UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-K




þANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





 ̈    TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT F 1934




Commission
File Number:  333-140806






Capital
City Energy Group, Inc.


(Exact
Name of Registrant as specified in its Charter)






Nevada
                          
                          20-5131044(State
      or other Jurisdiction of
                            Incorporation
      or Organization)
                          
                          (I.R.S.
      Employer Identification Nos.)1611
      North Main Street ▪ Suite A
                            North
      Canton, Ohio 44720
                          
                          43235(Address
      of Principal Executive Offices)
                          
                          (Zip
      code)


Registrants’
telephone number, including area code:614-310-1614




Securities
registered pursuant to Section 12(b) of the Act: None




Securities
registered pursuant to Section 12(g) of the Act:







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    ̈  Yes    þ  No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.    ̈  Yes    þ  No




Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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.    þ  Yes     ̈  No




Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     ̈










Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (Check one):




Large Accelerated Filer
      o
              
              Accelerated Filer  ̈
              
              Non-Accelerated Filer   ̈
              
              Smaller Reporting Company  þ




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




The
aggregate market value of the voting and non-voting common equity of the
Registrant held by non-affiliates as of April 30, 2009 was
$44,811,943.




The
number of shares of outstanding common stock, par $.001, of the Registrant as of
April 30, 2009 was 32,008,531.




The
number of shares of outstanding preferred stock, par $.001, of the Registrant as
of April 30, 2009 was 3,078,842.









DOCUMENTS
INCORPORATED BY REFERENCE




No
portions of the Notice of Annual Meeting and Proxy Statement, to be filed no
later than June 30, 2009, for the Registrant’s 2009 Annual Meeting of
Shareholders, scheduled to be held August 15, 2009, are incorporated by
reference in Part III.












FORM
10-K REPORT INDEX




10-K Part
                                        and Item No.
                                      
                                      
                                      
                                      Page No.PART IItem 1
                                      
                                      Business
                                      
                                      1Item 1A
                                      
                                      Risk
      Factors
                                      
                                      8Item 1B
                                      
                                      Unresolved
      Staff Comments
                                      
                                      8Item
      2
                                      
                                      Properties
                                      
                                      8Item
      3
                                      
                                      Legal
      Proceedings
                                      
                                      9Item
      4
                                      
                                      Submission
      of Matters to a Vote of Security Holders
                                      
                                      9PART IIItem
      5
                                      
                                      Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                      
                                      9Item
      6
                                      
                                      Selected
      Financial Data
                                      
                                      10Item
      7
                                      
                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                      
                                      10Item 7A
                                      
                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                      
                                      21Item
      8
                                      
                                      Financial
      Statements and Supplementary Data
                                      
                                      21Item
      9
                                      
                                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                      
                                      21Item 9A
                                      
                                      Controls
      and Procedures
                                      
                                      21Item 9B
                                      
                                      Other
      Information
                                      
                                      22PART IIIItem 10
                                      
                                      Directors,
      Executive Officers and Corporate Governance of the
    Registrant
                                      
                                      22Item 11
                                      
                                      Executive
      Compensation
                                      
                                      25Item 12
                                      
                                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                      
                                      26Item 13
                                      
                                      Certain
      Relationships and Related Transactions
                                      
                                      29Item 14
                                      
                                      Principal
      Accountant Fees and Services
                                      
                                      30PART IVItem 15
                                      
                                      Exhibits
      and Financial Statement Schedules
                                      
                                      31












CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS




This 2008
Annual Report on Form 10-K contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended.  Such statements can often be identified by the use words
such as “believe,” “expect,” “may,” “might,” “will,” “should,” “seek,”
“on-track,” “plan,” “intend” or “anticipate,” or the negative thereof or
comparable terminology.  In addition, expressions or discussions of
our strategy, plans, prospects or future results are forward-looking statements.
These statements reflect management’s current views with respect to future
events and are subject to risks and uncertainties, both known and
unknown.  You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their date, and that any such
forward-looking statements are not guarantees of future
performance.  Our business and operations are subject to a variety of
risks and uncertainties and, consequently, our actual results may materially
differ from those projected or implied by any forward-looking statements.
Certain of such risks and uncertainties are discussed below under
Item 1A–Risk Factors. We make no commitment to revise or update any
forward-looking statements in order to reflect events or circumstances after the
date any such statement is made.




PART
I





Item
1.    Business





Background





The
Company was originally formed on June 27, 2006 as The Baby Dot Company to engage
in the business of designing, marketing and distributing handcrafted baby
blankets and other accessories made from quality fabrics. Our business
operations had been conducted through a wholly owned subsidiary, Baby Dot LLC, a
limited liability company formed under the laws of the State of
Nevada.





On March
11, 2008, the Company merged with Capital City Energy Group,
Inc.  Capital City Energy Group, Inc., founded in 2003 in Columbus,
Ohio and now headquartered in North Canton, Ohio and Delmont, Pennsylvania, is a
growing energy company.  Its business is evolving from being an
innovative leader in the design, management and sponsorship of retail and
institutional direct participation energy programs to become one of the few
vertically integrated independent oil & natural gas companies, with a
particular focus on oilfield services.  While the Company has not
abandoned its “Triad” business model, consisting of Fund Management, Principal
Investments and Strategic Acquisitions of energy related companies, it has
retrenched its efforts in the past few months through the strategic acquisition
of Hotwell Services, Inc. to delivering wireline services in the Northeastern
region of the United States, as described more fully in the “Subsequent
Events.”





As used
in this Annual Report, references to “the Company” or to “we,” “us” or “our”
refer to Capital City Energy Group, Inc., together with its consolidated
subsidiaries, Capital City Petroleum, Inc., Avanti Energy Partners, LLC, Eastern
Well Services, LLC and Hotwell Services, Inc., unless the context otherwise
requires.





Throughout
2008, the Company was in transition as it moved from receiving the majority of
revenue from the Fund Management Division (Avanti Energy Partners, LLC) of the
Company in 2007 and previous years to receiving the majority of revenue from the
direct ownership of interests in energy properties.  The Company
operates its Principal Investment Division though Capital City Petroleum, Inc.,
which accounts for 70% of revenue earned in 2008 which is the oil and natural
gas revenue received from the ownership interests in more than 60 energy
properties located in 12 different states.





During
2008, the Strategic Acquisition Division, operated through Eastern Well
Services, LLC, earned consulting fees from oil & gas operating companies,
operating internationally.  However, beginning on December 31, 2008
with the Company’s acquisition of Hotwell, the Company is moving towards
becoming a full service oilfield service company, with an emphasis on charging
for services such as wireline, logging, testing and other well completion
services.





Overview
of Hotwell Services, Inc.





Acquired
on December 31, 2008 and based in Delmont, Pa. and Clarksburg, W.Va., Hotwell
Services Inc. (“Hotwell”) is a full service wireline company servicing the
northeast region of the U.S.  Hotwell provides industry-leading
technology and provides high tiered cased-hole mechanical services (horizontal
perforation, high pressure wireline operations, tubing conveyed perforation) and
evaluation services (pulsed neutron, compensated neutron, density, and
production logging). Hotwell’s strategy is to build the newest, state-of-the-art
fleet of cranes, pressure equipment and wireline trucks and furnish the
operating companies with the most experienced and trained engineers with an
average of 20 years local experience with independent and major
engineers.








Hotwell
is a preferred provider of horizontal logging and well completion services, the
optimal method of hydrocarbon extraction for the much publicized, domestic
natural gas play, the Marcellus Shale. Most importantly, Hotwell’s management
are some of the Appalachian Basin’s most talented and respected field services
professionals. The Company has determined to focus its efforts to aggressively
support Hotwell’s growth plan in the Appalachian Basin, and specifically in the
prolific Marcellus Shale formation.  The Company anticipates launching
additional bases of field services operations in the Basin during fiscal year
2009 to further service the existing clients.





Hotwell
delivers wireline services focused on vertical logging and well completions in
Ohio, Western Pennsylvania and New York.





All
Other Operations





The
Company presently has two other lines of business besides
Hotwell.  During 2008, Eastern Well Services, LLC, an Ohio limited
liability company (“Eastern”), provided consulting services to oil and gas
companies internationally, however, it is no longer operating:  The
Principal Investment Division operated through Capital City Petroleum, Inc.
(“Petroleum”) which holds various oil and gas properties and Fund
Management/Drilling Programs, Avanti Energy Partners, LLC, an Ohio limited
liability company (“Avanti”), which manages Fund XVII, LP and the new
Homer/Woody Joint Venture.





Capital
City Petroleum, Inc.





Prior to
the extended bull market in energy prices, the Company, through Petroleum,
recognized the need to provide investors with some exposure to alternative asset
classes such as commodities including oil and natural gas
resources.  This intention led to the formation of several oil and gas
funds over a four year period from 2003 – 2007.  These funds were
direct participation blind pools investing in oil, natural gas and lease acreage
opportunities across the country.  The funds were structured as
diverse and balanced collections of small working interest investments in a
variety of energy properties including existing production, developmental
drilling, lease acreage, and exploration opportunities with established and
successful oil & natural gas operating companies.  Distributions
were paid to investors from the production revenue generated by the wells, who
also received substantial tax attributes allocated to them.  Since
inception, Petroleum formed a total of ten (10) funds with total investment
capital of approximately $17,000,000 subscribed.





In 2007,
the first seven funds contributed their assets to Petroleum.  The fund
investors received preferred and common stock in Petroleum in exchange for their
interest in the funds.  On December 11, 2008, CCEF XIV, LLC and CCEF
XVI, LP merged with Petroleum with the fund investors receiving 733,491 and
860,221 shares of Company common stock, respectively, valued at $1,466,982 and
$1,720,442, respectively, based on  the closing stock price of CETG
immediately prior to the acquisition date.





Oil
and Gas Disclosures





General.  Through
Petroleum and Avanti, the Company engages in oil and gas operations which
require certain detailed disclosures.  Unless indicated, the
information presented herein is for properties and activities under
Petroleum.





Producing
Activities





Production
Profile. As of December 31, 2008, the reserve life index of our
estimated proved reserves, representing the ratio of reserves to annual
production, was 20.2 years overall and approximately 13.8 years for
our proved developed producing reserves, based on annualized fourth quarter
production.





Production
Volumes. Our production volumes for 2008 totaled 3.7 Bcfe, an increase of
13% over 2007 levels. Production in the fourth quarter of 2008 was 1.0 Bcfe,
reflecting volumetric growth of 4.6% on a period-over-period basis. The
following table shows our total net oil and gas production volumes during the
last three years.





