.63         61,635         21.65        1.50
         NOW accounts                     38,197         12.53        1.80         33,844         11.89        1.43
         Super NOW accounts               13,951          4.58        1.00         17,492          6.14        1.00
         Money market accounts            18,938          6.21        3.02         18,778          6.59        2.39
                                        ----------    ---------    ----------    ---------     ----------    ----------
            Total transaction            147,125         48.28        1.62        145,387         51.06        1.40
             accounts

         Certificates of deposit         157,631         51.72        4.38        139,338         48.94        3.96
                                        ----------    ---------    ----------    ---------     ----------    ----------


            Total deposits              $304,756        100.00%       3.05%      $284,725        100.00%       2.65%
                                        ==========    =========    ==========    =========     ==========    ==========


</TABLE>

11.      SHORT-TERM AND 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,  2006 and
        December 31, 2005:
<TABLE>
<CAPTION>

                 Description                Maturity       Interest          2006                2005
                                               Date          Rate
                 -----------------------    -----------    ----------    ----------------  ---------------
                                                                              (Dollars in Thousands)
<S>                                         <C>              <C>              <C>                  <C>
                 Short-term borrowing       07/03/2006       5.42%            $10,630             $   -
                 Fixed rate amortizing      06/30/2021       5.57%              7,000                 -
                 Short-term borrowing       01/03/2006       4.17%                  -              15,415
                                                                         ----------------  ---------------
                                                                             $17,630             $15,415
                                                                         ================  ===============
</TABLE>

        At June 30,  2006,  the Bank had a borrowing  capacity of $52.2  million
        available  from  the  FHLB of New  York,  of  which  $17.6  million  was
        outstanding,  which is based on the  amount of FHLB stock held or levels
        of other assets,  including investment  securities,  which are available
        for collateral.

--------------------------------------------------------------------------------
                                       13
<PAGE>


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.

        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.

--------------------------------------------------------------------------------
                                       14
<PAGE>


        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 December 31,
2005, the allowance did not include an unallocated component.


COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2006 AND DECEMBER 31, 2005

        Total assets increased $22.2 million, or 6.6%, to $359.1 million at June
30, 2006,  from $336.9 million at December 31, 2005. The increase was the result
of  increases  in  loans  receivable,  Federal  Home  Loan  Bank  stock,  office
properties and  equipment,  accrued  interest  receivable  and  certificates  of
deposits  in other  financial  institutions,  offset by a  decrease  in cash and
amounts due from banks and investment securities available for sale.

        Net loans  receivable  increased by $24.3 million,  or 15.4%,  to $182.1
million at June 30,  2006 from  $157.8  million at December  31,  2005.  One- to
four-family  residential  real estate  loans,  which  comprise  half of our loan
portfolio,  increased $15.1 million, or 19.4%, to $92.8 million at June 30, 2006
from $77.8 million at December 31, 2005  reflecting a continued  increase in our
marketing efforts and the hiring of mortgage solicitors.  Commercial real estate
loans  increased $6.1 million,  or 19.4%, to $37.5 million at June 30, 2006 from
$31.4 million at December 31, 2005.  The increased  commercial  real estate loan
balances  reflected our  continued  emphasis on  originating  this type of loan,
resulting, in part, from the expansion of our commercial lending staff in recent
years.

        Securities available for sale decreased $3.4 million, or 2.4%, to $135.9
million at June 30, 2006 from $139.3  million at December 31, 2005. The decrease
was the result of $9.4  million in  principal  amortization,  $706  thousand  in
maturities and calls of investment securities and a $2.0 million decrease in the
fair value of securities available for sale offset by purchases in the amount of
$8.0 million. 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 slightly by $761
thousand,  to $16.7  million at June 30, 2006 from $17.5 million at December 31,
2005.  This  was  mainly  from  principal   amortization  from   mortgage-backed
securities.

        In March 2006,  the Company,  through its banking  subsidiary,  Colonial
Bank,  FSB  submitted  an  application  to the Office of Thrift  Supervision  to
establish a Delaware corporation as a wholly-owned operating subsidiary. Subject
to the receipt of regulatory approval, the Company anticipates  establishing and
funding the subsidiary  during the third calendar quarter of 2006. The operating
subsidiary will receive cash and investment securities from the Bank in exchange
for all the outstanding common stock of the new corporation.  The purpose of the
subsidiary is to invest in and manage securities.

