##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-QSB



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|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 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 000-25227



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CAPITOL CITY BANCSHARES, INC.

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



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Georgia                                                        |  | 58 - 2452995                           
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

562 Lee Street, S.W., Atlanta, Georgia 30311

(Address of principal executive office)

(404) 752-6067

(Issuers telephone number)

N/A

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



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Check whether the
issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

State the number of shares outstanding of each of the issuers classes of common stock, as of August 1, 2006: 2,188,352; $1.50 par value

Transitional Small Business Disclosure Format    Yes ̈No  x



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##### Table of Contents

INDEX



|         |  |                                                                                                                                |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                                                |  | Page
|Part I.  |  | Financial Information                                                                                                          |  |     
|         |  |                                                                                                                               
|         |  | Item 1. Financial Statements (unaudited)                                                                                       |  |     
|         |  |                                                                                                                               
|         |  | Condensed Consolidated Balance Sheet as of June 30, 2006                                                                       |  | 2   
|         |  |                                                                                                                               
|         |  | Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2006 and 2005 |  | 3   
|         |  |                                                                                                                               
|         |  | Condensed Consolidated Statements of Cash Flows For The Six Months Ended June 30, 2006 and 2005                                |  | 4   
|         |  |                                                                                                                               
|         |  | Notes to Consolidated Financial Statements                                                                                     |  | 5   
|         |  |                                                                                                                               
|         |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 8   
|         |  |                                                                                                                               
|         |  | Item 3. Controls and Procedures                                                                                                |  | 14  
|         |  |                                                                                                                               
|Part II. |  | Other Information                                                                                                              |  |     
|         |  |                                                                                                                               
|         |  | Item 1. Legal Proceedings                                                                                                      |  | 15  
|         |  |                                                                                                                               
|         |  | Item 2. Unregistered Sale of Equity Securities and Use of Proceeds                                                             |  | 15  
|         |  |                                                                                                                               
|         |  | Item 3. Defaults Upon Senior Securities                                                                                        |  | 15  
|         |  |                                                                                                                               
|         |  | Item 4. Submission of Matters to a Vote of Security Holders                                                                    |  | 15  
|         |  |                                                                                                                               
|         |  | Item 5. Other Information                                                                                                      |  | 16  
|         |  |                                                                                                                               
|         |  | Item 6. Exhibits                                                                                                               |  | 16  
|         |  |                                                                                                                               
|         |  | Signatures                                                                                                                     |  | 17  
|         |  |                                                                                                                               
|         |  | Certifications                                                                                                                 |  |     



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##### Table of Contents

PART I - FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED
CONSOLIDATED BALANCE SHEET

June 30, 2006

(Unaudited)



|                                                                                                     |  |   |             |  
|---------------------------------------------------------------------------------------------------- |  | - | ----------- | -
|Assets                                                                                               |  |   |             |  
|Cash and due from banks                                                                              |  | $ | 5,087,687   |  
|Interest-bearing deposits at other financial institutions                                            |  |   | 19,596      |  
|Federal funds sold                                                                                   |  |   | 3,980,000   |  
|Securities available for sale, at fair value                                                         |  |   | 51,846,102  |  
|Restricted equity securities, at cost                                                                |  |   | 481,000     |  
|                                                                                                     | 
|Loans, net of unearned income                                                                        |  |   | 174,206,535 |  
|Less allowance for loan losses                                                                       |  |   | 2,925,207   |  
|                                                                                                     |  |   |             |  
|Loans, net                                                                                           |  |   | 171,281,328 |  
|                                                                                                     |  |   |             |  
|Premises and equipment, net                                                                          |  |   | 9,153,114   |  
|Other real estate owned                                                                              |  |   | 485,121     |  
|Other assets                                                                                         |  |   | 4,121,420   |  
|                                                                                                     |  |   |             |  
|Total assets                                                                                         |  | $ | 246,455,368 |  
|                                                                                                     |  |   |             |  
|Liabilities and Stockholders Equity                                                                 |  |   |             |  
|                                                                                                     | 
|Liabilities:                                                                                         |  |   |             |  
|Deposits:                                                                                            |  |   |             |  
|Noninterest-bearing                                                                                  |  | $ | 31,590,750  |  
|Interest-bearing                                                                                     |  |   | 192,048,937 |  
|                                                                                                     |  |   |             |  
|Total deposits                                                                                       |  |   | 223,639,687 |  
|Note payable                                                                                         |  |   | 707,000     |  
|Securities sold under repurchase agreements                                                          |  |   | 3,000,000   |  
|Company guaranteed trust preferred securities                                                        |  |   | 3,403,000   |  
|Other liabilities                                                                                    |  |   | 1,692,087   |  
|                                                                                                     |  |   |             |  
|Total liabilities                                                                                    |  |   | 232,441,774 |  
|                                                                                                     |  |   |             |  
|Stockholders equity                                                                                 |  |   |             |  
|Common stock, par value $1.50; 20,000,000 shares authorized; 2,188,352 shares issued and outstanding |  |   | 3,282,528   |  
|Surplus                                                                                              |  |   | 2,358,164   |  
|Retained earnings                                                                                    |  |   | 9,181,890   |  
|Accumulated other comprehensive loss                                                                 |  |   | (808,988    | )
|                                                                                                     |  |   |             |  
|Total stockholders equity                                                                           |  |   | 14,013,594  |  
|                                                                                                     |  |   |             |  
|Total liabilities and stockholders equity                                                           |  | $ | 246,455,368 |  
|                                                                                                     |  |   |             |  

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



2



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##### Table of Contents

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Unaudited)



|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------------------------------- |  | ------------------------- | --------- | ------------------------ | ---- | - | --------- |  | - | --------- | - |  | - | --------- | -
|                                                                                             |  | Three MonthsEndedJune 30, |           | Six
MonthsEnded June 30, |     
|                                                                                             |  | 2006                      |           |                          | 2005 |   | 2006      |  |   | 2005      |  
|Interest income:                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Loans, including fees                                                                        |  | $                         | 4,292,361 |                          |      | $ | 3,256,935 |  | $ | 8,237,342 |   |  | $ | 6,145,566 |  
|Securities:                                                                                  |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Taxable                                                                                      |  |                           | 470,593   |                          |      |   | 309,383   |  |   | 907,015   |   |  |   | 569,725   |  
|Nontaxable                                                                                   |  |                           | 98,307    |                          |      |   | 113,614   |  |   | 205,303   |   |  |   | 230,029   |  
|Federal funds sold                                                                           |  |                           | 35,435    |                          |      |   | 14,444    |  |   | 76,157    |   |  |   | 53,022    |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Total interest income                                                                        |  |                           | 4,896,696 |                          |      |   | 3,694,376 |  |   | 9,425,817 |   |  |   | 6,998,342 |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Interest expense:                                                                            |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Deposits                                                                                     |  |                           | 2,027,088 |                          |      |   | 1,430,828 |  |   | 3,919,721 |   |  |   | 2,748,373 |  
|Other borrowings                                                                             |  |                           | 95,888    |                          |      |   | 69,681    |  |   | 224,609   |   |  |   | 130,110   |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Total interest expense                                                                       |  |                           | 2,122,976 |                          |      |   | 1,500,509 |  |   | 4,144,330 |   |  |   | 2,878,483 |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Net interest income                                                                          |  |                           | 2,773,720 |                          |      |   | 2,193,867 |  |   | 5,281,487 |   |  |   | 4,119,859 |  
|Provision for loan losses                                                                    |  |                           | 121,000   |                          |      |   | 44,000    |  |   | 245,100   |   |  |   | 98,000    |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Net interest income after provision for loan losses                                          |  |                           | 2,652,720 |                          |      |   | 2,149,867 |  |   | 5,036,387 |   |  |   | 4,021,859 |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Other income:                                                                                |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Service charges on deposit accounts                                                          |  |                           | 507,310   |                          |      |   | 507,791   |  |   | 968,753   |   |  |   | 979,706   |  
|Other fees and commissions                                                                   |  |                           | (5,756    | )                        |      |   | 15,066    |  |   | 10,848    |   |  |   | 26,034    |  
|Mortgage origination income                                                                  |  |                           | 45,705    |                          |      |   | 49,571    |  |   | 77,385    |   |  |   | 91,695    |  
|Other operating income                                                                       |  |                           | 42,674    |                          |      |   | 84,885    |  |   | 87,692    |   |  |   | 182,575   |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Total other income                                                                           |  |                           | 589,933   |                          |      |   | 657,313   |  |   | 1,144,678 |   |  |   | 1,280,010 |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Other expenses:                                                                              |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Salaries and employee benefits                                                               |  |                           | 958,695   |                          |      |   | 812,528   |  |   | 1,912,539 |   |  |   | 1,588,703 |  
|Occupancy and equipment expenses, net                                                        |  |                           | 311,616   |                          |      |   | 230,090   |  |   | 571,731   |   |  |   | 457,464   |  
|Other operating expenses                                                                     |  |                           | 1,240,910 |                          |      |   | 1,053,642 |  |   | 2,293,405 |   |  |   | 1,885,673 |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Total other expenses                                                                         |  |                           | 2,511,221 |                          |      |   | 2,096,260 |  |   | 4,777,675 |   |  |   | 3,931,840 |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Income before income taxes                                                                   |  |                           | 731,432   |                          |      |   | 710,920   |  |   | 1,403,390 |   |  |   | 1,370,029 |  
|                                                                                             |  |                           |           |                         
|Income tax expense                                                                           |  |                           | 227,949   |                          |      |   | 198,368   |  |   | 430,450   |   |  |   | 409,856   |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Net income                                                                                   |  |                           | 503,483   |                          |      |   | 512,552   |  |   | 972,940   |   |  |   | 960,173   |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Other comprehensive income (loss)                                                            |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Unrealized gains (losses) on securities available for sale arising during period, net of tax |  |                           | (242,288  | )                        |      |   | 162,329   |  |   | (362,544  | ) |  |   | (224,929  | )
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Comprehensive income                                                                         |  | $                         | 261,195   |                          |      | $ | 674,881   |  | $ | 610,396   |   |  | $ | 735,244   |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Basic earnings per common share                                                              |  | $                         | 0.23      |                          |      | $ | 0.24      |  | $ | 0.45      |   |  | $ | 0.45      |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Diluted earnings per common share                                                            |  | $                         | 0.21      |                          |      | $ | 0.22      |  | $ | 0.40      |   |  | $ | 0.42      |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  
|Cash dividends declared per share of common stock                                            |  | $                         | 0.07      |                          |      | $ | 0.06      |  | $ | 0.07      |   |  | $ | 0.06      |  
|                                                                                             |  |                           |           |                          |      |   |           |  |   |           |   |  |   |           |  

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



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##### Table of Contents

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Unaudited)



|                                                                                  |  |      |            |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | -
|                                                                                  |  | 2006 |            |   | 2005 |  
|OPERATING ACTIVITIES                                                              |  |      |            |   |      |   |             |  
|Net income                                                                        |  | $    | 972,940    |   |      | $ | 960,173     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |            |   |      |   |             |  
|Depreciation and amortization                                                     |  |      | 242,869    |   |      |   | 246,772     |  
|Provision for loan losses                                                         |  |      | 245,100    |   |      |   | 98,000      |  
|Loss on sale of other real estate owned                                           |  |      |           |   |      |   | 37,453      |  
|Net other operating activities                                                    |  |      | (178,997   | ) |      |   | (580,466    | )
|                                                                                  |  |      |            |   |      |   |             |  
|Net cash provided by operating activities                                         |  |      | 1,281,912  |   |      |   | 761,932     |  
|                                                                                  |  |      |            |   |      |   |             |  
|INVESTING ACTIVITIES                                                              |  |      |            |   |      |   |             |  
|Purchases of securities available for sale                                        |  |      | (4,951,154 | ) |      |   | (11,320,365 | )
|Proceeds from maturities of securities available for sale                         |  |      | 4,648,511  |   |      |   | 2,690,478   |  
|Net (increase) decrease in interest-bearing deposits                              |  |      | 91,336     |   |      |   | (4,850      | )
|Net (increase) decrease in federal funds sold                                     |  |      | (1,944,000 | ) |      |   | 2,833,000   |  
|Purchase of restricted equity securities                                          |  |      | (102,600   | ) |      |   | (103,900    | )
|Net increase in loans                                                             |  |      | (1,775,932 | ) |      |   | (17,115,417 | )
|Proceeds from sale of other real estate owned                                     |  |      |           |   |      |   | 48,377      |  
|Purchase of premises and equipment                                                |  |      | (231,278   | ) |      |   | (268,708    | )
|                                                                                  |  |      |            |   |      |   |             |  
|Net cash used in investing activities                                             |  |      | (4,265,117 | ) |      |   | (23,241,385 | )
|                                                                                  |  |      |            |   |      |   |             |  
|FINANCING ACTIVITIES                                                              |  |      |            |   |      |   |             |  
|Net increase in deposits                                                          |  |      | 5,767,879  |   |      |   | 18,802,964  |  
|Net increase (decrease) in securities sold under repurchase agreements            |  |      | (1,000,000 | ) |      |   | 3,500,000   |  
|Proceeds from note payable                                                        |  |      |           |   |      |   | 50,000      |  
|Proceeds from exercise of stock options                                           |  |      | 50,000     |   |      |   |            |  
|                                                                                  |  |      |            |   |      |   |             |  
|Net cash provided by financing activities                                         |  |      | 4,817,879  |   |      |   | 22,352,964  |  
|                                                                                  |  |      |            |   |      |   |             |  
|Net increase (decrease) in cash and due from banks                                |  |      | 1,834,674  |   |      |   | (126,489    | )
|                                                                                  |  |     
|Cash and due from banks, beginning of period                                      |  |      | 3,253,013  |   |      |   | 4,820,743   |  
|                                                                                  |  |      |            |   |      |   |             |  
|Cash and due from banks, end of period                                            |  | $    | 5,087,687  |   |      | $ | 4,694,254   |  
|                                                                                  |  |      |            |   |      |   |             |  
|NONCASH TRANSACTIONS                                                              |  |      |            |   |      |   |             |  
|Principal balances of loans transferred to other real estate owned                |  | $    | 604,000    |   |      | $ | 197,000     |  
|Financed sales of other real estate owned                                         |  |      | 604,000    |   |      |   |            |  
|Transfer of other real estate owned to premises and equipment                     |  |      | 2,518,407  |   |      |   |            |  

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



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##### Table of Contents

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The consolidated financial information included for Capitol City Bancshares, Inc. (the Company), Capitol City Bank & Trust Company
(the Bank) and Capitol City Home Loans (the Mortgage Company) herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods. These statements should be read in conjunction with the consolidated financial statements and related notes included in the Companys Annual Report on Form 10-KSB
for the year ended December 31, 2005.

The results of operations for the three and six month periods ended June 30, 2006 are not
necessarily indicative of the results to be expected for the full year.

NOTE 2. EARNINGS PER COMMON SHARE

Presented below is a summary of the components used to calculate basic and diluted earnings per common share for the three and six months ended
June 30, 2006 and 2005.



|                                                                                                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                                                                                                     |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                                                                                                                                     |  | 2006                        |           | 2005                      |   | 2006      |  | 2005
|Net income                                                                                                                           |  | $                           | 503,483   |                           | $ | 512,552   |  | $    | 972,940   |  | $ | 960,173  
|                                                                                                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Weighted average common shares outstanding                                                                                           |  |                             | 2,188,352 |                           |   | 2,128,352 |  |      | 2,181,722 |  |   | 2,128,352
|Net effect of the assumed exercise of stock options based on the treasury stock method using the average market price for the
period |  |                             | 216,934   |                           |   | 158,547   |  |      | 223,453   |  |   | 158,209  
|                                                                                                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Total weighted average common shares and common stock equivalents outstanding                                                        |  |                             | 2,405,286 |                           |   | 2,286,899 |  |      | 2,405,175 |  |   | 2,286,561
|                                                                                                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Diluted earnings per common share                                                                                                    |  | $                           | 0.21      |                           | $ | 0.22      |  | $    | 0.40      |  | $ | 0.42     
|                                                                                                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          



5



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. STOCK BASED COMPENSATION

The Company has a stock option plan in which the Company can grant to directors, emeritus directors, and employees options for an aggregate of 638,400
shares of the Companys stock. For incentive stock options, the option price shall be not less than the fair market value of such shares on the date the option is granted. If the optionee owns shares of the Company representing more than 10% of
the total combined voting power, then the price shall not be less than 110% of the fair market value of such shares on the date the option is granted. With respect to nonqualified stock options, the option price shall be set at the Boards sole
and absolute discretion. The option period for all grants will not exceed ten years from the date of grant.

Effective January 1, 2006,
the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), entitled Share-Based Payment (SFAS No. 123R) which requires compensation costs related to share-based payment transactions to be
recognized in the financial statements. This Statement eliminates the alternative to use Accounting Principles Board (APB) Opinion No. 25s Accounting for Stock Issued to Employees intrinsic value method of accounting that was
provided in Statement 123 as originally issued. Results for prior periods have not been restated.

Under APB Opinion No. 25, issuing
stock options to employees generally resulted in recognition of no compensation cost. This statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair
value of those awards (with limited exceptions). Recognition of that compensation cost helps users of financial statements to better understand the economic transactions affecting an entity.

Prior to the adoption of 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows
in the Statements of Cash Flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as
financing cash flows.

At December 31, 2004, all outstanding options were fully vested and there were no options granted during the
three and six month periods ended June 30, 2006 and 2005. Therefore, there was no compensation cost related to share-based payments for the three and six months ended June 30, 2006 and no pro forma effect on net income for the three and
six months ended June 30, 2005.



6



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##### Table of Contents

The fair value of an option award will be estimated on the date of grant using the Black-Scholes-Merton
option valuation model. Expected volatilities are based on a value calculated using the historical volatility of an appropriate industry sector index. The Company uses historical data to estimate option exercise, employee termination and forfeitures
within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is estimated based on the short-cut method. The risk-free
rate for periods within the estimated life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The
following table represents stock option activity for the three and six months ended June 30, 2006:



|                                        |  |                                 |  |                                |      |                 |         |                                |   |                                      |  |        
|--------------------------------------- |  | ------------------------------- |  | ------------------------------ | ---- | --------------- | ------- | ------------------------------ | - | ------------------------------------ |  | -------
|                                        |  | Three Months EndedJune 30, 2006 |  | Six Months Ended June 30, 2006
|                                        |  | Numberof Shares                 |  | WeightedAverageExercisePrice   |      | Numberof Shares |         | Weighted AverageExercise Price |   | WeightedAverageRemainingContractLife
|Options outstanding beginning of period |  | 420,000                         |  | $                              | 2.68 |                 | 440,000 |                                | $ | 2.67                                 |  |        
|Options granted                         |  |                                |  |                                |     |                 |        |                                |   |                                     |  |        
|Options exercised                       |  |                                |  |                                |     |                 | 20,000  |                                |   | 2.50                                 |  |        
|                                        |  |                                 |  |                                |      |                 |         |                                |   |                                      |  |        
|Options outstanding end of period       |  | 420,000                         |  |                                | 2.68 |                 | 420,000 |                                |   | 2.68                                 |  | 3.5 Yrs
|                                        |  |                                 |  |                                |      |                 |         |                                |   |                                      |  |        
|Outstanding exercisable end of period   |  | 420,000                         |  |                                | 2.68 |                 | 420,000 |                                |   | 2.68                                 |  | 3.5 Yrs
|                                        |  |                                 |  |                                |      |                 |         |                                |   |                                      |  |        

The range of option prices for options outstanding and exercisable at June 30, 2006 was $2.50
to $3.75.

Shares available for future stock options grants to employees and directors under existing plans were 158,400 at June 30,
2006. At June 30, 2006, the aggregate intrinsic value of options outstanding and exercisable was $3.1 million. Total intrinsic value of options exercised was $150,000 for the six months ended June 30, 2006. There were no options exercised
in the second quarter of 2006.

NOTE 4. CONTINGENCIES

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Companys consolidated
financial statements, except as discussed below.

As of June 30, 2006, the Company is in litigation with another financial institution
group (Plaintiff) with a similar name. The suit alleges the Company infringed on the Plaintiffs federally registered trademarks. The Plaintiff seeks both damages and injunctive relief against the Company. The Company has asserted several
defenses against the Plaintiffs claims and has also asserted a counterclaim against the Plaintiff seeking injunctive relief and damages for the Plaintiffs trademark usage within the Companys trade area. The Company is pursuing its
defenses and counterclaims. Management is unable to reasonably estimate the



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amount of liability which may be incurred if an adverse decision is rendered because it is dependent upon
the interpretation by the court as to which party infringed the other partys trademarks.

As of June 30, 2006, there is pending
an action filed by the Commissioner of Insurance for the State of Georgia against multiple defendants, including Capitol City Bank & Trust Company, a subsidiary of Capitol City Bancshares, Inc., in the Superior Court of Fulton County, Civil
Action Number 2005-CV-98868. The plaintiff seeks to recover from the Bank alleged preferential or fraudulent payments of approximately $400,000 made to the Bank by co-defendant Providers Direct Health Plan of Georgia, Inc. (PDHP) prior
to PDHP going into receivership. The plaintiff also seeks to recover funds offset by the Bank of debts of PDHP from accounts held by it with the Bank totaling approximately $400,000. The plaintiff further alleges the Bank made fraudulent or
negligent misrepresentations to the Department of Insurance regarding the capitalization of PDHP, and seeks to recover additional damages resulting from PDHPs insolvency, alleged to be in excess of $5,000,000. In addition, some of the other
defendants have asserted cross claims against the Bank, alleging that they relied on advice negligently furnished to them by the Bank and seeking to recover from the Bank any damages which the plaintiff may recover against them. The Bank disputes
these allegations altogether and has asserted claims against eleven persons who benefited from the set-off and the alleged fraudulent transfers; however, the lawsuit could result in a large expenditure in attorney fees, costs of litigation, and the
potential liability for damages as described above. The Company has accrued $200,000 in the event of an unfavorable outcome.

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is
managements discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements.

FORWARD-LOOKING STATEMENTS

This quarterly report contains certain
forward-looking statements which are based on certain assumptions and describe future plans, strategies, and our expectations. These forward-looking statements are generally identified by use of the words believe, expect,
intend, anticipate, estimate, project, or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on our operations include, but are not limited to, changes in interest rates, general economic conditions, legislation and regulation, monetary and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of our loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, and accounting principles and
guidelines. You should consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on such statements. We will not publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.



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CRITICAL ACCOUNTING POLICIES

We have established policies to govern the application of accounting principles in the preparation of our financial statements. Certain accounting policies involve assumptions and decisions by management which may have a material impact on
the carrying value of certain assets and liabilities, and the results of our operations. We consider these accounting policies to be our critical accounting policies. The assumptions and decisions used by management are based on historical data and
other factors which are believed to be reasonable considering the circumstances.

Allowance for loan losses. We believe the allowance for loan
losses is a critical accounting policy that requires the most significant decisions and estimates used in the preparation of our financial statements. The allowance for loan losses represents managements estimate of probable loan losses
inherent in the loan portfolio.

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically
identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations, and current economic conditions that may affect the borrowers ability to pay. This evaluation does not
include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions.

FINANCIAL CONDITION

Total assets increased during the first six months of 2006 by $5.4 million from $241.1 million to $246.5 million, or
2.24%. The growth was funded by increases in total deposits, which increased by $5.8 million, or 2.65%. The increase in total assets for the six months ended June 30, 2006 consisted primarily of an increase of $1.7 million in total loans and an
increase of $1.9 million in federal funds sold. The loan to deposit ratio at June 30, 2006 was 78% compared to 79% at December 31, 2005.

Premises and equipment increased $2.5 million from $6.6 million to $9.2 million during the first six months of 2006. The increase consisted of a transfer of $2.5 million from other real estate owned, purchases of $231,000, offset by
depreciation expense of $243,000. We intend to open a full service branch at this location.

Stockholders equity increased by $564,000 for the six
months ended June 30, 2006. This net increase consisted of net income of $973,000 less dividends declared of $153,000, exercise of stock options and related tax benefit of $107,000, and a net increase in accumulated other comprehensive losses
of $363,000.



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##### Table of Contents

LIQUIDITY

Liquidity
management involves the matching of the cash flow requirements of customer withdrawals of funds and the funding of loan originations, and the ability of our subsidiary bank to meet those requirements. Management monitors and maintains appropriate
levels of liquidity so that maturities of assets and deposit growth are such that adequate funds are provided to meet estimated customer withdrawals and loan requests.

At June 30, 2006, the Banks liquidity ratio of 22.75% was considered satisfactory in relation to regulatory guidelines and internal target ratios.

REGULATORY CAPITAL REQUIREMENTS

Banking regulations require us to
maintain minimum capital levels in relation to assets. At June 30, 2006, the Banks capital ratios were considered well capitalized based on regulatory minimum capital requirements. The minimum capital requirements and the actual capital
ratios for the Company and Bank at June 30, 2006 are as follows:



|                          |  |         |   |  |       |   |  |                              |  
|------------------------- |  | ------- | - |  | ----- | - |  | ---------------------------- | -
|                          |  | Company |   |  | Bank  |   |  | RegulatoryMinimumRequirement |  
|Leverage Capital Ratio    |  | 7.49    | % |  | 7.56  | % |  | 4.00                         | %
|Risk-Based Capital Ratios |  |         |   |  |       |   |  |                              |  
|Core Capital              |  | 9.22    | % |  | 9.30  | % |  | 4.00                         | %
|Total Capital             |  | 10.48   | % |  | 10.55 | % |  | 8.00                         | %

We are not aware of any other recommendations by the regulatory authorities, events or trends, which, if they were
to be implemented, would have a material effect on our liquidity, capital resources, or operations.

OFF BALANCE SHEET ARRANGEMENTS

Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. These off-balance sheet financial
instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are distributed or the instruments become payable. Our exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making
commitments as we do for on-balance sheet instruments. Although these amounts do not necessarily represent future cash requirements, a summary of our commitments as of June 30, 2006 are as follows:



|                                    |  |               |           
|----------------------------------- |  | ------------- | ----------
|                                    |  | June 30, 2006
|Commitments to extend credit        |  | $             | 13,634,000
|Financial standby letters of credit |  |               | 1,545,000 
|Other standby letters of credit     |  |               | 1,040,000 
|                                    |  |               |           
|                                    |  | $             | 16,219,000
|                                    |  |               |           



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##### Table of Contents

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2006 and 2005

Net Interest Income. Net interest income increased by $580,000 and $1.2
million for the three and six month periods ended June 30, 2006, respectively, compared to the same periods in 2005. The increase in net interest income for both periods ended June 30, 2006 is attributable to an increase in earning assets
of $28.9 million as compared to June 30, 2005 combined with the spread maintained between rates earned on interest earning assets and rates paid on interest bearing liabilities. Total loans increased during this period by $17.3 million, which
provide greater yields to the Company than any of the other interest earning assets. During this same period, total deposits increased by $30.8 million, which included an increase of $28.2 million in interest-bearing deposits and an increase of $2.6
million in non-interest bearing deposits.

The net interest margin increased to 4.72% at June 30, 2006 as compared to 4.41% at June 30, 2005. The
yield on interest-earning assets increased to 8.43%, or 94 basis points, from June 30, 2005 to June 30, 2006. The rate paid on interest-bearing liabilities increased to 4.28%, or 78 basis points, for the same period. The increase in the
rate paid on interest-bearing liabilities is due in part to the use of brokered certificates of deposit which typically demand higher rates. Brokered deposits totaling $31.6 million at June 30, 2006 are a secondary source of funding loan
demand.

Provision for Loan Losses. The provision for loan losses is based on managements evaluation of the economic environment, the history
of charged off loans and recoveries, size and composition of the loan portfolio, nonperforming and past due loans, and other aspects of the loan portfolio. We review the allowance for loan loss on a quarterly basis and make provisions as necessary.
A provision of $245,000 was made during the six month period ending June 30, 2006 as compared to a provision of $98,000 made during the six month period ending June 30, 2005. The allowance for loan loss as a percentage of total loans was
1.68%, 1.60%, and 1.34% at June 30, 2006, December 31, 2005 and June 30, 2005, respectively. Total nonaccrual loans decreased by $653,000, net charge-offs decreased by $92,000, and loans past due ninety days or more and still
accruing decreased by $411,000 for the six months ended June 30, 2006 as compared to the same period in 2005. At December 31, 2005, nonaccrual loans and past due loans ninety days or more and still accruing were $2.6 million and $944,000,
respectively. The increase in nonaccrual loans since December 31, 2005 is primarily due to two loans placed on nonaccrual in the first quarter totaling $2.5 million. We have allocated approximately $367,000 of our allowance for loan losses to
these two loans as of June 30, 2006. Due to collateral values of the underlying collateral, we do not anticipate significant additional losses related to identified impaired loans. Management believes the allowance for loan loss at
June 30, 2006 is adequate to absorb any foreseeable losses in the loan portfolio.



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##### Table of Contents

At June 30, 2006 and 2005, nonaccrual, past due and restructured loans were as follows:



|                                                                                                         |  |                        |       |              |   |      
|-------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ------------ | - | -----
|                                                                                                         |  | June 30,2006           |       | June 30,2005
|                                                                                                         |  | (Dollars in thousands)
|Total nonaccruing loans                                                                                  |  | $                      | 4,154 |              | $ | 4,807
|Loans contractually past due ninety days or more as to interest or principal payments and still accruing |  |                        | 103   |              |   | 514  
|Restructured loans                                                                                       |  |                        |      |              |   |     

It is our policy to discontinue the accrual of interest income when, in the opinion of management, collection of
such interest becomes doubtful. This status is accorded such interest when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected and (2) the
principal or interest is more than ninety days past due, unless the loan is both well-secured and in the process of collection. Accrual of interest on such loans is resumed when, in managements judgment, the collection of interest and
principal becomes probable.

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the
table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources. These classified loans do not represent material credits about
which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Information regarding certain loans and allowance for loan loss data for the six months ended June 30, 2006 and 2005 is as follows:



|                                                                              |  |                           |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                              |  | Six Months Ended June 30, |        
|                                                                              |  | 2006                      |         |   | 2005 |  
|                                                                              |  | (Dollars in thousands)    |        
|Average amount of loans outstanding                                           |  | $                         | 168,814 |   |      | $ | 145,463 |  
|                                                                              |  |                           |         |   |      |   |         |  
|Balance of allowance for loan losses at beginning of period                   |  | $                         | 2,763   |   |      | $ | 2,186   |  
|                                                                              |  |                           |         |   |      |   |         |  
|Loans charged off                                                             |  |                           |         |   |      |   |         |  
|Commercial                                                                    |  |                           | (13     | ) |      |   | (46     | )
|Real estate                                                                   |  |                           | (73     | ) |      |   | (160    | )
|Installment                                                                   |  |                           | (31     | ) |      |   | (125    | )
|                                                                              |  |                           |         |   |      |   |         |  
|                                                                              |  |                           | (117    | ) |      |   | (331    | )
|                                                                              |  |                           |         |   |      |   |         |  
|Loans recovered                                                               |  |                           |         |   |      |   |         |  
|Commercial                                                                    |  |                           | 23      |   |      |   | 76      |  
|Real estate                                                                   |  |                           | 4       |   |      |   | 38      |  
|Installment                                                                   |  |                           | 7       |   |      |   | 42      |  
|                                                                              |  |                           |         |   |      |   |         |  
|                                                                              |  |                           | 34      |   |      |   | 156     |  
|                                                                              |  |                           |         |   |      |   |         |  
|Net charge-offs                                                               |  |                           | (83     | ) |      |   | (175    | )
|                                                                              |  |                           |         |   |      |   |         |  
|Additions to allowance charged to operating expense during period             |  |                           | 245     |   |      |   | 98      |  
|                                                                              |  |                           |         |   |      |   |         |  
|Balance of allowance for loan losses at end of period                         |  | $                         | 2,925   |   |      | $ | 2,109   |  
|                                                                              |  |                           |         |   |      |   |         |  
|Ratio of net loans charged-off during the period to average loans outstanding |  |                           | .05     | % |      |   | .12     | %
|                                                                              |  |                           |         |   |      |   |         |  



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##### Table of Contents

Other Income. Other income decreased by $67,000 and $135,000 for the three and six months ended June 30,
2006, respectively, compared to the same periods in 2005. Service charges on deposit accounts include monthly service charges and non-sufficient funds (NSF) charges which account for 72% and 71% of the service charges on deposit accounts
for the three and six months ended June 30, 2006, respectively. The amount of service charges fluctuates with the volume of transaction accounts and the volume of NSF activity.

Other Expenses. Other expenses increased by $415,000 and $846,000 for the three and six months ended June 30, 2006, respectively, as compared to the same periods in 2005. The increases consists of
increases of $146,000 and $324,000 in salaries and employee benefits, $82,000 and $114,000 in occupancy and equipment expenses, and $187,000 and $408,000 in other operating expenses for the three and six month periods, respectively. The increase in
salaries and employee benefits includes normal increases in salaries and benefits and an increase in the number of full-time equivalent employees. At June 30, 2006, the number of full-time equivalent employees was 89 compared to 75 at
June 30, 2005. The most significant increase in other expenses was legal expenses which increased $286,000 to $502,000 at June 30, 2006 from $216,000 at June 30, 2005. Legal expenses included expenses incurred related to litigation
involving a dispute with another financial institution over the legal name of our bank subsidiary as well as a lawsuit noted in Note 4 that was filed by the Commissioner of Insurance for the State of Georgia against multiple defendants, including
the Company.

The mortgage company was formed in 2002 and currently originates loans which are table funded through independent investors. The net loss for
the three and six months ended June 30, 2006 was $3,000 and $21,000, respectively, as compared to a loss of $3,000 and $10,000 for the three and six months ended June 30, 2005, respectively.

Income Taxes. Income tax expense increased by $30,000 and $21,000 for the three and six months ended June 30, 2006, respectively, as compared to the same
periods in 2005. The effective tax rate for the six month periods in 2006 and 2005 was 31% and 30%, respectively. The effective tax rate is less than the statutory tax rate due to nontaxable interest income on securities.

Net Income. Net income increased by $13,000 for the six months ended June 30, 2006 and decreased $9,000 for the three months ended June 30, 2006 as
compared to the same periods in 2005. The minimal change in net income during the first six months and second quarter of 2006 is primarily due to the increases in the provision for loan losses and other expenses as well as the decrease in other
income offsetting the increases in net interest income for the same periods.



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##### Table of Contents

ITEM 3. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation
under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of the Companys disclosure controls and procedures. Based upon this evaluation, our
Chief Executive Officer and the Principal Financial and Accounting Officer concluded that the Companys disclosure controls and procedures are effective.

There have been no changes in the Companys internal control over financial reporting in the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal
controls over financial reporting.



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##### Table of Contents

PART II - Other Information

ITEM 1. LEGAL PROCEEDINGS

There have been no material developments in the legal proceedings previously
reported in the Companys Annual Report on Form 10-KSB (filed with the Commission on March 31, 2006) nor have any new reportable legal proceedings involving the Company been instituted.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of the stockholders of
Capitol City Bancshares, Inc. was held on June 27, 2006. A total of 1,339,197 of the shares issued and outstanding registered for the meeting either in person or by proxy. The results of the meeting were as follows:

Proposal 1: To elect the fifteen nominees to serve as directors for the following year.



|                          |  |           |  |         |  |        
|------------------------- |  | --------- |  | ------- |  | -------
|Directors                 |  | For       |  | Against |  | Abstain
|George D. Andrews         |  | 1,339,197 |  | 0       |  | 0      
|Dr. Gloria Campbell DHue |  | 1,339,197 |  | 0       |  | 0      
|J. Al Cochran             |  | 1,339,197 |  | 0       |  | 0      
|Leon Goodrum              |  | 1,339,197 |  | 0       |  | 0      
|Agnes H. Harper           |  | 1,339,197 |  | 0       |  | 0      
|Charles W. Harrison       |  | 1,339,197 |  | 0       |  | 0      
|Robert A. Holmes          |  | 1,339,197 |  | 0       |  | 0      
|Moses M. Jones            |  | 1,339,197 |  | 0       |  | 0      
|Marian S. Jordan          |  | 1,339,197 |  | 0       |  | 0      
|Kaneta R. Lott            |  | 1,339,197 |  | 0       |  | 0      
|Donald F. Marshall        |  | 1,339,197 |  | 0       |  | 0      
|Elvin Mitchell, Sr.       |  | 1,339,197 |  | 0       |  | 0      
|Roy W. Sweat              |  | 1,339,197 |  | 0       |  | 0      
|William Thomas            |  | 1,339,197 |  | 0       |  | 0      
|Cordy T. Vivian           |  | 1,339,197 |  | 0       |  | 0      

Proposal 2: Approval of the Capitol City Bank 2006 Employee Stock Purchase Plan.



|          |  |          
|--------- |  | ---------
|          |  | # Shares 
|For       |  | 1,339,197
|Against   |  | 0        
|Abstained |  | 0        



15



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##### Table of Contents

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1    |  | Plan of Reorganization and Agreement of Merger, dated April 14, 1998, by and between Capitol City Bancshares, Inc., Capitol City Bank and Trust, and Capitol City Interim, Inc., which
Agreement is included as Appendix A to the Proxy Statement included in this Registration Statement filed by Registrant on Form S-4 on September 30, 1998, Registration No. 333-64789 (incorporated by reference as Exhibit 2.1 to the Registrants
10-KSB filed on March 31, 1999).
|       | 
|3.1    |  | Articles of Incorporation of Registrant (incorporated by reference as Exhibit 3.1 to the Registrants 10-KSB filed on March 31, 1999).                                                                                                                                                                                                                                                                                                                                    
|       | 
|3.1(A) |  | Amendment to the Articles of Incorporation of Registrant (incorporated by reference as Exhibit 3.1(A) to the Registrants Annual Report on Form 10-KSB filed on March 31,
2005).                                                                                                                                                                                                                                                                                          
|       | 
|3.2    |  | Bylaws of Registrant (incorporated by reference as Exhibit 3.2 to the Registrants 10-KSB filed on March 31, 1999).                                                                                                                                                                                                                                                                                                                                                       
|       | 
|31.1   |  | Section 302 Certification of Principal Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                  
|       | 
|31.2   |  | Section 302 Certification of Principal Financial and Accounting Officer                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 
|32.1   |  | Section 906 Certification of Principal Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                  
|       | 
|32.2   |  | Section 906 Certification of Principal Financial and Accounting Officer                                                                                                                                                                                                                                                                                                                                                                                                   



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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



|                      |  |                                                                                                         
|--------------------- |  | --------------------------------------------------------------------------------------------------------
|                      |  | CAPITOL CITY BANCSHARES, INC.                                                                           
|                      | 
|Date: August 14, 2006 |  | /s/ George G. Andrews                                                                                   
|                      |  | George G. Andrews                                                                                       
|                      |  | CEO, President and Director                                                                             
|                      | 
|Date: August 14, 2006 |  | /s/ Dane Alexander                                                                                      
|                      |  | Dane Alexander                                                                                          
|                      |  | Senior Vice President of Accounting and Financial Reporting (Principal Financial and Accounting Officer)



17