2


Year
      Ended December 31,Production:
                      
                      2008
                      
                      
                      2007Natural
      Gas (MCF)
                      
                      
                      131,088
                      
                      
                      
                      39,981Oil
      (Bbl)
                      
                      
                      23,341
                      
                      
                      
                      6,986Total
      natural gas equivalents (Mcfe)
                      
                      
                      271,134
                      
                      
                      
                      81,897





Production
Prices and Costs. Our production revenues and estimated oil and gas
reserves are substantially dependent on prevailing market prices for natural
gas, which comprised 78% of our proved reserves on an energy equivalent basis at
the end of 2008. The following table shows the average sales prices for our oil
and gas production during the last three years, along with our average lifting
costs and transmission, compression and processing costs in each of the reported
periods.





Year
      Ended December 31,Sales
      Prices and Production Costs:
                  
                  2008
                  
                  
                  2007Average
      sales prices:Natural
      Gas (MCF)
                  
                  
                  8.33
                  
                  
                  
                  5.76Oil
      (Bbl)
                  
                  
                  98.70
                  
                  
                  
                  57.97Total
      natural gas equivalents (Mcfe)
                  
                  
                  600.54
                  
                  
                  
                  353.58





Proved Oil and
Gas Reserves





General.
The estimates of our proved oil and gas reserves as of December 31, 2008
were prepared by James Engineering, independent petroleum engineers, in
accordance with regulations of the Securities and Exchange Commission (“SEC”). Under those
regulations, proved reserves are limited to estimated quantities of crude oil,
natural gas and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions, using prices
and costs as of the date the estimate is made. These prices and costs are held
constant over the estimated life of the reserves. Our reserve estimates should
be read in conjunction with the supplementary disclosure on our oil and gas
development and producing activities and oil and gas reserve data included in
the footnotes to our consolidated financial statements at the end of this
report.





There are
many uncertainties inherent in estimating quantities of proved reserves and in
projecting future rates of production and timing of development expenditures,
including many factors beyond the control of the producer. Reservoir engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact way. The accuracy of any reserve estimate is
dependent on the quality of available data and is subject to engineering and
geological interpretation and judgment. Results of drilling, testing and
production after the date of an estimate may justify revision of the estimate.
As a result, reserve estimates are often materially different from the
quantities of oil and gas that are ultimately recovered.





Reserve
Quantities.The
following table summarizes the estimates by James Engineering of our proved
developed producing reserve volumes as of December 31, 2008. Proved
developed producing reserves are the estimated amounts of oil and gas that can
be expected to be recovered from existing wells with existing equipment and
operating methods.







3


Estimated
      Proved Developed Reserves:
                    
                    As
      of December 31,2008
                    
                    
                    2007Natural
      gas (Mcf)Proved
      properties
                    
                    
                    5,828,935
                    
                    
                    
                    5,240,952Unproved
      properties
                    
                    
                    19,338
                    A
                    
                    
                    —Total
      natural gas (Mcf)
                    
                    
                    5,848,273
                    
                    
                    
                    5,240,952Crude
      oilProved
      properties
                    
                    
                    6,998,057
                    
                    
                    
                    4,288,052Unproved
      properties
                    
                    
                    —
                    
                    
                    
                    —Total
      crude oil (Bbl)
                    
                    
                    6,998,057
                    
                    
                    
                    4,288,052Total
      gas equivalents (Mcfe)
                    
                    
                    47,836,615
                    
                    
                    
                    30,969,263




A -
Leases from Avanti





Reserve
Values.The
following table summarizes the estimates by James Engineering of future net cash
flows from the production and sale of our proved developed producing reserves as
of December 31, 2008 and the present value of those cash flows, discounted
at 10% per year in accordance with SEC regulations to reflect the timing of net
cash flows. The future net cash flows were computed after giving effect to
estimated future development and production costs, based on year-end costs and
assuming the continuation of economic conditions at the time of the estimates.
The standardized measure of future net cash flows gives effect to future income
taxes on discounted future cash flows based on year-end statutory rates,
adjusted for any operating loss carryforwards and tax credits.





The
prices used in the following estimates were based on prices we received for our
oil and gas production at the end of each reported period, without escalation.
The prices as of December 31, 2008 had a weighted average of $8.42 per Mcf of
natural gas and $98.27 per barrel of crude oil.  The estimates are
highly dependent on the year-end prices used in the computation and are subject
to considerable uncertainty.





December
      31,From
      Proved Reserves:
              
              2008Undiscounted
      future net cash flows
              
              
              2,221,63010%
      annual discount for estimated timing of cash flows
              
              
              (945,869
              )Standardized
      measure of discounted future net cash flows
              
              
              1,275,761
  We
      have not filed any estimates of our proved reserves with an federalauthority
      or agency during the past year other than estimates filed
      with the SEC under the Exchange
Act.








4


Oil
and Gas Properties





Oil and
Gas Interests.The following table shows our ownership interests under oil and gas
leases as of December 31, 2008. Our leases are for varying primary terms
and are generally subject to specified royalty or overriding royalty interests,
development obligations and other commitments and restrictions.  Our
ownership interests as of December 31, 2008 are 1315 of gross acres and 263 net
acres.





Productive
Wells.The
following table shows, by state, our gross and net productive oil and gas wells
as of December 31, 2008. The table does not include wells that were in
progress or were drilled by year end but were awaiting installation of gathering
lines prior to completion.








Gas
      Wells
                                  
                                  Oil
      Wells
                                  
                                  TotalGross
                                  
                                  Net
                                  
                                  Gross
                                  
                                  Net
                                  
                                  Gross
                                  
                                  NetAlabama
                                  1
                                  
                                  0.0100
                                  
                                  
                                  
                                  
                                  
                                  1
                                  
                                  0.0100California
                                  1
                                  
                                  0.1750
                                  
                                  
                                  
                                  
                                  
                                  1
                                  
                                  0.1750Kansas
                                  7
                                  
                                  1.1634
                                  
                                  2
                                  
                                  0.6125
                                  
                                  9
                                  
                                  1.7759Louisiana
                                  3
                                  
                                  1.2342
                                  
                                  7
                                  
                                  1.1300
                                  
                                  10
                                  
                                  2.3642Nebraska
                                  2
                                  
                                  0.3173
                                  
                                  3
                                  
                                  0.3500
                                  
                                  5
                                  
                                  0.6673Ohio
                                  42
                                  
                                  5.1852
                                  
                                  9
                                  
                                  0.2742
                                  
                                  51
                                  
                                  5.4594Oklahoma
                                  2
                                  
                                  0.0200
                                  
                                  1
                                  
                                  0.3406
                                  
                                  3
                                  
                                  0.3606Pennsylvania
                                  0
                                  
                                  
                                  
                                  2
                                  
                                  0.1003
                                  
                                  2
                                  
                                  0.1003Texas
                                  16
                                  
                                  1.6778
                                  
                                  18
                                  
                                  2.3154
                                  
                                  34
                                  
                                  3.9931Wyoming
                                  3
                                  
                                  0.1223
                                  
                                  5
                                  
                                  2.1186
                                  
                                  8
                                  
                                  2.2409Total
                                  77
                                  
                                  9.9052
                                  
                                  47
                                  
                                  7.2415
                                  
                                  124
                                  
                                  17.1467





Drilling
Partnerships





Investment
Capital.  During the last two years, we raised over $3,678,810
from outside investors for participation in many of our drilling initiatives
through private placements of interests in sponsored drilling partnerships. Net
proceeds from these private placements are used to fund the investors’ share of
drilling and completion costs under our drilling contracts with the programs.
These payments are recorded as customer drilling deposits at the time of
receipt. We recognize revenues from drilling operations on the completed
contract method as the wells are drilled, rather than when funds are received.
Our financing activities through private placements of interests in sponsored
drilling partnerships during the last three years are summarized in the
following table.





Total
      Wells
              PartnershipDrilling
      Partnerships:
              
              
              Contracted
              
              ContributionsCapital
      City Energy Fund XIV
              
              35
              
              $1,830,000Capital
      City Energy Fund XVI
              
              30
              
              $1,211,310Capital
      City Energy Fund XVII
              
              10
              
              $637,500Total
              
              
              
              75
              
              3,678,810





5


Structure.
Our drilling partnerships are structured to optimize tax advantages for private
investors and share development costs, risks and returns
proportionately.  Under our drilling program structure, proceeds from
the private placement of interests in each investment partnership, are
contributed to a separate joint venture or “program” that we form with that
partnership to conduct operations.





Customers





We do not
sell oil and gas production directly to any gas marketer but rather own
fractional percentage of interest in a number of non-operated
wells.





Competition





We are in
direct competition with numerous oil and natural gas companies, drilling and
income programs and partnerships exploring various areas of the United States
and elsewhere competing for properties.  However, given our recent focus on
wireline services, our main competitors are Schlumberger, Baker-Atlas,
Weatherford, Halliburton, Superior Well Services, Inc., J-W Wireline, Inc. and
Gray Wireline, Inc.  Many of our operating competitors possess greater
financial and personnel resources enabling them to identify and acquire more
economically desirable energy producing properties and drilling prospects than
us. Additionally, there is competition from other fuel choices to supply the
energy needs of consumers and industry.





Regulation





General.The oil and gas business is
subject to broad federal and state laws that are routinely under review for
amendment or expansion. Various federal, state and local departments and
agencies that administer these laws have issued extensive regulations that are
binding on industry participants. Many of these laws and regulations,
particularly those affecting the environment, have become more stringent in
recent years, and some impose penalties for noncompliance, creating the risk of
greater liability on a larger number of potentially responsible parties. The
following overview of oil and gas industry regulation is summary in nature and
is not intended to cover all regulatory matters that could affect our
operations.





State
Regulation.State statutes and regulations require permits for drilling operations
and construction of gathering lines, as well as drilling bonds and reports on
operations. These requirements often create delays in drilling and completing
new wells and connecting completed wells. Ohio and other states in which we
conduct operations also have statutes and regulations governing conservation
matters. These include regulations affecting the size of drilling and spacing or
proration units, the density of wells that may be drilled and the unitization or
pooling of oil and gas properties. State conservation laws generally prohibit
the venting or flaring of gas and impose requirements on the ratability of
production. None of the existing statutes or regulations in states where we
operate currently imposes restrictions on the production rates of our wells or
the prices received for our production.





Federal
Regulation. In the United States, legislation affecting the oil and gas
industry has been pervasive and is under constant review for amendment or
expansion. Pursuant to such legislation, numerous federal, state and local
departments and agencies have issued extensive rules and regulations binding on
the oil and gas industry and its individual members, some of which carry
substantial penalties for failure to comply. These laws and regulations have a
significant impact on oil and gas drilling, gas processing plants and production
activities, increasing the cost of doing business and, consequently, affect
profitability. Inasmuch as new legislation affecting the oil and gas industry is
commonplace and existing laws and regulations are frequently amended or
reinterpreted, the Company may be unable to predict the future cost or impact of
complying with these laws and regulations. The Company considers the cost of
environmental protection a necessary and manageable part of its business. The
Company should be able to plan for and comply with new environmental initiatives
without materially altering its operating strategies.





The sale
and transportation of natural gas in interstate commerce is subject to
regulation under various federal laws administered by the FERC Historically,
these laws included restrictions on the selling prices for specified categories
of natural gas sold in first sales, both in interstate and intrastate commerce.
While these restrictions were removed in 1993, enabling sales by producers of
natural gas and crude oil to be made at market prices, federal legislation
reinstituting price controls could be adopted in the future.





6


During
the last decade, a series of initiatives were undertaken by FERC to remove
various barriers and practices that historically limited producers from
effectively competing with interstate pipelines for sales to local distribution
companies and large industrial and commercial customers. These regulations have
had a profound influence on domestic natural gas markets, primarily by
increasing access to pipelines, fostering the development of a large short term
or spot market for gas and creating a regulatory framework designed to put gas
sellers into more direct contractual relations with gas buyers. These changes in
the federal regulatory environment have greatly increased the level of
competition among suppliers. They have also added substantially to the
complexity of marketing natural gas, prompting many producers to rely on highly
specialized experts for the conduct of gas marketing operations.





Environmental
Regulation.Participants in the oil and gas industry are subject to numerous federal,
state and local laws and regulations designed to protect the environment,
including comprehensive regulations governing the treatment, storage and
disposal of hazardous wastes. Liability for some violations of these laws and
regulations may be unlimited in cases of willful negligence or misconduct, and
there is no limit on liability for environmental clean-up costs or damages on
claims by the state or private parties. Under regulations adopted by the
Environmental Protection Agency and similar state agencies, producers must
prepare and implement spill prevention control and countermeasure plans to deal
with the possible discharge of oil into navigable waters. State and local
permits or approvals may also be needed for waste-water discharges and air
pollutant emissions. Violations of environment regulations or permits can result
in substantial liabilities, penalties and injunctive restraints.





We invest
in non-operated wells with drilling and production activities which comply with
all applicable environmental regulations, permits and lease
conditions.  While we believe their operations conform to those
conditions, we remain at risk for inadvertent noncompliance, conditions beyond
our control and undetected conditions resulting from activities by prior owners
or operators of properties in which we own interests. In any of those events, we
could be exposed to liability for clean-up costs or damages in excess of
insurance coverage, and we could be required to remove improperly disposed
waste, remediate property contamination or undertake plugging operations to
prevent future contamination.





Oilfield
Services and Well Services require licensing and compliance with various
regulating bodies including the Bureau of Alcohol Tobacco Firearms and
Explosives (“BATFE”), the Nuclear Regulatory Commission (“NRC”),Department of
Environmental Protection (“DEP”), Department of Transportation (“DOT”), and
various other state requirements.





Occupational
Safety Regulations. We are subject to various federal and state laws and
regulations intended to promote occupational health and safety. Although all of
our wells are drilled by independent subcontractors under our drilling
contracts, we have adopted environmental and safety policies and procedures
designed to protect the safety of our own supervisory staff and to monitor all
subcontracted operations for compliance with applicable regulatory requirements
and lease conditions, including environmental and safety compliance. This
program includes regular field inspections of our drill sites and producing
wells by members of our operations staff and internal assessments of our
compliance procedures. We consider the cost of compliance a manageable and
necessary part of our business.





Avanti
Energy Partners, LLC





The
primary responsibility of Avanti is to be the Manager of Fund XVII, to locate,
screen, evaluate and select the energy properties for this Fund and for
strategic opportunities for the Company.  Avanti as an operator also
acts in a principal capacity and utilizes strategic business relationships with
oil and gas operators across the United States to generate investment
opportunities. These relationships have strengthened over time due to synergies
in the business goals of the Company.





In the
third and fourth quarter of 2008, the Company, through Avanti, identified
certain lands located in Medina, Ashland and Wayne Counties, Ohio which Avanti
believed to have oil and gas production potential.  Avanti acquired
certain oil and gas leases for the drilling and completion of oil and gas wells
(known as “Homer Prospect I – Woody Prospect I” ) hereinafter, referred to as
the “Project”).  The Homer Prospect I will consist of up to six (6)
wells in Medina and Ashland Counties, Ohio drilled to the Clinton sandstone
formation and Woody Prospect I will consist of up to three (3) wells in Wayne or
Ashland County, Ohio drilled to the Berea sandstone formation for a total
potential of nine (9) wells.





7


Through
December 31, 2008, the Company, through Avanti, has raised $563,121 and another
$150,000 in the First Quarter, 2009 from outside investors for participation in
one of our drilling initiatives through private placements of interests in
sponsored drilling partnerships. Net proceeds from these private placements have
been and will be used to fund the investors’ share of drilling and completion
costs under our joint venture drilling contracts.  This program offers
investors a direct interest in the wells drilled in Homer Prospect I – Woody
Prospect I.  Initially, Avanti agrees to sell and Participant hereby
agrees to purchase a participation interest in an undivided working interest in
the Project.  Avanti assumes all responsibility for and shall
supervise all aspects of the drilling, operating and development of the wells
and offers this service on a turn-key basis.  Then, upon successful
completion, Avanti is the operator for all wells.  If the well does
not produce, Avanti receives a fee of 10% of the costs to drill, complete and
cap the unproductive well.  Thereafter, after reimbursing Avanti for
the lease operating expenses, the production revenue is shared by Avanti and the
investors.  Our drilling joint venture are structured to optimize tax
advantages for private investors and share development costs, risks and returns
proportionately, except for functional allocations of intangible drilling costs
(IDC) to
investors.





Eastern
Well Services, LLC





Beginning
in April, 2008, Eastern executed a consulting agreement to provide training
services to Exploration Geophysics Proprietary Limited (“EGPL”) to assist EGPL
to complete its exploration and development prospects in
Botswana.  Eastern terminated this agreement with EGPL in October,
2008.





Employees





As of
December 31, 2008, we had 42 full-time employees. Our staff includes
professionals experienced in geology, petroleum engineering, land acquisition,
finance, accounting and law.





Research
and Development Activities





During
each of the last two fiscal years, we have not spent any funds on research and
development activities.





Taxation





Our
operations, as is the case in the petroleum industry generally, are
significantly affected by federal tax laws. Federal, as well as state, tax laws
have many provisions applicable to corporations which could affect the future
tax liability of the Company.





Availability
of Information





We file
annual, quarterly and current reports and other information with the SEC. The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.





Item
1A.           
  RISK FACTORS





Not
applicable to smaller reporting company.





Item 1B.              Unresolved
Staff Comments




None.





Item
2.                 Properties





On May
14, 2008, we entered into a transaction to acquire a 35 acre parcel of
unimproved land and 4,000 square foot garage.  Initially, structured
as a lease from Daniel and Barb Coffee, the transaction was always intended to
be a joint purchase of this parcel.  Presently, the Company is
negotiating a subdivision of this parcel with the Coffees.





8


We
currently lease 3,508 square feet of office space for our former corporate
headquarters in Columbus, Ohio.  Our lease is for a period of 5 years
at rates comparable to commercial rates in the area.  The Company has
been exploring reducing its general overhead by consolidating operations and no
longer requires the offices in Columbus, Ohio. All of the operations were
shifted to the Company’s offices in North Canton, Ohio.





We lease
an office of approximately 1,500 square feet in North Canton, Ohio, which is
used for the Company’s headquarters and accounting office.  Hotwell
has two leases, one from Sitesco, LLC, an entity owned by Joseph Sites,
President of Hotwell and a director, for 12,000 square feet in Delmont, PA and
one for 22,000 square feet in Clarksburg, West Virginia.





Item
3.                  Legal
Proceedings





From time
to time, the Company is party to various legal actions in the normal course of
our business.  Management believes that the Company is not party to
any litigation that, if adversely determined, would have a material adverse
effect on our business, financial condition, result of operations or cash
flows.





Item 4.                 Submission
of Matters to a Vote of Security Holders





On
October 23, 2008, we held our annual meeting of stockholders at 10:00 a.m. at
8405 Pulsar Place, Columbus, Ohio 43240 for the purpose of electing directors
and changing our audit firm.  As of our declared record date of
September 19, 2008, there were 27,347,283 stockholders eligible to vote in these
elections.





For
Proposal No. 1, the re-election of the following directors, Timothy Crawford,
James Bishop, Joseph Smith, Lee Robinson, David Tenwick and Daniel Coffee, was
carried by all shareholders present, either in person or by
proxy.  There were no dissenting votes and the directors were
re-elected to serve until the next annual meeting of the
stockholders.





For
Proposal No. 2 – the ratification of the change of our auditing firm from Moore
& Associates to GBH CPAs, PC, was carried by all shareholders present,
either in person or by proxy.  There were no dissenting votes and the
ratification was carried.





There was
no other matter brought before the shareholders.





No
further matters were submitted during the fourth quarter of the fiscal year
ended December 31, 2008, to a vote of security holders through the solicitation
of proxies or otherwise.







PART
II




Item 5.
            Market
      For Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities





Company
Capital Structure





Our
authorized capital stock consists of 90,000,000 shares of Common Stock, $0.001
par value per share, and 10,000,000 shares of preferred stock, par value $0.001
par value per share (of which 3,250,000 have been designated as Series A
Preferred Stock). At December 31, 2008, there were 32,008,531740 shares of
Common Stock issued and outstanding and 3,078,842 shares of Series A Preferred
Stock issued and outstanding.  As of April 30, 2009, there were
approximately 436 holders of shares of Common Stock and 269 holders of shares of
Preferred Stock.





Market
Information





Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol,
CETG.  The following table sets forth the range of high and low
closing bid prices for the common stock for the periods indicated since it
commenced public trading on March 13, 2007.  The over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions.





9


2008Quarter
      Ended
                                              
                                              High
      $
                                              
                                              Low
      $December
      31, 2008
                                              
                                              $2.75
                                              
                                              $.85September
      30, 2008
                                              
                                              $2.99
                                              
                                              $1.85June
      30, 2008
                                              
                                              $3.65
                                              
                                              $2.10March
      31, 2008
                                              
                                              $3.50
                                              
                                              $.2020071Quarter
      Ended
                                              
                                              High
      $
                                              
                                              Low
      $December
      31, 2007
                                              
                                              $.20
                                              
                                              $.20September
      30, 2007
                                              
                                              $.20
                                              
                                              $.20June
      31, 2007
                                              
                                              $.20
                                              
                                              $.20March
      31, 2007
                                              
                                              $.50
                                              
                                              $.50





Dividend
Policy





We have
not paid any cash dividends on our common stock to date and do not intend to pay
cash dividends in the near future. The payment of cash dividends in the future
will be contingent upon our revenues, earnings, if any, capital requirements and
general financial condition.  The Company issued shares of preferred
stock to various individuals in 2007 when it acquired the assets of the seven
(7) investment funds.  The Company’s Certificate of Incorporation
establishes designations, rights and preferences for the Series A Preferred
Stock, including a cumulative dividend of 10%.  The Company paid the
dividend to the holders of the preferred stock for each quarter ended on June
30, 2008 and September 30, 2008. The Company suspended payments of preferred
stock dividends for the fourth quarter, 2008 and does not anticipate declaring
and paying a dividend in the near future.  In addition, we are a
holding company and conduct all of our operations through our
subsidiaries.  As a result, we rely on dividends and distributions to
us from our subsidiaries.





Incentive
Plan





The
Company has adopted the Plan to attract, retain and motivate officers,
directors, employees and independent contractors, and to further align their
interests with those of the Company's shareholders, by providing for performance
based benefits.  The Plan provides for the grant of stock options,
restricted stock and other equity-based awards.  The Board has
reserved 2,500,000 shares of Common Stock for issuance under the
Plan.  To date, seven (7) directors were granted 125,000 options at
$3.29 per share.  The granted options were subject to a one year cliff
vesting period.  Only Messrs, Timothy W. Crawford, Coffee,
Robinson and Smith continue to hold these options to date. All others were
cancelled when the directors resigned.





Item 6.                  Selected Financial
Data




This
information is not required for a smaller reporting company.





Item
7.                  Management’s
Discussion And Analysis and Plan Of Operation





The
following discussion should be read in conjunction with our consolidated
financial statements and the accompanying notes thereto included elsewhere in
this Annual Report on Form 10-K. The following discussion contains, in addition
to historical information, forward-looking statements that include risks and
uncertainties (see discussion of “Forward-Looking Statements” included elsewhere
in this Annual Report on Form 10-K). Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those factors set forth under Item 1A—Risk
Factors of this Annual Report on Form 10-K.


1 Please
note the predecessor of Capital City Energy Group, Inc., BabyDot, Inc., operated
with a fiscal year ended October 31st.  Shortly,
before merging with Capital City Energy Group, Inc., BabyDot, Inc. changed its
fiscal year to a year ended on December 31st.
 10


Overview





Our
Company, through our subsidiaries, is an expanding energy company that has
evolved from the design, management and sponsorship of the Funds to become a
vertically integrated independent energy company building a portfolio of core
areas which provide growth opportunities through grass-roots drilling,
operating, service companies, acquisitions and fund management.  This
business plan, the Triad, consists of the following three core divisions: Fund
Management, Principal Investments and Strategic Acquisitions.  As
discussed, this business plan is being streamlined to focus for the near future,
on wireline and well completion services.





The
Company restated its balance sheet as of December 31, 2007 to reflect the
deferred income tax liability associated with the acquisition of certain
Funds.  The restatement resulted in the increase of deferred tax
liability by $1,934,923 and the decrease of retained earnings by
$1,934,923.  Therefore, please refer to the 2007 financial statements
included in this report for a full description of the effect of this
change.





Summary
of Our Plan





While we
will continue to be opportunistic, the Company will focus all of its attention
to executing on Hotwell’s business plan. This plan is to be the preferred
provider of high end horizontal - well completion and wireline
services.  While we have not abandoned our “Triad” business model,
which consists of: Fund Management, Principal Investments and Strategic
Acquisitions of energy related companies, we do not anticipate making any
significant investment in any other area than the provision of wireline and well
completion services.  More details of our business plan are found in
the “Description of Our Company” portion of this Annual Report.





It is
also our plan to abandon the operations for Eastern and significantly restrict
Avanti’s activities to existing projects, managing Fund XVII and operating the
wells in the Homer/Woody Project.





We do not
currently have sufficient funding to implement all phases of our business plan
for the next 12 months and do need to raise additional funding for this
purpose.





Results
Of Operations For The Three Months Ended December 31, 2008:





Revenues





On a
consolidated basis oil and gas revenues increased to $2,350,387 and our net loss
was $7,662,048 during the three month ended December 31, 2008, compared to oil
and gas revenue of $842,377 and a net loss of $256,451 recorded during the same
period for 2007.





Management
revenues increase to $435,829 over the three months ended December 31, 2008,
compared to $61,423 for same period in 2007.





Total net
oil and gas production realized from principal investments was 4,198 barrels of
oil and 27,340 thousand cubic feet (MCF) of natural gas for this quarter ended
December 31, 2008.  The comparative data for the same period of 2007
was 6,986 barrels of oil and 39,981 thousand cubic feet (MCF) of natural
gas.





Average
commodity price realized on the principal investment portfolio production for
the quarter ended December 31, 2008 was $87.13 per barrel of oil and $8.23 per
thousand cubic feet (MCF) of natural gas. The comparative data for the same
period of 2007 was $57.97 per barrel of oil and $5.76 per thousand cubic feet
(MCF) of natural gas.





Lease
Operating Expenses And Dry Hole Expense





For the
quarter ended December 31, 2008, lease operating expenses (LOE) increased to
$176,158 compared to $140,515 during the same quarter ended December 31, 2007
due to our direct ownership of the energy properties acquired in fourth quarter
of 2007 from the Capital City Energy Funds, instead of just managing the
Funds.





Typical
LOE expenses include operating labor, field supervision, water hauling and
disposal fees, communications, fuel, leased vehicles, environmental and safety
compliance.





11


Depreciation
And Depletion





Depreciation
and depletion expenses totaled $1,506,722 for the quarter ended December 31,
2008, compared to $776,031 for the quarter ended December 31, 2007. This
increase was expected due to the $11,700,000 acquisition of the oil and gas
properties owned by Capital City Energy Funds V through XII completed in the
fourth quarter of 2007.





Selling,
General And Administrative Expenses





For the
three month period ending December 31, 2008, the general and administrative
expenses totaled $1,666,049 which was an increase over expenses of $3,036 posted
during the same time period in 2007.  The increase in operating
expenses was driven by significant one-time costs as we continued to accelerate
the execution of our Triad model business plan, the costs associated with the
$11,700,000 acquisition of the oil and gas properties owned by Capital City
Energy Funds V through XII, the cost associated with the reverse merger in the
first quarter of 2008, the one-time start-up expenses associated with the
establishment of our North Canton accounting office and headquarters of Eastern
Well Services in Burbank, Ohio, stock options granted to Directors and various
stock incentive bonuses given to key employees.





Interest
Expense





For this
quarter ended December 31, 2008, interest expense of $80,012, up substantially
from its level of $__________ recorded for the same quarter,
2007.  Interest in 2008 is attributed to the $1,500,000 participation
financing arrangement being added in early 2008.





Income
Tax Expense/Benefit





We had no
income tax benefit for the three months ended December 31, 2008 as compared
to an income tax expense of $163,960 for the same period in 2007.





Net
Loss





Net loss
for the three months ended December 31, 2008 was $7,662,048 compared to a net
loss of $256,451 for the same period in 2007.





Liquidity
And Capital Resources





As of
December 31, 2008, we had total current assets of $1,387,659.  The
current assets consisted mainly of cash in the amount of $438,766, prepaid
expenses in the amount of $28,879 and accounts receivable and accrued revenues
in the amount of $741,658.





Our total
current liabilities as of December 31, 2008 were $5,401,151. The current
liabilities consist of accounts payable and accrued expenses in the amount of
$3,198,366, notes payable-current portion in the amount of $175,665 and
$1,500,000 of debt related to a participating interest financing arrangement. In
addition, we had $5,056,320 in stockholder’s equity as of December 31,
2008.




The
ability of the Company to continue as a going concern is dependent on the
Company obtaining adequate capital to fund operating losses until it becomes
profitable. If the Company is unable to obtain adequate capital, it could be
forced to cease operations.  Capital City has incurred cumulative
operating losses through December 31, 2008 of $10,550,636 and had a working
capital deficit of $9,185,220 at December 31, 2008.  Revenues during
the three months ended December 31, 2008 were not sufficient to cover our
operating costs and we continue to generate negative cash flows from
operations.  There can be no assurance that Capital City can or will
be able to generate sufficient revenue or complete any debt or equity financing
that might be needed to support operations in the future.





In order
to continue as a going concern, the Company will need, among other things,
additional capital resources. Management’s plan is to obtain such resources for
the Company by obtaining capital from management and significant shareholders
sufficient to meet its minimal operating expenses and seeking additional equity
and/or debt financing from third parties. However Management cannot provide any
assurances that the Company will be successful in accomplishing any of its
plans.  An acceleration of acquisitions or our planned investments in
energy properties and continued expansion of our various divisions over the next
twelve months may require additional expenditures. Additional financing through
partnering, public or private equity financings, lease transactions or other
financing sources may not be available on acceptable terms, or at all. An
initial equity financing could result in significant dilution to our
shareholders.





12


Results Of Operations For The Year Ended December
31, 2008:





Revenues





On a
consolidated basis oil and gas revenues decreased to $2,350,387 and our net loss
was $9,185,220 during the year ended December 31, 2008, compared to oil and gas
revenue of $2,677,086 and a net loss of $187,601 recorded during the same period
ended on December 31, 2007.





Management
revenues increased to $733,403 during 2008 due the Capital City Energy Funds,
the acquisition of Eastern and Avanti compared to $223,615 for same period in
2007.





Total net
oil and gas production realized from principal investments was 23,341 barrels of
oil and 23,341 thousand cubic feet (MCF) of natural gas for 2008.  The
comparative data for the same period of 2007 was 6,986 barrels of oil and 39,981
thousand cubic feet (MCF) of natural gas.





Average
commodity price realized on the principal investment portfolio production for
2008 was $98.27 per barrel of oil and $8.42 per thousand cubic feet (MCF) of
natural gas. The comparative data for the same period of 2007 was $57.97 per
barrel of oil and $5.76 per thousand cubic feet (MCF) of natural
gas.





Lease
Operating Expenses And Dry Hole Expense





For the
year ended December 31, 2008, lease operating expenses (LOE) increased to
$750,515 compared to $548,452 during 2007 due to our direct ownership of the
energy properties acquired in fourth quarter of 2007 from the Capital City
Energy Funds, instead of just managing the Funds.





Typical
LOE expenses include operating labor, field supervision, water hauling and
disposal fees, communications, fuel, leased vehicles, environmental and safety
compliance.





Depreciation
And Depletion





Depreciation
and depletion expenses totaled $2,109,918 for the year ended December 31, 2008,
above the results for 2007 of $776,031. This increase was expected due to the
$11,700,000 acquisition of the oil and gas properties owned by Capital City
Energy Funds V through XII completed in the fourth quarter of 2007.





Selling, General And Administrative Expenses





For the
year ended December 31, 2008, the general and administrative expenses totaled
$4,291,272 which was an increase over expenses of $842,558 posted during the
same time period in 2007.  The increase in operating expenses was
driven by significant one-time costs as we continued to accelerate the execution
of our Triad model business plan, the costs associated with the $11,700,000
acquisition of the oil and gas properties owned by Capital City Energy Funds V
through XII, the cost associated with the reverse merger in the first quarter of
2008, the one-time start-up expenses associated with the establishment of our
North Canton accounting office and headquarters of Eastern Well Services in
Burbank, Ohio, stock options granted to Directors and various stock incentive
bonuses given to key employees.





Interest
Expense





Interest
expense of $258,516 for the year ended December 31, 2008 was down from its level
of $482,789 recorded for the first nine months of 2007.  Interest in
2008 is attributed to the $1,500,000 participation financing arrangement added
in early 2008.





13


Income
Tax Expense/Benefit





We had an
income tax benefit of $163,960 for the year ended December 31,
2008.  For the year ended December 31, 2007, the Company had an income
tax expense of $2,098,885.





Net
Loss





Net loss
for the year ended December 31, 2008 was $9,185,220 compared to a net loss of
$1,747,322 for the same period in 2007.





Liquidity
And Capital Resources





As of
December 31, 2008, we had total current assets of $1,387,659. The current assets
consisted mainly of cash in the amount of $438,766, prepaid expenses in the
amount of $28,879 and accounts receivable and accrued revenues in the amount of
$741,658.





Our total
current liabilities as of December 31, 2008 were $5,401,152. The current
liabilities consist of accounts payable and accrued expenses in the amount of
$3,198,366, notes payable-current portion in the amount of $175,665 and
$1,500,000 of debt related to a participating interest financing arrangement. In
addition, we had $5,056,320 in stockholder’s equity as of December 31,
2008.





An
acceleration of acquisitions or our planned investments in energy properties and
continued expansion of our various divisions over the next twelve months may
require additional expenditures. Additional financing through partnering, public
or private equity financings, lease transactions or other financing sources may
not be available on acceptable terms, or at all. An initial equity financing
could result in significant dilution to our shareholders.





Going
Concern





Capital
City requires additional financing to grow its business and fund its
operations.  The Company’s unaudited interim consolidated financial
statements are prepared using accounting principles generally accepted in the
United States of America applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. Capital City has incurred cumulative operating losses through December
31, 2008 of $10,550,636 and had a net loss of $9,185,220 at December 31,
2008.  Revenues during the year ended December 31, 2008 were not
sufficient to cover our operating costs and we continue to generate negative
cash flows from operations. The Company continues to analyze its monthly cost
structure to reduce the overall cash expenditures until additional capital is
raised or cash flows from operations are generated. There can be no assurance
that Capital City can or will be able to generate sufficient revenue or complete
any debt or equity financing that might be needed to support operations in the
future. Capital City is in the process of raising additional capital through a
related party private fund management company.





Cash
Flow From Operating Activities





For the
year ended December 31, 2008, net cash used in operating activities was
$1,379,502 versus net cash provided by operating activities of $1,632,046 for
the same twelve-month period ended December 31, 2007.





Cash
Flow From Investing Activities





For the
year ended December 31, 2008, net cash used in  investing activities
was $3,701,368 primarily attributed to our lease acquisition and continued
rework program. For the year ended December 31, 2007, net cash provided by
investing was $146,035. Our investing activities were funded from the use of
cash from operations and financing.





Cash
Flow From Financing Activities





For the
year ended December 31, 2008, net cash provided in financing activities was
$2,560,181 versus net cash used in financing activities of $1,957,729 for the
same period ended December 31, 2007.  Financing activities principally
consisted of $678,751 proceeds from sale of common stock and exercise of
warrants $1,500,000 of proceeds related to our participation interest
financing.





14


Impact
of Inflation





The
impact of inflation on our operations has not been significant to date. However,
there can be no assurance that a high rate of inflation in the future would not
have an adverse impact on our operating results.





Management
Changes





Key
management positions were filled in late 2007; however, throughout 2008 and
during the first few months of 2009, the Company has streamlined its management
personnel to best fit its short and long term objectives:




·
              Joseph
      Sites was hired on December 31, 2008 to continue to serve in his capacity
      as the President of  the acquired Hotwell operations and the
      Executive Vice-President of the Company.  Additionally, Mr.
      Sites joined the Board of
Directors.




·
            On
      March 6, 2009, Timothy W. Crawford, as the Company reduced its operations
      in the First Quarter, resigned on March 5, 2009.  Additionally,
      Mr. Crawford resigned as Chairman on April 15,
  2009.




·
              On
      May 12, 2009, Daniel Coffee resigned as the Chief Operating Officer,
      President, Principal Executive Officer and
  Director.




·
              Doug
      Crawford joined the Company in September, 2008 as the Chief Accounting
      Officer and Controller. In early 2009, he became the Chief Financial
      Officer. Finally, in May, 2009, Mr. Doug Crawford was selected to fill a
      vacancy on the Board.





Our new
management team is executing on the Business Plan of the Company by focusing on
Hotwell.





Off-Balance
Sheet Arrangements





As of
December 31, 2008, we had no off-balance sheet arrangements.





Critical
Accounting Policies





In
December 2001, the SEC requested that all registrants list their three to five
most “critical accounting polices” in the Management Discussion and Analysis.
The SEC indicated that a “critical accounting policy” is one which is both
important to the portrayal of a company’s financial condition and results, and
requires management’s most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. We believe that the following accounting policies fit this
definition.





Revenue
Recognition





The
Company recognizes income from the management of energy funds and also from the
sale of oil and gas production from the managed energy funds and from
investments it makes for its own account.





Revenues
from the management of energy funds are recognized when the services are
performed. Intercompany revenues are eliminated in the
consolidation.





Revenues
from the production of natural gas and oil properties in which the Combined
Companies have an interest are based on the respective Company’s net working
interests.  These revenues are recorded when the gas or oil passes to
the purchasers.





Accounts
Receivable





The
majority of the accounts receivable is comprised of oil and gas revenues related
to production which took place on or prior to the end of accounting periods,
payment for which was not received prior to the end of the year. Accounts
receivable include the Company’s share of income from the managed energy funds
and from investments the Company made on it own behalf.





15


The
Company’s receives distributions from the Funds based partially on the amount of
its oil and gas revenues, net of lease operating expenses and applicable
severance taxes. Part of the management services provided to the Funds by the
Company is to review the purchasers credit worthiness prior of all oil and gas
purchasers prior to executing division orders for the sale of hydrocarbons.
Receivables are generally due in 30 to 60 days. When collections of specific
amounts due are no longer reasonably assured, an allowance for doubtful accounts
is established.





Oil
and Gas Properties





In
accordance with Statement of Financial Accounting Standard (SFAS) No. 69, the
Company follows the successful efforts method of accounting for its oil and gas
activities.  Accordingly, the cost associated with developmental oil
and gas properties are capitalized and recovered using units of production cost
depletion method.  Exploratory cost, including the cost of exploratory
dry holes and related geological and geophysical cost are charged as current
expense.  In instances where the status of a well is indeterminable at
the end of the year, it is the Company’s practice to capitalize these costs as
oil and gas properties, until such time as the outcome of drilling becomes known
to the Company. Wells cannot remain in a status of indeterminable for a period
greater than twelve months.





Impairment
of Long Lived Assets and the Disposal of Long Lived Assets





The
Financial Accounting Standards issued Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment of Long-Lived Assets, in August,
2001.  SFAS No. 144 superseded SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed.  The Company’s primary long-lived asset is oil and gas
properties, proven and unproven. The Company’s position is to test for potential
impairment annual or whenever circumstances indicate a significant change of
value may have occurred,  For developed properties the Company groups
properties by operator; for undeveloped properties, the Company test on a field
level basis.





The
Company has recognized an expense from impairment of our reserves of
$5,095,085, due to a significant drop in commodity prices by the end of
2008.




Stock-based
Compensation





The
Company adopted SFAS No. 123-R effective January 1, 2006 using the modified
prospective method. Under this transition method, stock compensation expense
includes compensation expense for all stock-based compensation awards granted on
or after January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123-R.





During
2008, the Company has issued stock options to its Board of Directors as
discussed in further detail in Note 9 to the consolidated financial
statements.





Subsequent
Events





Since the
completion of fiscal year ended on December 31, 2008, the Company has undergone
significant changes which has forced the Company to refocus its business on the
Hotwell division.  The Chief Executive Officer, Timothy W. Crawford,
resigned on March 5, 2009.  The Company’s Chief Operating Officer,
President and Principal Executive Officer, Daniel Coffee resigned on May 12,
2009.  Each of Mr. Crawford,  David Tenwick and James Bishop
each resigned from the Board of Directors (“Board”) on April 15, 2009, February
2, 2009, and May 4, 2009, respectively  On May 12, 2009, Dan Coffee,
resigned as Chief Operating Officer, Principal Executive Officer, President and
as a Director of Capital City.  Mr. Coffee had been a member of the
Operating, Nominating and Reserves Committees of the Board.  In his
letter of resignation, Mr. Coffee indicated that he was resigning due to a
fundamental difference of opinion between the Board and Mr. Coffee about the
business direction to be taken by, and the financial management of, the
Company.   On May 7, 2009, the Company added Doug Crawford,
its Chief Financial Officer to the Board, such that the Board consisted on such
date of Joseph Sites, Joseph Smith, Lee Robinson and Doug Crawford.





16


As part
of an intended  recapitalization plan, the Company intends to name
Joseph Sites, its Chief Executive Officer and begin the process of identifying
independent individuals to serve on the Board.  Doug Crawford will
remain the Company’s Chief Financial Officer.





Since
December, 2008, the Company has experienced a significant decline in its
revenues from its inventory of fractional interests in oil and gas
wells.  Likewise, while Hotwell has shown steady growth of its
revenue, the total revenues have not been sufficient to pay the ongoing
operating costs of the Company.  Throughout the first (1st)
Quarter, 2009, the Company has been operating in a capital deficient
environment, which has further weakened its competitive position and diminished
Hotwell’s ability to compete in the burgeoning Marcellus Shale play of the
Appalachian Basin.  The Company found it difficult to pay its bills as
they became due.  The Company began to undertake discussions with key
creditors, structuring payment plans.





One such
payment plan was entered into on April 13 with ASEP USA, Inc., Hotwell’s
equipment lessor.  Under an amendment to the Master Lease Agreements
for three trucks entered into by Hotwell and ASEP in 2008. The amendment
requires Hotwell to make total payments of $1,007,000 to ASEP on April 13, 2009,
May 1, 2009, and June 1, 2009.  In conjunction with the amendment to
the Master Lease Agreements, the Company was required to also enter into a
Purchase Agreement for an additional truck for $547,000.  Immediately
upon full payment to ASEP, Hotwell will own six (6) wireline trucks, free and
clear of any liens.





During
the 1st
Quarter, 2009, Management, with the Board, began to cut costs and
overhead.  Initially, overall headcount of the Company was reduced
from 45 to 35.  The office in Columbus is being closed, with
operations moved to the North Canton, Ohio office.  Finally, all
unnecessary expenditures were eliminated.  The operating expenses of
the Company have been significantly reduced and the Company should benefit fully
from the cost cutting measures beginning in the second quarter of
2009.





The
Company needs capital to finance its ongoing operations.  Initially,
to address the capital needs, on March 27, 2009, Hotwell and the Company entered
into an Accounts Receivable Financing Agreement with Crestmark Commercial
Capital Lending, LLC, which provided up to $1.0 million of financing, secured by
the accounts receivable of Hotwell and all of the other assets of the Company
and Hotwell.





In March,
2009, the Company hired Wright Capital and paid a $25,000 retainer to seek and
obtain the necessary capital for the business.





Beginning
in April, 2009, the Company structured a senior secured financing, using the
inventory of fractional interests as collateral.  The Company entered
into a placement agreement with Capital City Securities, LLC. (“CCS”), a FINRA
broker-dealer and an affiliate of the  Company’s major shareholders
and Joseph Smith, a member of our Board.  This financing calls for the
Company to pay the noteholders 14% interest and pay CCS a 10% fee for all monies
raised under this financing.  To date, the Company has received
$275,000 from this loan facility.





On May 5,
2009, the Board approved a plan of recapitalization and financing sponsored by
Meridian Capital Ventures, LLC (“Meridian”).  The $3.0 million secured
financing will be provided by Brin Investments, LLC (“Brin”), which will be
secured by the assets of Hotwell and the inventory of fractional interests in
oil and gas wells.  In order to obtain the financing commitment, which
is still subject to due diligence, the Company had to pay an expense retainer to
Brin of $30,000.





The Brin
Financing is dependent on the Company to enter into a plan of recapitalization
proposed by Meridian (the “Plan”).  The Plan calls for the Company to
approve:





·  a 1 for
10 reverse stock split;




·  dispose
of Eastern;




·  elect
Joseph Sites as Chief Executive Officer;




17


·  use
commercially reasonable efforts to convert the preferred shareholders to common
shareholders;




·  enter
into a management contract with Meridian, which pays Meridian a management fee
of $30,000 per month and issuing a warrant to Meridian for 2.5 million shares of
common stock;




·  amend the
Company’s Omnibus Incentive Plan, authorizing up to 2.5 million shares
thereunder;




·  granting
Meridian the right to invest a minimum of $1.5 million dollars by purchasing
common stock at the then prevailing market price.




The Plan
will be subject to shareholder vote and will be more fully described in the
Proxy to be filed no later than June 30, 2009.





Recent
Accounting Pronouncements





In
December, 2007, the FASB issued SFAS 160, “Non-controlling interests in
Consolidated Financial Statements – an amendment of ARB No. 51  This
Statement amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary.  It clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.  This
Statement is effective for fiscal years beginning on or after December 15,
2008.  Early adoption is not permitted.  Management is
currently evaluating the effects of this statement, but it is not expected to
have an impact on the Company’s financial statements.





In
February, 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”.  SFAS 159 creates a fair value
option allowing an entity to irrevocably elect fair value as the initial and
subsequent measurement attribute for certain financial assets and financial
liabilities, with changes in fair value recognized in earnings as they
occur.  SFAS 159 also requires an entity to report those financial
assets and financial liabilities measured at fair value in a manner that
separates those reported fair values from the carrying amounts of assets and
liabilities measured using another measurement attribute on the face of the
statement of financial position.  Lastly, SFAS 159 requires an entity
to provide information that would allow users to understand the effect on
earnings of changes in the fair value on those instruments selected for the fair
value election.  SFAS 159 is effective for fiscal years beginning
after November 15, 2007 with early adoption permitted.  The Company is
continuing to evaluate SFAS 159 and to assess the impact on its results of
operations and financial condition if an election is made to adopt the
standard.





In September, 2006, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements.  Where
applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP and does not require any
new fair value measurements.  SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.  Earlier adoption is
encouraged.  The Company does not expect the adoption of SFAS No. 157
to have a significant effect on its financial position or results of
operation.





Director
or Officer Involvement in Certain Legal Proceedings





To the
best of our knowledge, during the past five years, none of the following
occurred with respect to a present or former director or executive officer of
the Company:  (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the Securities and
Exchange Commission or the Commodities Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has
not been reversed, suspended or vacated.





18


Meetings
of Our Board of Directors





Our Board
held their first meeting on April 3, 2008 and continued to meet once a month
throughout 2008.  In addition to regularly scheduled monthly meetings,
our Board of Directors acted by unanimous consent on various
matters.





Committees
of the Board





We have
several committees of the Board.  During the October, 2008 meeting,
the Board selected Mr. James Bishop, Chair (since resigned), Mr. David Tenwick
(since resigned) and Mr. Joseph Smith to perform the functions of an audit
committee, but no written charter governed the actions of such committee of the
Board when performing the functions of what would generally be performed by an
audit committee.  Presently, the audit committee is comprised of Mr.
Robinson and Mr. Smith and the Company is seeking qualified candidates to fill
the vacancies left after the resignations of Messrs. Coffee, Crawford, Bishop
and Tenwick.





The audit
committee assisted management in the hiring of our current independent certified
public accountants to audit our 2008 financial statements.  The audit
committee of the Board meets and interacts with the independent accountants to
discuss issues related to financial reporting. In addition, the audit committee
of the Board reviews the scope and results of the audit with the independent
accountants, reviews with management and the independent accountants our annual
operating results, considers the adequacy of our internal accounting procedures
and considers other auditing and accounting matters including fees to be paid to
the independent auditor and the performance of the independent
auditor.





Our Board
of Directors does not maintain a nominating committee. As a result, no written
charter governs the director nomination process.  We believe that our
size and the size of our Board, at this time, do not require a separate
nominating committee.  As provided in the Bylaws, the Board has the
authority to expand the number of directors and fill the newly created seats on
the Board without shareholder vote.




When
evaluating director nominees, our directors consider the following
factors:
  ·
              The
      appropriate size of our Board of
Directors;


·
              Our
      needs with respect to the particular talents and experience of our
      directors;
  ·
                The
      knowledge, skills and experience of nominees, including experience in
      finance, administration or public service, in light of prevailing business
      conditions and the knowledge, skills and experience already possessed by
      other members of the Board;
  ·
                  The
      reputation and integrity of any
nominee;
  ·
                    The
      experience of any nominee in the oil and gas
  industry;
  ·
                    The
      experience of any nominee in political
affairs;
  ·
                      The
      experience of any nominee with accounting rules and practices;
      and
  ·
                      The
      desire to balance the benefit of continuity with the periodic injection of
      the fresh perspective provided by new Board
  members.


Our goal
is to assemble a Board that brings together a variety of perspectives and skills
derived from high quality business and professional experience. In doing so, the
Board will also consider candidates with appropriate non-business
backgrounds.





Other
than the foregoing, there are no stated minimum criteria for director nominees,
although the Board may also consider such other factors as it may deem are in
our best interests as well as our stockholders. In addition, the Board
identifies nominees by first evaluating the current members of the Board willing
to continue in service. Current members of the Board with skills and experience
that are relevant to our business and who are willing to continue in service are
considered for re-nomination. If any member of the Board does not wish to
continue in service or if the Board decides not to re-nominate a




19


member
for re-election, the Board then identifies the desired skills and experience of
a new nominee in light of the criteria above. Current members of the Board are
polled for suggestions as to individuals meeting the criteria described above.
The Board may also engage in research to identify qualified individuals. To
date, we have not engaged third parties to identify or evaluate or assist in
identifying potential nominees,although we reserve the
right in the future to retain a third party search firm, if necessary. The Board
does not have a formal policy regarding any nominees proposed by the
shareholders.  Shareholders may submit a nominee proposal to the Board
by sending such proposal in writing to the Board at the executive offices of the
Company, and the Board will consider such nominee in the same manner in which it
would consider a nominee identified as described above.





In
addition to the audit committee, the Company has established an executive
committee, consisting of Mr. Robinson and Mr. Smith.  The executive
committee adopted a charter on March 3, 2009, in a special meeting called for
this specific purpose.  Generally, the executive committee, to the
extent permitted by law and provided in the resolution of the Board shall have
and may exercise all the powers and authority of the Board in the management of
the business and affairs of the Company.  The desired purpose of the
executive committee was to closely manage the financial affairs of the Company
during a transition period following the resignation of its Chief Executive
Officer, Mr. Timothy W. Crawford.





In
addition to these committees, the Company has compensation, reserves and
operating committees.  Presently, the entire Board sits on each of
these committees to perform the functions of such committees, but no written
charter governed the actions of such committees of the Board when performing the
functions of what would generally be performed by that committee.





Indemnification
of Directors and Officers





Our
officers and directors are indemnified as provided by the Nevada Revised
Statutes and our Bylaws.





Under the
governing Nevada statutes, director immunity from liability to a company or its
shareholders for monetary liabilities applies automatically unless it is
specifically limited by a company's Articles of Incorporation. Our Articles of
Incorporation do not contain any limiting language regarding director immunity
from liability. Excepted from this immunity are:





1.
            a
      willful failure to deal fairly with the company or its shareholders in
      connection with a matter in which the director has a material conflict of
      interest;





2.
            a
      violation of criminal law (unless the director had reasonable cause to
      believe that his or her conduct was lawful or no reasonable cause to
      believe that his or her conduct was
unlawful);





3.
            a
      transaction from which the director derived an improper personal profit;
      and





4.
            willful
      misconduct.





Our
Bylaws provide that we will indemnify our directors and officers to the fullest
extent not prohibited by Nevada law; provided, however, that we may modify the
extent of such indemnification by individual contracts with our directors and
officers; and, provided, further, that we shall not be required to indemnify any
director or officer in connection with any proceeding (or part thereof)
initiated by such person unless:





1.
            such
      indemnification is expressly required to be made by
  law;





2.
            the
      proceeding was authorized by our Board of
  Directors;





3.
            such
      indemnification is provided by us, in our sole discretion, pursuant to the
      powers vested us under Nevada law;
or





4.
            such
      indemnification is required to be made pursuant to the
    Bylaws.





20


Our Bylaws provide that we will advance
to any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or officer, of the company, or is or was serving at the request
of the company as a director or executive officer of another company,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request
therefore, all expenses incurred by any director or officer in connection with
such proceeding upon receipt of an undertaking by or on behalf of such person to
repay said amounts if it should be determined ultimately that such person is not
entitled to be indemnified under our Bylaws or otherwise.





Our
Bylaws provide that no advance shall be made by us to an officer of the company,
except by reason of the fact that such officer is or was a director of the
company in which event this paragraph shall not apply, in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, if a
determination is reasonably and promptly made: (a) by the Board of Directors by
a majority vote of a quorum consisting of directors who were not parties to the
proceeding, or (b) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the company.





Item 7A.               Quantitative and Qualitative
Disclosures About Market Risk




This information is not required for a smaller reporting
company.




Item
8.                  Financial Statements and Supplementary
Data




The
consolidated financial statements and supplementary data of Capital City Energy
Group, inc. required by this Item are described in Item 15 of this Annual
Report on Form 10-K and are presented beginning on page F-1.




Item 9.                  Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure





None.




Item 9A.               Controls and
Procedures




Evaluation
of Disclosure Controls and Procedures




In
accordance with Item 307 of Regulation S-K, based on management's
evaluation, with the participation of our Chief Executive Officer and Chief
Accounting Officer, as of the end of the period covered by this report, our
Company has concluded that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended), are effective to provide reasonable assurance that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in SEC rules and forms, and is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.




Management’s
Report on Internal Control over Financial Reporting





Management’s
Responsibility for Financial Statements





Our
management is responsible for the integrity and objectivity of all information
presented in this report. The consolidated financial statements included in this
report have been prepared in accordance with U.S. GAAP and reflect management’s
judgments and estimates on the effect of the reported events and
transactions.





Disclosure
Controls and Procedures





Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Exchange Act, as of the end
of the period covered by this report. Based on management’s evaluation as of
December 31, 2008, our chief executive officer and chief accounting officer
have concluded that our disclosure controls and procedures are effective to
ensure that material information about our business and operations is recorded,
processed, summarized and publicly reported within the time periods required
under the Exchange Act, and that this information is accumulated and
communicated to our management to allow timely decisions about required
disclosures.





21


Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act. Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2008 using the criteria established
under Internal Control —
Integrated Framework, issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on those criteria, management concluded that
our internal control over financial reporting was effective as of
December 31, 2008. Management reviewed the results of their assessment with
the audit committee of our Board.





Changes in
Internal Control over Financial Reporting





We
regularly review our system of internal control over financial reporting to
ensure the maintenance of an effective internal control environment. There were
no changes in our internal control over financial reporting during the period
covered by this report that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.





This Annual Report on Form 10-K does not include an attestation report
of the Company’s registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by
the Company’s registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report on Form 10-K.





Item 9B.               Other
Information





None.







PART
III





Item 10.                Directors, Executive Officers, and
Corporate Governance of the Registrant





DIRECTORS
AND EXECUTIVE OFFICERS





The
following table sets forth information regarding the members of our Board of
Directors and our executive officers and other significant employees. All of our
officers and directors were appointed on the effective date of the Merger. All
of our directors hold office until the next annual meeting of stockholders and
their successors are duly elected and qualify. Executive officers serve at the
request of the Board of Directors.








Name
                  Age
                  Office(s)
      HeldJoe
      Sites
                  32
                  Executive
      Vice President, President – Hotwell Services, Inc.,
    DirectorDoug
      Crawford
                  46
                  Chief
      Financial Officer, DirectorJoseph
      Smith
                  50
                  DirectorLee
      A. Robinson
                  44
                  Director





Set forth
below is a brief description of the background and business experience of each
of our current executive officers and directors.





22


Joseph Sites, Executive Vice
President joined the firm on December 31, 2008 as part of the acquisition of
Hotwell. He is also the founder and President of Hotwell Services, Inc. Prior to
Hotwell, Mr. Sites was the Business Development Manager for J-W Wireline, an $80
Million, 200+ employee logging and perforating wireline business. While at J-W
Wireline, Mr. Sites’ responsibilities included successful implementation of
growth and management for the entire wireline division. During this time Mr.
Sites directly expanded their entire operation from 30 to 60+ wireline units
making them one of the fastest growing US based wireline company in
2007.  From 2000 to 2006 Mr. Sites served a multitude of operational
roles including Operations Manager for Schlumberger (A $23 Billion, 84,000
employee oilfield services company) in the Barnett Shale. Mr. Sites created
quality control measures which were implemented on worldwide basis. He was also
honored for superior operational execution and safety. Also with Schlumberger,
Mr. Sites served as Service Quality Manager for Mexico Offshore Operations,
developing successful training, calibration standards, quality control and
explosives disarming procedures. Mr. Sites holds a BS, with honors, in Chemical
Engineering from The University of Pittsburgh.





Doug Crawfordjoined the
Company in September, 2008 as Chief Accounting Officer and quickly moved into
the role of Chief Financial Officer.  Mr. Crawford oversees all
accounting functions in the North Canton, Ohio office.  Prior to
joining Capital City Energy Group Mr. Crawford was a partner at a startup
software company called Imadex, a division of Ports Petroleum Co. Inc. which
provided document imaging solutions to small and mid-sized
businesses.  From 1995 to 2004 Mr. Crawford was the Chief Financial
Officer for Ports Petroleum Co. Inc., located in Wooster, Ohio, a $750 million
wholesaler and retailer of petroleum products with more than 80 locations in 15
states and wholesale clients in 20 states.  While at Ports Petroleum,
Mr. Crawford directed all aspects of corporate finance, including financial
strategies, accounts payable/receivable, payroll, HR, general ledger, monthly
reporting, IT and tax functions. Mr. Crawford also secured external financing,
managed auditing, legal, insurance, and corporate investments.  Mr.
Crawford received his Bachelor of Business Administration in Accounting from
Kent State University.





Joseph A.
Smithbecame a director in
March, 2008.  From 2003 to present, he served as the Managing Director
and Head of Investment Banking of Capital City Partners, LLC (a stockholder of
the Company) and its
affiliates, a regional diversified financial services firm, located in Columbus,
Ohio and Miami, Florida. In addition to his investment banking duties, he became
a member of CCSSM Partners LLC (a stockholder of the company) in 2006 and is the
Manager of the SIG Real Property Fund LLC, a Florida real estate fund and the
Opportunity Fund LLC, a private equity fund.  Prior to Capital City
Partners LLC, from 2002 to 2003, Mr. Smith was Senior Vice President of
Investment Banking for vFinance Investments, Inc. which specialized in financing
small-cap/micro-cap public companies. From 2001-2002, Mr. Smith was a Senior
Vice President at William R. Hough & Co, Florida’s oldest municipal bond
underwriting firm. From 1990 to 2001, Mr. Smith served as a principal and
Managing Director of First Equity Corporation of Florida, one of South Florida’s
oldest local brokerage firms.  From 1987 to 1990, Mr. Smith served as
a Vice President of Lehman Brothers. Mr. Smith began his career with Merrill
Lynch in 1982 and held various positions there until 1987. At Merrill Lynch,
where he was responsible for the management of portfolios consisting of public
and private companies with assets in excess of $100 million.





Lee A. Robinson was appointed
to the Board of Directors in May 2008. He has diverse and valuable experience in
many facets of the oil and natural gas industry, working throughout Appalachia,
in the Gulf of Mexico and in New Mexico. In 1989, Mr. Robinson became a field
engineer with Dowell Schlumberger providing on-site supervision of oil field
cementing and completion services throughout much of the Appalachian Basin. In
1989, he joined Columbia Gas Transmission, a subsidiary of the Columbia Energy
Group and one of the largest interstate natural gas pipeline companies in the
United States.  During his tenure with Columbia Gas Transmission, he
was responsible for computer modeling of the pipeline system, operational and
strategic planning, analysis and divestiture of underperforming assets, and
often served as an expert witness for the company.  In 1998, he was
recruited by a sister company, Columbia Natural Resources, to lead its land
operations group as it sought to grow its leasehold position and dramatically
expand its drilling program to 250 wells annually. Then, in 2000, the Columbia
Energy Group was acquired by NiSource. Shortly thereafter, Mr. Robinson chose to
leave the company and join a number of other former members of Columbia Natural
Resources' senior management team in the formation of a new E&P company
named Triana Energy. With Mr. Robinson's help and guidance as Director of Land
Operations, this new company quickly acquired leasehold rights to hundreds of
thousands of acres, formed strategic joint venture partnerships with several
other producers, and became the most highly respected deep exploration company
in the eastern United States.  Mr. Robinson holds a Bachelor of
Science degree in Petroleum Engineering from Marietta College. He is a member of
the Society of Petroleum Engineers, the American Association of Professional
Landmen and the Independent Oil and Gas Association of New York. He has also
served on the Industry Advisory Committee for the Department of Petroleum
Engineering and Geology at Marietta College and on the Producer Advocacy Group
for the Petroleum Technology Transfer Council.





23


Directors
and Officers





Our
Bylaws authorize no less than one (1) and no more than thirteen (13)
directors.  We currently have four directors on the
Board.  Our Directors are appointed for a one-year term to hold office
until the next annual general meeting of our shareholders or until such director
resigns.  Our officers are appointed by our Board and hold office
until removed by the Board.





FAMILY
RELATIONSHIPS





None.





CODE
OF ETHICS





The
Company has adopted a Code of Ethics applicable to all officers which is
included in this report as an exhibit hereto. The Company has posted such Code
of Ethics on its website, which can be found at www.capcityenergy.com.
Any person may, without charge, request a copy of such Code of Ethics by
contacting the Company at 614-310-1620 or by email at info@capcityenergy.com.





The Board
of Directors does not have a standing nominating committee, compensation
committee or any committees performing similar functions. As there are only four
Directors serving on the Board, it is the view of the Board that all Directors
should participate in the process for the nomination and review of potential
Director candidates and for the review of the Company’s executive pay practices.
Accordingly, Messrs. Sites, Smith, Robinson and Doug Crawford all participate in
the nominating process, in the review of executive employment contracts and in
review of the Company’s executive compensation practices. It is the view of the
Board that the participation of all Directors in the duties of nominating and
compensation committees ensures not only as comprehensive as possible a review
of Director candidates and executive compensation, but also that the views of
independent, employee, and shareholder Directors are considered.





The Board
does not have any formal policy regarding the consideration of director
candidates recommended by shareholders; any recommendation would be considered
on an individual basis. The Board believes this is appropriate due to the lack
of such recommendations made in the past, and its ability to consider the
establishment of such a policy in the event of an increase of such
recommendations. The Board welcomes properly submitted recommendations from
shareholders and would evaluate shareholder nominees in the same manner that it
evaluates a candidate recommended by other means. Shareholders may submit
candidate recommendations by mail to CAPITAL CITY ENERGY GROUP, INC., 1611 North
Main St., Ste. A, North Canton, OH  44720.  With respect to
the evaluation of director nominee candidates, the Board has no formal
requirements or minimum standards for the individuals that it nominates. Rather,
the Board considers each candidate on his or her own merits. However, in
evaluating candidates, there are a number of factors that the Board generally
views as relevant and is likely to consider, including the candidate’s
professional experience, his or her understanding of the business issues
affecting the Company, his or her experience in facing issues generally of the
level of sophistication that the Company faces, and his or her integrity and
reputation. With respect to the identification of nominee candidates, the Board
has not developed a formalized process. Instead, its members and the Company’s
senior management have recommended candidates whom they are aware of personally
or by reputation.




The
Company’s Audit Committee consists of Messrs. Robinson and Smith, each of
whom has an understanding of finance and accounting and is able to read and
understand fundamental financial statements. Audit Committee members are
appointed by the full Board.  The functions of the Audit Committee are
to review the Company’s internal controls, accounting policies and financial
reporting practices; to review the financial statements, the arrangements for
and scope of the independent audit, as well as the results of the audit
engagement; to review the services and fees of the independent auditors,
including pre-approval of non-audit services, the auditors’ independence; and
recommend to the Board of Directors for its approval and for ratification by the
shareholders the engagement of the independent auditors to serve the following
year in examining the accounts of the Company. Mr. Bishop and Mr. Smith, each
members of the Audit Committee, are “financial experts,” as defined in
Regulation S-K. The Board examined the qualifications of its Audit Committee
members and determined that the present members of the Audit Committee were
sufficiently capable of performing the duties of the Audit Committee in
2008.





24


SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Section 16(a)
of the Securities and Exchange Act of 1934 requires the Company’s officers and
Directors, and persons who own more than 10% of a registered class of the
Company’s equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (“SEC”). Officers,
directors, and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of copies of such reports received or representations from
certain reporting persons, the Company believes that, during the year ended
December 31, 2008, other than the filings listed below, all other Section
16(a) filing requirements applicable to its officers, Directors and 10%
shareholders were timely met.





Item 11.               Executive
Compensation




Summary
Compensation Table





Name
      and Position
                                                                                  
                                                                                  
                                                                                  Year
                                                                                  
                                                                                  
                                                                                  Salary
                                                                                  
                                                                                  
                                                                                  Bonus
                                                                                  
                                                                                  
                                                                                  Stock/Option  Awards
      (7)
                                                                                  
                                                                                  
                                                                                  All
      other Comp. (8)
                                                                                  
                                                                                  
                                                                                  TotalJoseph
      Sites, Executive Vice President, President of Hotwell(1)
                                                                                  
                                                                                  
                                                                                  2008
                                                                                    2007
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0Doug
      Crawford,
                                                                                    CFO
      Chief Accounting  Officer and Controller (2)
                                                                                  
                                                                                  
                                                                                  2008
                                                                                    2007
                                                                                  
                                                                                  
                                                                                  $33,846
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $3,329
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $37,175
                                                                                    $0Timothy
      W. Crawford, former CEO and Chairman(3)
                                                                                  
                                                                                  
                                                                                  2008
                                                                                    2007
                                                                                  
                                                                                  
                                                                                  $182,942
                                                                                    $
      29,032
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $435,250
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $8,369
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $626,561
                                                                                    $
      29,032Daniel
      Coffee, former COO, President and Director(4)
                                                                                  
                                                                                  
                                                                                  2008
                                                                                    2007
                                                                                  
                                                                                  
                                                                                  $150,000
                                                                                    $
      18,750
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $429,750
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $4,487
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $584,237
                                                                                    $0Keith
      J. Kauffman, President, former Secretary and Director (5)
                                                                                  
                                                                                  
                                                                                  2008
                                                                                    2007
                                                                                  
                                                                                  
                                                                                  $101,230
                                                                                    $150,000
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $424,250
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $525,480
                                                                                    $150,000David
      Beule, former Chief Finalcial Officer and Director (6)
                                                                                  
                                                                                  
                                                                                  2008
                                                                                    2007
                                                                                  
                                                                                  
                                                                                  $
      5,000
                                                                                    $
      0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $424,250
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $0
                                                                                    $0
                                                                                  
                                                                                  
                                                                                  $429,250
                                                                                    $
      0





NOTES TO SUMMARY
COMPENSATION TABLE


(1)
                                  
                                  The
      Company and Mr. Sites entered into an Employment and Option Agreement on
      December 31, 2008 (the “Effective Date”).The Employment
      Agreement, which is at-will, terminates on December 31, 2010 (the “Term”);
      provided, however, that after the first anniversary of the Effective Date,
      the Term automatically extends on a daily basis (the “Renewal Date”) such
      that the Term terminates one (1) year from such Renewal Date, unless
      terminated earlier for cause. During the Term of the Employment Agreement,
      Sites’ annual base salary will be $240,000, (the “Base Salary”), plus, a
      performance bonus as more fully described below, payable in options to
      acquire stock in Capital City and a discretionary bonus as determined by
      the Board. During the Term of the Employee Agreement, Sites shall be
      entitled to participate in all other benefits, perquisites, vacation days,
      benefit plans or programs of the Capital City which are available
      generally to office employees and other executives of the Capital City in
      accordance with the terms of such




25


plans,
      benefits or programs, including the provision of an automobile at the
      Company’s expense.  In addition to the Base Salary,
      discretionary bonus and other benefits, Sites will also be granted on an
      annual basis performance options to purchase common stock of Capital City
      in the event that the Surviving Corporation attains net income before
      taxes for the calendar years of the Surviving Corporation during the Term,
      with the number of options to be granted each year equal to five percent
      (5%) of the Surviving Corporation’s actual net income before taxes divided
      by the closing price of the Capital City’s common stock on December 31 of
      each year during the Term in which the Surviving Corporation has net
      income (the “Performance Options”). The Performance Options, if issued,
      will be substantially similar to the Employee Option but will vest
      immediately upon issuance and will have exercise prices equal to the
      closing price of Capital City’s common stock on December 31 of the year in
      which the Performance Option was earned. The maximum amount of performance
      options to be issued annually will be limited to the Surviving
      Corporation’s first $100,000,000 of net income (meaning Sites’ portion
      will be options in the amount of $5,000,000). The issuance of Performance
      Options will be on an annual basis, and is subject to Sites being employed
      by Capital City or the Surviving Corporation on December 31 of the year in
      which the Performance Option is earned. The determination of the Surviving
      Corporation’s actual net income before taxes will be based on the audited
      financial statements of Capital City and its subsidiaries. In the event
      Sites' employment is terminated without cause (or for "good reason" (as
      defined in the Employment Agreement) by Sites), Sites is entitled to
      severance equal to six (6) months' base salary.(2)
                    
                    Doug
      Crawford began employment with the Company  on September 8,
      2008.(3)
                    
                    Mr.
      Crawford resigned as Chief Executive Officer on March 6, 2009. He also
      resigned as a director on April 15, 2009.  Payments in 2008
      included consulting fees paid to CCSSM Partners, LLC.  Stock
      Option Awards listed above are for Mr. Crawford in his capacity as a
      Director.  As of the date of this filing, these
      options  have vested.  Also included in Stock Option
      Awards was the value of all shares issued to Mr. Crawford in compensation
      for attendance at Director’s Meetings.(4)
                    
                    Mr.
      Coffee resigned on May 12, 2009.  Stock Option Awards listed
      above are for Mr. Coffee in his capacity as a Director.  As of
      the date of this filing, these options  have
      vested.  Also included in Stock Option Awards was the value of
      all shares issued to Mr. Coffee in compensation for attendance at
      Director’s Meetings.(5)
                    
                    Mr.
      Kauffman resigned on August 18, 2008.  Stock Option Awards
      listed above are for Mr. Kauffman in his capacity as a
      Director.  As of the date of this filing, these
      options  have vested.  Also included in Stock Option
      Awards was the value of all shares issued to Mr. