##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the quarterly period ended June 30, 2008



| ̈ | 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

CAPITOL CITY BANCSHARES, INC.



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



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|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)

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   ̈

Large accelerated
filer   ̈    Accelerated filer   ̈

Non-accelerated filer   ̈    (Do not check if a smaller reporting company)    Smaller reporting company  x

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, 2008; 2,222,266; $1.50 par value



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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, 2008 and December 31, 2007                                                  |  | 2      
|                                                                                                                                | 
|Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 
30, 2008 and 2007 |  | 3      
|                                                                                                                                | 
|Condensed Consolidated Statements of Cash Flows For The Six Months Ended June 30, 2008 and 2007                                 |  | 4      
|                                                                                                                                | 
|Notes to Condensed Consolidated Financial Statements                                                                            |  | 5 - 11 
|                                                                                                                                | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                                   |  | 12 - 19
|                                                                                                                                | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                              |  | 19     
|                                                                                                                                | 
|Item 4. Controls and Procedures                                                                                                 |  | 19     
|                                                                                                                                | 
|Part II. Other Information                                                                                                      |  |        
|                                                                                                                                | 
|Item 1. Legal Proceedings                                                                                                       |  | 20     
|                                                                                                                                | 
|Item 2. Unregistered Sale of Equity Securities and Use of Proceeds                                                              |  | 20     
|                                                                                                                                | 
|Item 3. Defaults Upon Senior Securities                                                                                         |  | 20     
|                                                                                                                                | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                                     |  | 20     
|                                                                                                                                | 
|Item 5. Other Information                                                                                                       |  | 21     
|                                                                                                                                | 
|Item 6. Exhibits                                                                                                                |  | 21     
|                                                                                                                                | 
|Signatures                                                                                                                      |  | 22     
|                                                                                                                                | 
|Certifications                                                                                                                  |  | 23 - 26



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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, 2008 and December 31, 2007



|                                                                                                                                 |  |                          |             |   |                  |   |            
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---------------- | - | -----------
|                                                                                                                                 |  | June 30, 2008(unaudited) |             |   | December 31,2007
|Assets                                                                                                                           |  |                          |             |   |                 
|Cash and due from banks                                                                                                          |  | $                        | 1,821,320   |   |                  | $ | 5,557,711  
|Interest-bearing deposits at other financial institutions                                                                        |  |                          | 110,073     |   |                  |   | 74,895     
|Federal funds sold                                                                                                               |  |                          |            |   |                  |   | 1,953,000  
|Securities available for sale, at fair value                                                                                     |  |                          | 47,789,338  |   |                  |   | 52,223,806 
|Restricted equity securities, at cost                                                                                            |  |                          | 692,700     |   |                  |   | 471,900    
|                                                                                                                                 |  |                         
|Loans, net of unearned income                                                                                                    |  |                          | 222,606,689 |   |                  |   | 199,488,088
|Less allowance for loan losses                                                                                                   |  |                          | 3,558,233   |   |                  |   | 3,349,052  
|                                                                                                                                 |  |                          |             |   |                  |   |            
|Loans, net                                                                                                                       |  |                          | 219,048,456 |   |                  |   | 196,139,036
|                                                                                                                                 |  |                          |             |   |                  |   |            
|Premises and equipment, net                                                                                                      |  |                          | 10,401,051  |   |                  |   | 10,432,908 
|Other real estate owned                                                                                                          |  |                          | 2,635,714   |   |                  |   | 550,278    
|Other assets                                                                                                                     |  |                          | 5,045,531   |   |                  |   | 5,557,103  
|                                                                                                                                 |  |                          |             |   |                  |   |            
|Total assets                                                                                                                     |  | $                        | 287,544,183 |   |                  | $ | 272,960,637
|                                                                                                                                 |  |                          |             |   |                  |   |            
|                                                                                                                                 |  |                         
|Liabilities and Stockholders Equity                                                                                             |  |                          |             |   |                 
|Liabilities:                                                                                                                     |  |                          |             |   |                  |   |            
|Deposits:                                                                                                                        |  |                          |             |   |                  |   |            
|Noninterest-bearing                                                                                                              |  | $                        | 30,693,618  |   |                  | $ | 30,654,203 
|Interest-bearing                                                                                                                 |  |                          | 227,177,962 |   |                  |   | 215,905,776
|                                                                                                                                 |  |                          |             |   |                  |   |            
|Total deposits                                                                                                                   |  |                          | 257,871,580 |   |                  |   | 246,559,979
|Note payable                                                                                                                     |  |                          | 452,000     |   |                  |   | 452,000    
|Federal Home Loan Bank Advances                                                                                                  |  |                          | 4,500,000   |   |                  |   |           
|Securities sold under repurchase agreements                                                                                      |  |                          |            |   |                  |   | 1,000,000  
|Company guaranteed trust preferred securities                                                                                    |  |                          | 3,403,000   |   |                  |   | 3,403,000  
|Other liabilities                                                                                                                |  |                          | 2,243,098   |   |                  |   | 2,795,643  
|                                                                                                                                 |  |                          |             |   |                  |   |            
|Total liabilities                                                                                                                |  |                          | 268,469,678 |   |                  |   | 254,210,622
|                                                                                                                                 |  |                          |             |   |                  |   |            
|                                                                                                                                 |  |                         
|Stockholders equity                                                                                                             |  |                          |             |   |                  |   |            
|Series A cumulative, non voting preferred stock, par value $100, 10,000 shares authorized, issued and outstanding                |  |                          | 1,000,000   |   |                  |   | 1,000,000  
|Common stock, par value $1.50; 20,000,000 shares authorized; 2,214,298 and 2,191,608 shares issued and outstanding,
respectively |  |                          | 3,321,447   |   |                  |   | 3,287,412  
|Surplus                                                                                                                          |  |                          | 2,578,705   |   |                  |   | 2,385,840  
|Retained earnings                                                                                                                |  |                          | 12,235,948  |   |                  |   | 12,040,145 
|Accumulated other comprehensive income (loss)                                                                                    |  |                          | (61,595     | ) |                  |   | 36,618     
|                                                                                                                                 |  |                          |             |   |                  |   |            
|Total stockholders equity                                                                                                       |  |                          | 19,074,505  |   |                  |   | 18,750,015 
|                                                                                                                                 |  |                          |             |   |                  |   |            
|Total liabilities and stockholders equity                                                                                       |  | $                        | 287,544,183 |   |                  | $ | 272,960,637
|                                                                                                                                 |  |                          |             |   |                  |   |            

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, 2008 AND 2007

(Unaudited)



|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------------------ |  | -------------------------- | --------- | - | ------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                     |  | Three MonthsEnded June 30, |           |   | Six MonthsEnded June 30, |  
|                                                                                     |  | 2008                       |           |   | 2007                     |   |           | 2008 |  |   | 2007      |  
|Interest income:                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Loans, including fees                                                                |  | $                          | 4,011,205 |   |                          | $ | 4,384,520 |      |  | $ | 8,388,968 |   |  | $ | 8,592,884 |  
|Deposits in banks                                                                    |  |                            | 3,489     |   |                          |   | 1,607     |      |  |   | 3,489     |   |  |   | 1,607     |  
|Securities:                                                                          |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Taxable                                                                              |  |                            | 502,659   |   |                          |   | 612,931   |      |  |   | 1,018,019 |   |  |   | 1,127,098 |  
|Nontaxable                                                                           |  |                            | 78,811    |   |                          |   | 79,135    |      |  |   | 144,769   |   |  |   | 168,790   |  
|Federal funds sold                                                                   |  |                            | 2,530     |   |                          |   | 31,618    |      |  |   | 23,038    |   |  |   | 100,685   |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total interest income                                                                |  |                            | 4,598,694 |   |                          |   | 5,109,811 |      |  |   | 9,578,283 |   |  |   | 9,991,064 |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Interest expense:                                                                    |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Deposits                                                                             |  |                            | 2,548,440 |   |                          |   | 2,389,220 |      |  |   | 5,143,436 |   |  |   | 4,698,894 |  
|Other borrowings                                                                     |  |                            | 72,044    |   |                          |   | 116,860   |      |  |   | 153,069   |   |  |   | 203,433   |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total interest expense                                                               |  |                            | 2,620,484 |   |                          |   | 2,506,080 |      |  |   | 5,296,505 |   |  |   | 4,902,327 |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Net interest income                                                                  |  |                            | 1,978,210 |   |                          |   | 2,603,731 |      |  |   | 4,281,778 |   |  |   | 5,088,737 |  
|Provision for loan losses                                                            |  |                            | 450,000   |   |                          |   | 25,000    |      |  |   | 710,000   |   |  |   | 25,000    |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Net interest income after provision for loan losses                                  |  |                            | 1,528,210 |   |                          |   | 2,578,731 |      |  |   | 3,571,778 |   |  |   | 5,063,737 |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Other income:                                                                        |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Service charges on deposit accounts                                                  |  |                            | 504,750   |   |                          |   | 527,593   |      |  |   | 936,458   |   |  |   | 1,003,928 |  
|Other fees and commissions                                                           |  |                            | 13,431    |   |                          |   | 36,222    |      |  |   | 32,196    |   |  |   | 41,238    |  
|Mortgage origination income                                                          |  |                            |          |   |                          |   | 14,343    |      |  |   |          |   |  |   | 22,985    |  
|Gain on sales of other real estate owned                                             |  |                            | 418,557   |   |                          |   |          |      |  |   | 418,557   |   |  |   |          |  
|Other operating income                                                               |  |                            | 46,761    |   |                          |   | (274      | )    |  |   | 117,650   |   |  |   | 68,494    |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total other income                                                                   |  |                            | 983,499   |   |                          |   | 577,884   |      |  |   | 1,504,861 |   |  |   | 1,136,645 |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Other expenses:                                                                      |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Salaries and employee benefits                                                       |  |                            | 1,116,053 |   |                          |   | 1,006,475 |      |  |   | 2,171,250 |   |  |   | 1,952,732 |  
|Occupancy and equipment expenses, net                                                |  |                            | 293,748   |   |                          |   | 272,945   |      |  |   | 576,162   |   |  |   | 560,992   |  
|Loss on sale of securities available for sale                                        |  |                            |          |   |                          |   | 2,698     |      |  |   |          |   |  |   | 2,698     |  
|Other operating expenses                                                             |  |                            | 1,106,528 |   |                          |   | 1,007,261 |      |  |   | 2,097,794 |   |  |   | 1,905,387 |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Total other expenses                                                                 |  |                            | 2,516,329 |   |                          |   | 2,289,379 |      |  |   | 4,845,206 |   |  |   | 4,421,809 |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Income (loss) before income taxes                                                    |  |                            | (4,620    | ) |                          |   | 867,236   |      |  |   | 231,433   |   |  |   | 1,778,573 |  
|                                                                                     |  |                            |           |  
|Income tax expense (benefit)                                                         |  |                            | (42,635   | ) |                          |   | 285,886   |      |  |   | 35,630    |   |  |   | 594,207   |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Net income                                                                           |  |                            | 38,015    |   |                          |   | 581,350   |      |  |   | 195,803   |   |  |   | 1,184,366 |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Other comprehensive income (loss)                                                    |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|Unrealized losses on securities available for sale arising during period, net of tax |  |                            | (439,266  | ) |                          |   | (349,553  | )    |  |   | (61,010   | ) |  |   | (238,676  | )
|                                                                                     |  |                            |           |  
|Reclassification adjustment for (gains) losses realized in net income, net of tax    |  |                            | (37,204   | ) |                          |   | 1,781     |      |  |   | (37,204   | ) |  |   | 1,781     |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Comprehensive income (loss)                                                          |  | $                          | (438,455  | ) |                          | $ | 233,578   |      |  | $ | 97,589    |   |  | $ | 947,471   |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Basic earnings per common share                                                      |  | $                          | 0.02      |   |                          | $ | 0.27      |      |  | $ | 0.09      |   |  | $ | 0.54      |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Diluted earnings per common share                                                    |  | $                          | 0.02      |   |                          | $ | 0.24      |      |  | $ | 0.08      |   |  | $ | 0.49      |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  
|                                                                                     |  |                            |           |  
|Cash dividends declared per share of common stock                                    |  | $                          |          |   |                          | $ | 0.10      |      |  | $ |          |   |  | $ | 0.10      |  
|                                                                                     |  |                            |           |   |                          |   |           |      |  |   |           |   |  |   |           |  

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



3



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##### Table of Contents

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Unaudited)



|                                                                                  |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | 2008 |             |   | 2007 |  
|OPERATING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Net income                                                                        |  | $    | 195,803     |   |      | $ | 1,184,366   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |   |             |  
|Depreciation                                                                      |  |      | 276,520     |   |      |   | 249,546     |  
|Provision for loan losses                                                         |  |      | 710,000     |   |      |   | 25,000      |  
|Net (gain) loss on sale of securities available for sale                          |  |      | (56,369     | ) |      |   | 2,698       |  
|(Gain) loss on sale of other real estate owned                                    |  |      | (418,557    | ) |      |   | 2,257       |  
|Net other operating activities                                                    |  |      | 558,590     |   |      |   | (85,015     | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |      | 1,265,987   |   |      |   | 1,378,852   |  
|                                                                                  |  |      |             |   |      |   |             |  
|                                                                                  |  |     
|INVESTING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Purchases of securities available for sale                                        |  |      | (22,951,246 | ) |      |   | (17,890,357 | )
|Proceeds from maturities of securities available for sale                         |  |      | 13,209,859  |   |      |   | 6,767,157   |  
|Proceeds from sales of securities available for sale                              |  |      | 14,083,416  |   |      |   | 4,494,754   |  
|Net increase in interest-bearing deposits                                         |  |      | (35,178     | ) |      |   | (47,257     | )
|Net decrease in federal funds sold                                                |  |      | 1,953,000   |   |      |   | 17,000      |  
|(Purchase) redemption of restricted equity securities                             |  |      | (220,800    | ) |      |   | 31,600      |  
|Net (increase) decrease in loans                                                  |  |      | (26,060,467 | ) |      |   | 994,604     |  
|Proceeds from sale of other real estate owned                                     |  |      | 225,200     |   |      |   | 674,663     |  
|Purchase of premises and equipment                                                |  |      | (244,663    | ) |      |   | (1,015,721  | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash used in investing activities                                             |  |      | (20,040,879 | ) |      |   | (5,973,557  | )
|                                                                                  |  |      |             |   |      |   |             |  
|                                                                                  |  |     
|FINANCING ACTIVITIES                                                              |  |      |             |   |      |   |             |  
|Net increase in deposits                                                          |  |      | 11,311,601  |   |      |   | 6,169,548   |  
|Net decrease in securities sold under repurchase agreements                       |  |      | (1,000,000  | ) |      |   | (2,000,000  | )
|Net increase in Federal Home Loan Bank advances                                   |  |      | 4,500,000   |   |      |   |            |  
|Issuance of preferred stock                                                       |  |      |            |   |      |   | 1,000,000   |  
|Proceeds from issuance of common stock under ESOP plan                            |  |      | 5,500       |   |      |   |            |  
|Proceeds from issuance of common stock from secondary stock offering              |  |      | 221,400     |   |      |   |            |  
|Dividends paid to shareholders                                                    |  |      |            |   |      |   | (219,120    | )
|                                                                                  |  |      |             |   |      |   |             |  
|Net cash provided by financing activities                                         |  |      | 15,038,501  |   |      |   | 4,950,428   |  
|                                                                                  |  |      |             |   |      |   |             |  
|                                                                                  |  |     
|Net increase (decrease) in cash and due from banks                                |  |      | (3,736,391  | ) |      |   | 355,723     |  
|                                                                                  |  |     
|Cash and due from banks, beginning of period                                      |  |      | 5,557,711   |   |      |   | 4,292,248   |  
|                                                                                  |  |      |             |   |      |   |             |  
|                                                                                  |  |     
|Cash and due from banks, end of period                                            |  | $    | 1,821,320   |   |      | $ | 4,647,971   |  
|                                                                                  |  |      |             |   |      |   |             |  
|                                                                                  |  |     
|SUPPLEMENTAL DISCLOSURES                                                          |  |      |             |   |      |   |             |  
|Cash paid for:                                                                    |  |      |             |   |      |   |             |  
|Interest                                                                          |  | $    | 5,295,262   |   |      | $ | 4,736,013   |  
|Income taxes                                                                      |  | $    | 225,374     |   |      | $ | 648,422     |  
|                                                                                  |  |     
|NONCASH TRANSACTIONS                                                              |  |      |             |   |      |   |             |  
|Principal balances of loans transferred to other real estate owned                |  | $    | 2,689,178   |   |      | $ | 418,531     |  
|Financed sales of other real estate owned                                         |  | $    | 248,131     |   |      | $ |            |  

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 CONDENSED 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-K for the year ended December 31, 2007.

The results of operations for the three and six month periods ended June 30, 2008 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, 2008 and 2007.



|                                                                                                                                     |  |                            |           |                          |   |           |  |      |           |  |   |          
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | --------- | ------------------------ | - | --------- |  | ---- | --------- |  | - | ---------
|                                                                                                                                     |  | Three Months EndedJune 30, |           | Six Months EndedJune 30,
|                                                                                                                                     |  | 2008                       |           | 2007                     |   | 2008      |  | 2007
|Net income                                                                                                                           |  | $                          | 38,015    |                          | $ | 581,350   |  | $    | 195,803   |  | $ | 1,184,366
|                                                                                                                                     |  |                            |           |                          |   |           |  |      |           |  |   |          
|Weighted average common shares outstanding                                                                                           |  |                            | 2,192,097 |                          |   | 2,188,352 |  |      | 2,192,097 |  |   | 2,188,352
|Net effect of the assumed exercise of stock options based on the treasury stock method using the average market price for the
period |  |                            | 215,684   |                          |   | 217,684   |  |      | 215,684   |  |   | 217,684  
|                                                                                                                                     |  |                            |           |                          |   |           |  |      |           |  |   |          
|Total weighted average common shares and common stock equivalents outstanding                                                        |  |                            | 2,407,781 |                          |   | 2,406,036 |  |      | 2,407,781 |  |   | 2,406,031
|                                                                                                                                     |  |                            |           |                          |   |           |  |      |           |  |   |          
|Diluted earnings per common share                                                                                                    |  | $                          | 0.02      |                          | $ | 0.24      |  | $    | 0.08      |  | $ | 0.49     
|                                                                                                                                     |  |                            |           |                          |   |           |  |      |           |  |   |          



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NOTES TO CONDENSED 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.

At December 31, 2007, all outstanding options were fully vested and there were no options granted during the three and six month
periods ended June 30, 2008 and 2007. Therefore, there was no compensation cost related to share-based payments for the three and six months ended June 30, 2008 and 2007.

The following table represents stock option activity for the three and six months ended June 30, 2008:



|                                        |  |                                 |  |                               |      |                 |         |                              |   |                                      |  |        
|--------------------------------------- |  | ------------------------------- |  | ----------------------------- | ---- | --------------- | ------- | ---------------------------- | - | ------------------------------------ |  | -------
|                                        |  | Three Months EndedJune 30, 2008 |  | Six Months EndedJune 30, 2008
|                                        |  | Numberof Shares                 |  | WeightedAverageExercisePrice  |      | Numberof Shares |         | WeightedAverageExercisePrice |   | WeightedAverageRemainingContractLife
|Options outstanding beginning of period |  | 418,000                         |  | $                             | 2.67 |                 | 418,000 |                              | $ | 2.67                                 |  |        
|Options granted                         |  |                                |  |                               |     |                 |        |                              |   |                                     |  |        
|Options exercised                       |  |                                |  |                               |     |                 |        |                              |   |                                     |  |        
|                                        |  |                                 |  |                               |      |                 |         |                              |   |                                      |  |        
|Options outstanding end of period       |  | 418,000                         |  |                               | 2.67 |                 | 418,000 |                              |   | 2.67                                 |  | 1.5 Yrs
|                                        |  |                                 |  |                               |      |                 |         |                              |   |                                      |  |        
|Outstanding exercisable end of period   |  | 418,000                         |  |                               | 2.67 |                 | 418,000 |                              |   | 2.67                                 |  | 1.5 Yrs
|                                        |  |                                 |  |                               |      |                 |         |                              |   |                                      |  |        

The range of option prices for options outstanding and exercisable at June 30, 2008 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,
2008. At June 30, 2008, the aggregate intrinsic value of options outstanding and exercisable was $3.1 million.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|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.



|NOTE 5. | FAIR VALUE MEASUREMENTS
|------- | -----------------------

On January 1, 2008,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS NO. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported
balances.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157
establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the
hierarchy) and the reporting entitys own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level
1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other
than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entitys
own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to the asset or liability.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|NOTE 5. | FAIR VALUE MEASUREMENTS (Continued)
|------- | -----------------------------------

The table
below presents the Companys assets and liabilities measured at fair value on a recurring basis as of June 30, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.



|                                         |  |                                                             |   |                                             |   |                                         |  |       |   |  |   |           
|---------------------------------------- |  | ----------------------------------------------------------- | - | ------------------------------------------- | - | --------------------------------------- |  | ----- | - |  | - | ----------
|                                         |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |   | SignificantUnobservable Inputs(Level 3) |  | Total
|Assets                                   |  |                                                             |   |                                             |   |                                         |  |       |   |  |   |           
|Investment securities available for sale |  | $                                                           |  |                                             | $ | 47,789,338                              |  | $     |  |  | $ | 47,789,338
|                                         |  |                                                             |   |                                             |   |                                         |  |       |   |  |   |           
|Total assets at fair value               |  | $                                                           |  |                                             | $ | 47,789,338                              |  | $     |  |  | $ | 47,789,338
|                                         |  |                                                             |   |                                             |   |                                         |  |       |   |  |   |           

Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.
For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve,
live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds terms and conditions, among other things. The investments in the Companys portfolio are generally not quoted on an exchange
but are actively traded in the secondary institutional markets.

The following table presents the assets that are measured at fair value on
a non-recurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial position at June 30, 2008 (dollars in thousands).



|                  |  |                                                               |   |                                           |   |                                      |  |   |            |       |  |  |   |           
|----------------- |  | ------------------------------------------------------------- | - | ----------------------------------------- | - | ------------------------------------ |  | - | ---------- | ----- |  |  | - | ----------
|                  |  | Quoted Prices inActive Markets forIdentical SecuritiesLevel 1 |   | Significant OtherObservable InputsLevel 2 |   | SignificantUnobservableInputsLevel 3 |  |   |            | Total
|Impaired loans    |  | $                                                             |  |                                           | $ |                                     |  | $ | 16,852,184 |       |  |  | $ | 16,852,184
|Other real estate |  |                                                               |  |                                           |   |                                     |  |   | 2,635,714  |       |  |  |   | 2,635,714 
|                  |  |                                                               |   |                                           |   |                                      |  |   |            |       |  |  |   |           
|                  |  | $                                                             |  |                                           | $ |                                     |  | $ | 19,487,898 |       |  |  | $ | 19,487,898
|                  |  |                                                               |   |                                           |   |                                      |  |   |            |       |  |  |   |           



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|NOTE 5. | FAIR VALUE MEASUREMENTS (Continued)
|------- | -----------------------------------

Impaired
loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value
hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company.
The value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipments net book value on the business financial statements. Inventory and accounts receivable
collateral are valued based on independent field examiner review or aging reports. Appraised and reported values may be discounted based on managements historical knowledge, changes in market conditions from the time of the valuation, and
managements expertise and knowledge of the client and clients business. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

Other real estate is adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of
carrying value or fair value. Fair value is based upon independent market prices or appraised values of the collateral. The fair value of the collateral is based on an observable market price or a current appraised value, and therefore the
foreclosed asset is recorded as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the
Company records the other real estate as nonrecurring Level 3.



|NOTE 6. | RECENT ACCOUNTING PRONOUNCEMENTS
|------- | --------------------------------

In December
2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company believes the adoption of SFAS 141(R) will not have a material impact on its financial statements.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB NO. 51.
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity and should be reported as equity in the consolidated financial statements. In addition to the amendments to ARB 51, SFAS 160 amends SFAS No. 128, Earnings per Share; so that earnings per share data will
continue to be calculated the same way those data were calculated before SFAS 160 was issued. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company believes
the adoption of SFAS 160 will not have a material impact on its financial statements.

In March 2008, the FASB issued SFAS 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment to SFAS 133 intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are account for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. The Company believes the adoption of SFAS 161 will not have a material impact on its financial statements.



|NOTE 7. | SECONDARY STOCK OFFERING
|------- | ------------------------

On May 8, 2008, the
Company filed an S-1 registration statement for a stock offering of up to 1,500,000 shares of the Companys common stock at a price of $10 per share. The offering will terminate on November 8, 2008 or when all 1,500,000 shares of common
stock are sold, whichever occurs first. The Company may, at its sole discretion, extend the offering for up to 90 days to February 8, 2009. As of June 30, 2008, the Company had sold 22,140 shares through the secondary stock offering.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|NOTE 8. | FEDERAL HOME LOAN BANK ADVANCES
|------- | -------------------------------

During the second
quarter of 2008, the Company received proceeds from Federal Home Loan Bank advances of $4,500,000. These advances are variable rate and mature in 2009.



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|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.

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. Management believes that the allowance for loan losses and the accounting for deferred income taxes are the most critical accounting policies upon which the Companys financial condition depends. The
allowance for loan losses and the recognition of deferred taxes involve the most complex and subjective decisions and assessments that management must make.

Allowance for loan losses.    Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Companys allowance for loan losses provides for probable losses based upon
evaluations of known and inherent risks in the loan portfolio. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Loans are charged against the allowance for loan losses when management
believes the collection of the principal is unlikely. The Companys allowance for loan and lease losses is the amount considered adequate to absorb probable losses within the portfolio based on managements evaluation of the size and
current risk characteristics of the loan portfolio. Such evaluation considers prior loss experience, the risk rating distribution of the portfolios, the impact of current internal and external influences on credit loss and the levels of
nonperforming loans. Specific allowances for loan and lease losses are established



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for large impaired loans and leases on an individual basis. The specific allowance established for these loans and leases is based on a thorough analysis of
the most probable source of repayment, including the present value of the loans expected future cash flows, the loans estimated market value, or the estimated fair value of the underlying collateral. General allowances are established
for loans that are classified as either special mention, substandard, or doubtful. These loans are assigned a risk rating, and the allocated allowance for loan losses is determined based upon the loss percentage factors that correspond to each risk
rating. Loss percentage factors are based on the probable loss including qualitative factors. The qualitative factors consider credit concentrations, recent levels and trends in delinquencies and nonaccrual, and growth in the loan portfolio. The
occurrence of certain events could result in changes to the loss factors. Accordingly, these loss factors are reviewed periodically and modified as necessary.

General allowances are established for loans and leases that can be grouped into pools based on similar characteristics. In this process, general allowance factors are based on an analysis of historical charge-off experience and expected
losses given default derived from the Companys internal risk rating process. These factors are developed and applied to the portfolio in terms of line of business and loan type. Adjustments are also made to the allowance for the pools after an
assessment of internal and external influences on credit quality that have not yet been reflected in the historical loss or risk rating data. Unallocated allowances relate to inherent losses that are not otherwise evaluated in the first two
elements. The qualitative factors associated with unallocated allowances are subjective and require a high degree of management judgment. These factors include the inherent imprecisions in mathematical models and credit quality statistics, recent
economic uncertainty, losses incurred from recent events, and lagging or incomplete data.

The process of reviewing the adequacy of the allowance for loan
losses requires management to make numerous judgments and assumptions about current events and subjective judgments, including the likelihood of loan repayment, risk evaluation, extrapolation of historical losses of similar banks, and similar
judgments and assumptions. If these assumptions prove to be incorrect, charge-offs in future periods could exceed the allowance for loan losses.

Management considers the allowance for loan losses to be adequate and sufficient to absorb possible future losses; however, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that
additional provisions to the allowance will not be required.

Deferred income taxes.Deferred income tax assets and
liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance
sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

A valuation allowance for deferred tax assets is required
when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realization of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected
future taxable income (in the near-term based on current projections), and tax planning strategies. As of June 30, 2008, deferred income taxes of $1,365,000 are included in other assets. Changes in the estimate about future taxable income could



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significantly affect the determination of the necessity for a valuation allowance for deferred tax assets.

FINANCIAL CONDITION

Total assets increased during the first six
months of 2008 by $14.5 million from $273.0 million to $287.5 million, or 5.34%. The growth was funded by increases in total deposits, which increased by $11.3 million, or 4.59%, and increases in Federal Home Loan Bank advances of $4.5 million. The
increase in total assets for the six months ended June 30, 2008 consisted primarily of a net increase in loans of $22.9 million, offset by decreases of $3.7 million in cash and due froms, $1.9 million in federal funds sold, and $4.4 million in
securities available for sale. The loan to deposit ratio at June 30, 2008 was 86% compared to 81% at December 31, 2007.

Stockholders
equity increased by $325,000 for the six months ended June 30, 2008. This net increase consisted of net income of $196,000 and proceeds from issuance of common stock of $227,000, offset by a net decrease in accumulated other comprehensive
losses of $98,000.

The total amount of nonperforming assets, which includes nonaccruing loans, other real estate owned, repossessed collateral, and loans
for which payments are more than 90 days past due was $8,755,000 at June 30, 2008, representing an increase of $1,848,000 (26.76%) from December 31, 2007. This increase is primarily attributable to an increase of $2,086,000 in other
real estate owned. Total nonperforming assets were 3.93% of total loans at June 30, 2008, compared to 3.46% at December 31, 2007. Nonperforming assets represented 3.05% of total assets at June 30, 2008, compared to 2.53% of total
assets at December 31, 2007. Nonaccrual loans represented 2.74% of total loans outstanding at June 30, 2008, compared to 2.12% of total loans outstanding at December 31, 2007. There were no related party loans which were considered to
be nonperforming at June 30, 2008.

At June 30, 2008, the Company had loan concentrations in real estate totaling $179,219,000, or 80.5% of total
loans. Commercial and industrial loans of $37,440,000 made up 16.8% of total loans. The remaining $5,948,000, or 2.7%, of total loans consisted of consumer and other loans.

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, 2008, the Banks liquidity ratio of 14.65% was considered
satisfactory in relation to regulatory guidelines and internal target ratios. At June 30, 2008, the Company had the ability to borrow an additional $24 million in Federal Home Loan Bank advances. In addition, the Company can borrow overnight
federal funds up to $1,500,000 for seven days and up to $5,000,000 on a thirty day repurchase agreement.



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REGULATORY CAPITAL REQUIREMENTS

Banking regulations require us to maintain minimum capital levels in relation to assets. At June 30, 2008, 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, 2008 are as follows:



|                          |  |         |   |  |      |   |  |                              |  
|------------------------- |  | ------- | - |  | ---- | - |  | ---------------------------- | -
|                          |  | Company |   |  | Bank |   |  | RegulatoryMinimumRequirement |  
|Leverage Capital Ratio    |  | 7.82    | % |  | 7.78 | % |  | 4.00                         | %
|Risk-Based Capital Ratios |  |         |   |  |      |   |  |                              |  
|Core Capital              |  | 8.75    | % |  | 8.70 | % |  | 4.00                         | %
|Total Capital             |  | 9.81    | % |  | 9.77 | % |  | 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, 2008 are as follows:



|                                    |  |               |            
|----------------------------------- |  | ------------- | -----------
|                                    |  | June 30, 2008
|Commitments to extend credit        |  | $             | 10,705,000 
|Financial standby letters of credit |  |               | 2,105,000  
|Other standby letters of credit     |  |               | 864,000    
|                                    |  |               |            
|                                    |  |               | $13,674,000
|                                    |  |               |            



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RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2008 and 2007

Net Interest Income.    Net interest income decreased by
$625,000 and $807,000 for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007. The decrease in net interest income is primarily attributable to the decrease in our net yield on average
interest-earning assets. The net yield on interest-earning assets decreased to 3.34% at June 30, 2008 as compared to 4.39% at June 30, 2007 and 4.18% for the entire year ended December 31, 2007.

The yield on interest-earning assets decreased from 8.62% to 7.48%, or 114 basis points, from June 30, 2007 to June 30, 2008. The rate paid on interest-bearing
liabilities decreased from 4.79% to 4.64%, or 15 basis points, for the same period. The decrease in the rate paid on interest-bearing liabilities is due primarily to the 325 basis point decrease in the prime rate over the last year.

The following table sets forth the amount of our interest income or interest expense for each category of interest-earnings assets or interest-bearing liabilities and
the average rate for total interest-earning assets or total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets.



|                                        |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|--------------------------------------- |  | ------------------------------------- | ------- | -------------- | ------------------------------------- | --------------- |  | ---- | -------------- |  | -------------- | ------- | --------------- | - | ----- |  | ----- | -
|                                        |  | For the Six Months EndedJune 30, 2008 |         |                | For the Six Months EndedJune 30, 2007 |                
|                                        |  | AverageBalance                        |         | Income/Expense |                                       | Yields/Rates(2) |  |      | AverageBalance |  | Income/Expense |         | Yields/Rates(4) |  
|                                        |  | (Dollars in thousands)                |        
|Earning assets:                         |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|Loans, net of unearned income           |  | $                                     | 207,101 |                | $                                     | 8,389           |  | 8.17 | %              |  | $              | 172,459 |                 | $ | 8,593 |  | 10.05 | %
|Taxable securities                      |  |                                       | 41,614  |                |                                       | 1,018           |  | 4.93 |                |  |                | 48,312  |                 |   | 1,128 |  | 4.70  |  
|Nontaxable securities                   |  |                                       | 7,701   |                |                                       | 145             |  | 3.79 |                |  |                | 8,804   |                 |   | 169   |  | 3.87  |  
|Interest-bearing deposits               |  |                                       | 123     |                |                                       | 3               |  | 5.71 |                |  |                | 54      |                 |   | 1     |  | 5.90  |  
|Federal funds sold                      |  |                                       | 1,600   |                |                                       | 23              |  | 2.90 |                |  |                | 3,983   |                 |   | 100   |  | 5.10  |  
|                                        |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|Total interest-earning assets(1)        |  | $                                     | 258,139 |                | $                                     | 9,578           |  | 7.48 |                |  | $              | 233,612 |                 | $ | 9,991 |  | 8.62  |  
|                                        |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|                                        |  |                                       |         |                |                                       |                
|Interest-bearing liabilities:           |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|Demand and savings deposits             |  | $                                     | 22,553  |                | $                                     | 389             |  | 3.48 |                |  | $              | 21,048  |                 | $ | 436   |  | 4.18  |  
|Time deposits                           |  |                                       | 202,128 |                |                                       | 4,754           |  | 4.74 |                |  |                | 179,612 |                 |   | 4,263 |  | 4.79  |  
|                                        |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|Total deposits                          |  |                                       | 224,681 |                |                                       | 5,143           |  | 4.62 |                |  |                | 200,660 |                 |   | 4,699 |  | 4.72  |  
|                                        |  |                                       |         |                |                                       |                
|Other short-term borrowings(3)          |  |                                       | 2,128   |                |                                       | 36              |  | 3.44 |                |  |                | 1,042   |                 |   | 53    |  | 10.25 |  
|Long-term debt                          |  |                                       | 3,403   |                |                                       | 117             |  | 6.92 |                |  |                | 3,403   |                 |   | 150   |  | 8.91  |  
|                                        |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|Total interest-bearing liabilities      |  | $                                     | 230,212 |                |                                       | 5,296           |  | 4.64 |                |  | $              | 205,105 |                 |   | 4,902 |  | 4.79  |  
|                                        |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|                                        |  |                                       |         |                |                                       |                
|Net interest income/net interest spread |  |                                       |         |                | $                                     | 4,282           |  | 2.84 | %              |  |                |         |                 | $ | 5,089 |  | 3.83  | %
|                                        |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  
|                                        |  |                                       |         |                |                                       |                
|Net yield on earning assets             |  |                                       |         |                |                                       |                 |  | 3.34 | %              |  |                |         |                 |   |       |  | 4.39  | %
|                                        |  |                                       |         |                |                                       |                 |  |      |                |  |                |         |                 |   |       |  |       |  



|(1) | Average securities exclude average unrealized gains of $475,000 and unrealized losses of $547,000 for the six months ended June 30, 2008 and 2007, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Annualized.
|--- | -----------

|(3) | The June 30, 2007 yield is skewed due to the fact that the Company was required to pay four quarters of interest due on their Silverton Bank line of credit because of a billing
error by Silverton Bank.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 $710,000 was made during the six month period ending June 30, 2008 as compared to a provision of $25,000 made during the six month period ending June 30, 2007. The
allowance for loan loss as a percentage of total loans was 1.60%, 1.68%, and 1.82% at June 30, 2008, December 31, 2007 and June 30, 2007, respectively. Total nonaccrual loans increased by $944,000, net charge-offs increased by
$427,000, and loans past due ninety days or more and still accruing decreased by $590,000 for the six months ended June 30, 2008 as compared to the same period in 2007. 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, 2008 is adequate to absorb any foreseeable losses in the loan portfolio.

At June 30, 2008 and 2007, nonaccrual, past due and restructured loans were as follows:



|                                                                                                         |  |                        |       |              |   |      
|-------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ------------ | - | -----
|                                                                                                         |  | June 30,2008           |       | June 30,2007
|                                                                                                         |  | (Dollars in thousands)
|Total nonaccruing loans                                                                                  |  | $                      | 6,110 |              | $ | 5,166
|Loans contractually past due ninety days or more as to interest or principal payments and still accruing |  |                        | 9     |              |   | 599  
|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.



17



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##### Table of Contents

Information regarding certain loans and allowance for loan loss data for the six months ended June 30, 2008 and 2007
is as follows:



|                                                                              |  |                          |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                              |  | Six Months EndedJune 30, |        
|                                                                              |  | 2008                     |         |   | 2007 |  
|                                                                              |  | (Dollars in thousands)   |        
|Average amount of loans outstanding                                           |  | $                        | 207,101 |   |      | $ | 172,459 |  
|                                                                              |  |                          |         |   |      |   |         |  
|Balance of allowance for loan losses at beginning of period                   |  | $                        | 3,349   |   |      | $ | 3,317   |  
|                                                                              |  |                          |         |   |      |   |         |  
|Loans charged off                                                             |  |                          |         |   |      |   |         |  
|Commercial                                                                    |  |                          | (780    | ) |      |   | (102    | )
|Real estate                                                                   |  |                          |        |   |      |   |        |  
|Installment                                                                   |  |                          | (152    | ) |      |   | (28     | )
|                                                                              |  |                          |         |   |      |   |         |  
|                                                                              |  |                          | (932    | ) |      |   | (130    | )
|                                                                              |  |                          |         |   |      |   |         |  
|Loans recovered                                                               |  |                          |         |   |      |   |         |  
|Commercial                                                                    |  |                          | 411     |   |      |   | 13      |  
|Real estate                                                                   |  |                          |        |   |      |   |        |  
|Installment                                                                   |  |                          | 20      |   |      |   | 43      |  
|                                                                              |  |                          |         |   |      |   |         |  
|                                                                              |  |                          | 431     |   |      |   | 56      |  
|                                                                              |  |                          |         |   |      |   |         |  
|Net charge-offs                                                               |  |                          | (501    | ) |      |   | (74     | )
|                                                                              |  |                          |         |   |      |   |         |  
|Additions to allowance charged to operating expense during period             |  |                          | 710     |   |      |   | 25      |  
|                                                                              |  |                          |         |   |      |   |         |  
|Balance of allowance for loan losses at end of period                         |  | $                        | 3,558   |   |      | $ | 3,268   |  
|                                                                              |  |                          |         |   |      |   |         |  
|Ratio of net loans charged-off during the period to average loans outstanding |  |                          | .24     | % |      |   | .04     | %
|                                                                              |  |                          |         |   |      |   |         |  

Other Income.    Other income increased by $406,000 and $368,000 for the three and six
months ended June 30, 2008, respectively, compared to the same periods in 2007. The most significant component of other income is service charges on deposit accounts which accounts for 62% and 88% of total other income for June 30, 2008
and 2007, respectively. Service charges on deposit accounts include monthly service charges, non-sufficient funds (NSF) charges, and other miscellaneous maintenance fees. The amount of service charges fluctuates with the volume of
transaction accounts and the volume of NSF activity. The increase in other income for the three and six month periods ended June 30, 2008 is largely due to the recording of gains on sales of other real estate owned of $418,000.

Other Expenses.     Other expenses increased by $227,000 and $423,000 for the three and six months ended June 30, 2008, respectively, as
compared to the same periods in 2007. The increases include increases of $109,000 and $218,000 in salaries and employee benefits, $21,000 and $15,000 in occupancy and equipment expenses, and $99,000 and $192,000 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. At June 30, 2008 and 2007, the number of full-time equivalent employees was 92. The most significant
increase in other operating expenses was legal expenses which increased $78,000



18



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##### Table of Contents

compared to June 30, 2007. Legal expenses at June 30, 2007 were lower due to a refund of fees from an attorney totaling approximately $57,000.

The mortgage company originates loans which are table funded through independent investors. The net loss for the three and six months ended June 30,
2008 was $2,000 and $6,000, respectively, as compared to a loss of $25,000 and $36,000 for the three and six months ended June 30, 2007, respectively.

Income Taxes.     Income tax expense decreased by $328,000 and $559,000 for the three and six months ended June 30, 2008, respectively, as compared to the same periods in 2007. The effective tax rate for the
six month periods in 2008 and 2007 was 15% and 33%, respectively. The decrease from the year ago period is primarily attributable to less income before income tax and a decline in the effective tax rate. The reduction in the effective tax rate
results from a decline in income before tax and increases in nontaxable interest income on securities.

Net Income.    Net
income decreased by $543,000 and $989,000 for the three and six months ended June 30, 2008 as compared to the same periods in 2007. The decrease in net income for the three and six months ended June 30, 2008 compared to the same period in
2007 is mainly due to the decreases in net interest income resulting from a decrease in yields on interest-bearing assets and additional provision for loan losses.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Not
applicable as the registrant is a smaller reporting company.



|ITEM 4. | 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-K (filed with the Commission on March 31, 2008) 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 24, 2008. A total of 1,494,538 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: To elect the twelve nominees to serve as directors for the following year.



|                          |  |           |  |         |  |        
|------------------------- |  | --------- |  | ------- |  | -------
|Directors                 |  | For       |  | Against |  | Abstain
|George D. Andrews         |  | 1,493,774 |  | 0       |  | 764    
|Dr. Gloria Campbell DHue |  | 1,493,774 |  | 0       |  | 764    
|Leon Goodrum              |  | 1,493,774 |  | 0       |  | 764    
|Agnes H. Harper           |  | 1,493,774 |  | 0       |  | 764    
|Charles W. Harrison       |  | 1,493,774 |  | 0       |  | 764    
|Robert A. Holmes          |  | 1,493,774 |  | 0       |  | 764    
|Moses M. Jones            |  | 1,493,774 |  | 0       |  | 764    
|Marian S. Jordan          |  | 1,493,774 |  | 0       |  | 764    
|Elvin Mitchell, Sr.       |  | 1,493,774 |  | 0       |  | 764    
|Roy W. Sweat              |  | 1,493,774 |  | 0       |  | 764    
|William Thomas            |  | 1,493,774 |  | 0       |  | 764    
|Cordy T. Vivian           |  | 1,493,774 |  | 0       |  | 764    



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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).                                                                                                                                                                                                                                                                                          
|       | 
|3.1(B) |  | Articles of Amendment to the Articles of Incorporation of the Registrant filed February 9, 2007 (incorporation by referenced as Exhibit 3.1(B) to the Registrants Current Report on Form 8-K
filed on February 15, 2007).                                                                                                                                                                                                                                                
|       | 
|3.1(C) |  | Articles of Amendment to the Articles of Incorporation of the Registrant filed February 12, 2007 (incorporation by referenced as Exhibit 3.1(C) to the Registrants Current Report on Form
8-K filed on February 15, 2007).                                                                                                                                                                                                                                               
|       | 
|3.1(D) |  | Articles of Amendment to the Articles of Incorporation of the Registrant filed February 15, 2007 (incorporation by referenced as Exhibit 3.1(D) to the Registrants Current Report on Form
8-K filed on February 15, 2007).                                                                                                                                                                                                                                               
|       | 
|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, 2008 |  |  |  | /s/ George G.
Andrews                       
|                      |  |  |  | George G. Andrews                           
|                      |  |  |  | CEO, President and Director                 
|                      |  |  |  |                                             
|                      |  | 
|Date: August 14, 2008 |  |  |  | /s/ Tatina
Brooks                           
|                      |  |  |  | Tatina Brooks                               
|                      |  |  |  | Senior Vice President of Accounting and     
|                      |  |  |  | Financial Reporting (Principal Financial and
|                      |  |  |  | Accounting Officer)                         



22