--------------------------------------------------------------------------------
                                       15
<PAGE>



        Deposits increased $20.1 million, or 7.0%, to $304.8 million at June 30,
2006 from $284.7  million at December  31,  2005.  The largest  increase  was in
certificates  of deposit,  which  increased  $18.3 million,  or 13.1%, to $157.6
million at June 30, 2006 from $139.3 million at December 31, 2005.  Non-interest
bearing  demand  accounts  increased  $1.9  million,  or 14.0%.  The increase in
non-interest  bearing  demand  accounts was due to  increases in small  business
checking accounts. Money-market deposit accounts increased by $160 thousand. NOW
accounts  increased by $4.4  million.  Super-NOW  accounts and savings  accounts
decreased by $3.5 million and $1.0 million, respectively.

        Short- and long-term  borrowings  increased $2.2 million,  or 14.3%,  to
$17.6  million at June 30, 2006 from $15.4  million at  December  31,  2005.  We
increased our  outstanding  borrowings  because our net increase in deposits and
the proceeds  received from the calls,  maturities  and pay downs of securities,
discussed above, exceeded the cash we needed to fund loan originations.

        Total  stockholders'  equity decreased $454 thousand to $35.4 million at
June 30,  2006 from $35.9  million at  December  31,  2005.  This  decrease  was
attributable  to an increase in  accumulated  other  comprehensive  loss of $1.2
million offset by net income of $724 thousand.  Accumulated other  comprehensive
loss increased as a result of changes in the net unrealized losses on investment
securities available for sale. Because of interest rate volatility,  accumulated
other comprehensive  income (loss) 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, 2006 AND
JUNE 30, 2005

        GENERAL. Net income decreased $145 thousand,  or 28.5%, to $364 thousand
for the three months ended June 30, 2006 from $509 thousand for the three months
ended June 30, 2005.  The principal  reason for the decrease was a $465 thousand
increase in  non-interest  expense offset by an increase in net interest  income
after  the  provision  for  loan  losses  of  $165  thousand,   an  increase  in
non-interest income of $41 thousand and a decrease in income tax expense of $114
thousand.

        INTEREST INCOME.  Interest income increased $930 thousand,  or 26.6%, to
$4.5  million for the three months ended June 30, 2006 from $3.5 million for the
three months ended June 30, 2005. The increase in interest  income resulted from
a $683  thousand  increase  in  interest  income  on loans  and a $247  thousand
increase in interest income on investment securities.

        Interest  income on loans  increased  $683 thousand,  or 34.5%,  to $2.7
million for the three months ended June 30, 2006 from $2.0 million for the three
months  ended  June 30,  2005.  The  average  balance of loans  increased  $39.4
million,  or 29.1%,  to $174.6  million for the three months ended June 30, 2006
from $135.2  million for the three months ended June 30, 2005. In addition,  the
average  yield  increased to 6.10% for the three months ended June 30, 2006 from
5.86% for the three  months  ended June 30,  2005.  The  increase in the average
balance  of loans  resulted  primarily  from  increases  in one- to  four-family
residential  real estate loans and commercial real estate loans. The increase in
the  average  balances  of  one-to-four   family  residential  real  estate  and
commercial  real  estate  loans  reflected,  in part,  our  increased  staffing,
including  mortgage  solicitors and from the expansion of our commercial lending
staff in recent years.

--------------------------------------------------------------------------------
                                       16
<PAGE>

        Interest income on securities increased $247 thousand,  or 15.8% to $1.8
million for the three months ended June 30, 2006 from $1.6 million for the three
months ended June 30, 2005.  This increase was due to an increase in the average
balance  of  investment  securities  and an  increase  in the  average  yield on
investment securities.

        INTEREST EXPENSE. Interest expense increased $804 thousand, or 50.9%, to
$2.4  million for the three months ended June 30, 2006 from $1.6 million for the
three months ended June 30, 2005.

        Interest  expense  on   interest-bearing   deposits  increased  by  $596
thousand,  or 37.8%,  to $2.2  million for the three  months ended June 30, 2006
from $1.6  million for the three  months  ended June 30,  2005.  The increase in
interest  expense on  interest-bearing  deposits was due to a $14.1 million,  or
5.3%,  increase in the average  balance of  interest-bearing  deposits to $282.0
million for the three  months  ended June 30,  2006 from $267.9  million for the
three  months  ended  June 30,  2005.  In  addition,  the  average  rate paid on
interest-bearing  deposits  increased  73 basis  points  to 3.08%  for the three
months  ended June 30, 2006 from 2.35% for the three months ended June 30, 2005.
We experienced increases in the average balances of certificates of deposits and
the  money  market  accounts  and  decreases  in the  savings  and  NOW  account
categories.  The average cost of all deposit  accounts  increased  for the three
months ended June 30, 2006 compared to the three months ended June 30, 2005.

        Interest  expense on total  borrowings  increased  $208 thousand to $211
thousand for the three months ended June 30, 2006 from $3 thousand for the three
months ended June 30, 2005. This increase was due to a $15.4 million increase in
the average  balance of  borrowings  to $16.5 million for the three months ended
June 30, 2006 from $1.1  million for the three months ended June 30, 2005 and by
a 397 basis point  increase in the average cost of such  borrowings to 5.11% for
the three  months ended June 30, 2006 from 1.14% for the three months ended June
30, 2005. Total borrowings increased to fund loan growth.

        NET INTEREST  INCOME.  Because the  increase in our interest  income was
greater than our increase in interest expense,  net interest income increased by
$126 thousand, or 6.4%, to $2.1 million for the three months ended June 30, 2006
from $2.0 million for the three months ended June 30, 2005. The average  balance
of net  interest-earning  assets increased to $31.0 million for the three months
ended June 30, 2006 compared to $6.9 million for the three months ended June 30,
2005.  However,  our net interest margin  decreased 31 basis points to 2.53% for
the three  months ended June 30, 2006 from 2.84% for the three months ended June
30, 2005,  and our net interest  rate spread  decreased 55 basis points to 2.23%
for the three  months  ended June 30, 2006 from 2.78% for the three months ended
June 30, 2005.

        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  necessary  to  absorb  probable  credit  losses
incurred 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 $36  thousand for the three months ended June 30, 2006 and a provision
for loan losses of $75 thousand  for the three  months ended June 30, 2005.  The
provisions recorded reflected net recoveries of $6 thousand for the

--------------------------------------------------------------------------------
                                       17
<PAGE>

three months ended June 30, 2006 and net charge-offs of $0 for the three months
ended June 30, 2005. The allowance for loan loss as a percentage of total loans
was 0.70% and 0.73% at June 30, 2006 and December 31, 2005, respectively.

        NON-INTEREST INCOME. Non-interest income was $253 thousand for the three
months ended June 30, 2006 and $212 thousand for the three months ended June 30,
2005. Fees and service charges on deposit accounts, through increases in volume,
increased  by $55  thousand  and  gains  on the sale of  loans  increased  by $8
thousand.  There  were no gains on sales and calls of  securities  for the three
months  ended June 30, 2006 while for the three months ended June 30, 2005 gains
on sales and calls of securities totaled $22 thousand.

        NON-INTEREST  EXPENSE.  Non-interest expense increased $465 thousand, or
33.0%,  to $1.9  million  for the three  months  ended  June 30,  2006 from $1.4
million for the three  months  ended June 30,  2005.  Compensation  and benefits
expense  increased $373 thousand to $1.1 million for the three months ended June
30, 2006 from $695  thousand for the three  months  ended June 30, 2005.  Normal
salary  increases,  the  addition of  management-level  employees,  increases in
benefit costs,  increases in payroll taxes and the implementation of an Employee
Stock  Ownership Plan ("ESOP")  accounted for the increase in  compensation  and
benefit  expense.  Also,  compensation and benefits expense for the three months
ended June 30,  2005 was  reduced by $201  thousand  by the  termination  of the
Phantom Stock  Appreciation  Rights Incentive Plan, which  represented an excess
accrual  after  distribution  of  amounts  due to  participants.  Occupancy  and
equipment expense  decreased  slightly by $4 thousand.  Data processing  expense
decreased  slightly by $7 thousand.  Professional  fees  increased $56 thousand.
This increase was mainly due to increased  accounting,  audit and legal expenses
associated with being a public company. The Company expects professional fees to
increase  in the future due to  increased  accounting,  audit,  legal and annual
meeting expenses associated with being a public company and fees associated with
complying with the Sarbanes-Oxley Act of 2002.

        INCOME TAX EXPENSE.  The provision for income taxes was $65 thousand for
the three months ended June 30,  2006,  compared to $179  thousand for the three
months ended June 30, 2005,  reflecting  effective tax rates of 15.2% and 26.0%,
respectively.  Our  effective  tax rate is below the combined  state and federal
statutory rate because of our investment in tax-exempt securities and bank-owned
life  insurance.  The  effective  tax rate  decreased  in 2006  over 2005 due to
increased tax-exempt income with lower pre-tax income.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND JUNE
30, 2005

        GENERAL. Net income decreased $184 thousand,  or 20.3%, to $724 thousand
for the six months  ended June 30,  2006 from $908  thousand  for the six months
ended June 30, 2005.  The principal  reason for the decrease was a $757 thousand
increase in  non-interest  expense offset by an increase in net interest  income
after  the  provision  for  loan  losses  of  $351  thousand,   an  increase  in
non-interest income of $86 thousand and a decrease in income tax expense of $136
thousand.

        INTEREST INCOME.  Interest income  increased $1.7 million,  or 24.6%, to
$8.6  million for the six months  ended June 30, 2006 from $6.9  million for the
six months ended June 30, 2005. The increase in interest  income resulted from a
$1.2 million  increase in interest income on loans and a $540 thousand  increase
in interest income on investment securities.

--------------------------------------------------------------------------------
                                       18
<PAGE>

        Interest  income on loans  increased  $1.3  million,  or 34.2%,  to $5.1
million  for the six months  ended June 30,  2006 from $3.8  million for the six
months  ended  June 30,  2005.  The  average  balance of loans  increased  $36.3
million, or 27.6%, to $168.0 million for the six months ended June 30, 2006 from
$131.7 million for the six months ended June 30, 2005. In addition,  the average
yield  increased  to 6.01% for the six months ended June 30, 2006 from 5.80% for
the six months ended June 30, 2005. The increase in the average balance of loans
resulted primarily from increases in one- to four-family residential real estate
loans and commercial real estate loans.  The increase in the average balances of
one- to four-family  residential  real estate and  commercial  real estate loans
reflected,  in part, our increased  staffing,  including mortgage solicitors and
from the expansion of our commercial lending staff in recent years.

        Interest income on securities increased $540 thousand,  or 17.7% to $3.6
million  for the six months  ended June 30,  2006 from $3.1  million for the six
months ended June 30, 2005.  This increase was due to an increase in the average
balance  of  investment  securities  and an  increase  in the  average  yield on
investment securities.

        INTEREST EXPENSE.  Interest expense increased $1.5 million, or 49.7%, to
$4.5  million for the six months  ended June 30, 2006 from $3.0  million for the
six months ended June 30, 2005.

        Interest expense on interest-bearing deposits increased by $1.2 million,
or 40.6%,  to $4.2  million  for the six months  ended  June 30,  2006 from $3.0
million for the six months ended June 30, 2005. The increase in interest expense
on  interest-bearing  deposits was due to a $18.0 million,  or 6.9%, increase in
the average balance of  interest-bearing  deposits to $278.9 million for the six
months ended June 30, 2006 from $260.9 million for the six months ended June 30,
2005. In addition, the average rate paid on interest-bearing  deposits increased
72 basis  points to 2.99% for the six months  ended June 30, 2006 from 2.27% for
the six months  ended June 30,  2005.  We  experienced  increases in the average
balances of  certificates  of deposits  and NOW  account  and  decreases  in the
savings and money  market  account  categories.  The average cost of all deposit
accounts  increased  for the six months ended June 30, 2006  compared to the six
months ended June 30, 2005.

        Interest  expense on total  borrowings  increased  $297 thousand to $353
thousand  for the six months  ended June 30, 2006 from $56  thousand for the six
months ended June 30, 2005. This increase was due to a $9.2 million  increase in
the average balance of borrowings to $14.4 million for the six months ended June
30, 2006 from $5.2  million for the six months  ended June 30, 2005 and by a 275
basis point increase in the average cost of such borrowings to 4.89% for the six
months  ended June 30, 2006 from 2.14% for the six months  ended June 30,  2005.
Total borrowings increased to fund loan growth.

        NET INTEREST  INCOME.  Because the  increase in our interest  income was
greater than our increase in interest expense,  net interest income increased by
$268  thousand,  or 7.0%, to $4.1 million for the six months ended June 30, 2006
from $3.9 million for the six months ended June 30, 2005. The average balance of
net interest-earning  assets increased to $30.8 million for the six months ended
June 30, 2006  compared to $9.2  million for the six months ended June 30, 2005.
However,  our net interest margin decreased 26 basis points to 2.54% for the six
months  ended June 30, 2006 from 2.80% for the six months  ended June 30,  2005,
and our net interest rate spread  decreased 48 basis points to 2.25% for the six
months ended June 30, 2006 from 2.73% for the six months ended June 30, 2005.

--------------------------------------------------------------------------------
                                       19
<PAGE>

        PROVISION  FOR LOAN LOSSES.  We recorded a provision  for loan losses of
$99  thousand  for the six months  ended June 30, 2006 and a provision  for loan
losses of $182 thousand for the six months ended June 30, 2005.  The  provisions
recorded  reflected net recoveries of $23 thousand for the six months ended June
30, 2006 and net  charge-offs of $27 for the six months ended June 30, 2005. The
allowance  for loan loss as a  percentage  of total loans was 0.70% and 0.73% at
June 30, 2006 and December 31, 2005, respectively.

        NON-INTEREST  INCOME.  Non-interest income was $489 thousand for the six
months  ended June 30, 2006 and $403  thousand for the six months ended June 30,
2005. Fees and service charges on deposit accounts, through increases in volume,
increased  by $89  thousand  and  gains on the sale of  loans  increased  by $23
thousand.  There  were no gains on sales  and  calls of  securities  for the six
months ended June 30, 2006 while for the six months ended June 30, 2005 gains on
sales and calls of securities totaled $22 thousand.

        NON-INTEREST  EXPENSE.  Non-interest expense increased $757 thousand, or
26.1%,  to $3.7 million for the six months ended June 30, 2006 from $2.9 million
for the six months  ended  June 30,  2005.  Compensation  and  benefits  expense
increased  $544  thousand to $2.1 million for the six months ended June 30, 2006
from  $1.6  million  for the six  months  ended  June 30,  2005.  Normal  salary
increases,  the  addition of  management-level  employees,  increases in benefit
costs,  increases in payroll taxes and the  implementation  of an Employee Stock
Ownership Plan ("ESOP")  accounted for the increase in compensation  and benefit
expense.  Also,  compensation and benefits expense for the six months ended June
30, 2005 was reduced by $201  thousand by the  termination  of the Phantom Stock
Appreciation  Rights Incentive Plan,  which  represented an excess accrual after
distribution  of amounts due to  participants.  Occupancy and equipment  expense
increased  slightly by $33 thousand.  Data processing expense increased slightly
by $20 thousand.  Professional  fees increased $115 thousand.  This increase was
mainly due to increased  accounting,  audit,  legal and annual meeting  expenses
associated with being a public company. The Company expects professional fees to
increase  in the future due to  increased  accounting,  audit,  legal and annual
meeting expenses associated with being a public company and fees associated with
complying with the Sarbanes-Oxley Act of 2002.

        INCOME TAX EXPENSE. The provision for income taxes was $135 thousand for
the six months ended June 30, 2006, compared to $271 thousand for the six months
ended  June 30,  2005,  reflecting  effective  tax  rates of  15.7%  and  23.0%,
respectively.  Our  effective  tax rate is below the combined  state and federal
statutory rate because of our investment in tax-exempt securities and bank-owned
life  insurance.  The  effective  tax rate  decreased  in 2006  over 2005 due to
increased tax-exempt income with lower pre-tax income.

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.

--------------------------------------------------------------------------------
                                       20
<PAGE>

        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, 2006, cash and cash equivalents
totaled  $10.2  million.  Securities  classified  as  available-for-sale,  which
provide  additional  sources of liquidity,  totaled  $135.9  million at June 30,
2006.  In addition,  at June 30,  2006,  we had the ability to borrow a total of
approximately $52.2 million from the Federal Home Loan Bank of New York. On that
date, we had $17.6 million in advances outstanding.

        At June 30, 2006, loan commitments outstanding totaled $15.9 million. In
addition to commitments to originate  loans,  we had $17.7 million in unadvanced
funds to borrowers. Certificates of deposit due within one year of June 30, 2006
totaled $87.8  million,  or 28.8% 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,  2007.  We believe,  however,  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, 2006,  we originated
$46.6 million of loans,  purchased  $4.7 million of securities and invested $700
thousand in certificates of deposits in other  financial  institutions.  For the
six  months  ended  June 30,  2005,  we  originated  $30.9  million of loans and
purchased $93 thousand of securities.

        Financing  activities  consist primarily of activity in deposit accounts
and Federal  Home Loan Bank  advances.  We  experienced  a net increase in total
deposits of $20.1  million and $18.5  million for the six months  ended June 30,
2006 and 2005, 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 $2.2 million, net for the six months ended June 30, 2006 and decreased
$13.9  million,  net for the six months ended June 30,  2005.  Federal Home Loan
Bank  advances  have  primarily  been  used to fund  loan  demand  and  purchase
securities.

        We have  received  approvals  and  have  begun  construction  on our new
administrative headquarters/full-service office in Vineland, New Jersey. We have
budgeted  approximately  $6.3 million for the  construction  of this new banking
facility,  for which we have already  spent $2.0 million as of June 30, 2006. We
cannot assure you that  construction and other costs will not exceed this budget
estimate.  We anticipate  opening the  administrative  headquarters in the first
calendar  quarter of 2007.  We also have plans to build a branch office in Buena
Township,  New Jersey.  As of June 30, 2006, we have spent $269 thousand for the
acquisition of this location.

--------------------------------------------------------------------------------
                                       21
<PAGE>


We anticipate  opening the branch office in the second calendar quarter of 2007.
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 by
these dates, 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, 2006,
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.

--------------------------------------------------------------------------------
                                       22
<PAGE>


ITEM 3.         CONTROLS AND PROCEDURES

        (a)     Evaluation of disclosure controls and procedures.

                Under  the  supervision  and  with  the   participation  of  our
                management,  including  our Chief  Executive  Officer  and Chief
                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 Chief  Executive  Officer  and
                Chief  Financial  Officer  concluded  that, as of the end of the
                period covered by this quarterly report, our disclosure controls
                and  procedures  were  effective  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.


                           PART II - OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

                At June 30,  2006,  the  Company  was not  involved in any legal
                proceedings,  the  outcome  of which  would be  material  to 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

--------------------------------------------------------------------------------
                                       23
<PAGE>

ITEM 4.         SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

                On July 20, 2006,  the Company held its first Annual  Meeting of
                Stockholders to obtain approval for three proposals submitted on
                behalf of the  Company's  Board of  Directors.  Stockholders  of
                record  as of June  1,  2006,  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*            Withheld
                                                  -------------   --------------
                      Frank M. Hankins, Jr.         4,037,461          39,169
                      Gregory J. Facemyer           4,044,384          32,246

                2.      To adopt the Colonial Bankshares,  Inc. 2006 Stock-Based
                        Incentive Plan:
<TABLE>
<CAPTION>

                             For*                  Against              Abstain          Broker Non-Votes
                      --------------------    ------------------    -----------------    ------------------
<S>                        <C>                     <C>                   <C>                  <C>
                           3,249,559               315,506               4,525                507,040
</TABLE>

                3.      To ratify the appointment of Beard Miller Company LLP as
                        the independent  registered  public  accounting firm for
                        the year ending December 31, 2006:
<TABLE>
<CAPTION>
                             For*                  Against              Abstain          Broker Non-Votes
                      --------------------    ------------------    -----------------    ------------------
<S>                        <C>                        <C>                 <C>                    <C>
                           4,076,330                  0                   300                    0
</TABLE>

                * Includes  2,441,716 shares owned by Colonial  Bankshares,  MHC
                (the "MHC") which were voted for these proposals.  Excluding the
                shares  owned by the MHC,  807,843  shares  were voted "for" the
                proposal to adopt the Colonial Bankshares, Inc. 2006 Stock-Based
                Incentive  Plan. A majority vote exclusive of the MHC shares was
                also required for passage of the plan.

ITEM 5.           OTHER INFORMATION

                  None


ITEM 6.           EXHIBITS

         Exhibit 31.1      Certification of Chief Executive Officer Pursuant to
                           Section 302 of Sarbanes-Oxley Act of 2002

         Exhibit 31.2      Certification of Chief Financial Officer Pursuant to
                           Section 302 of Sarbanes-Oxley Act of 2002

         Exhibit 32        Certification of Chief Executive Officer and Chief
                           Financial Officer Pursuant to Section 906 of
                           Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------
                                       24
<PAGE>




                                   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.
                                          Registrant



Date:  August 11, 2006                    BY:  /S/ EDWARD J. GELETKA
                                          ---------------------------
                                          Edward J. Geletka
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)


Date:  August 11, 2006                    BY:  /S/ L. JOSEPH STELLA, III
                                          -------------------------------
                                          L. Joseph Stella, III
                                          Executive Vice President and Chief
                                          Financial Officer
                                          (Principal Accounting and Financial
                                          Officer)


--------------------------------------------------------------------------------
                                       25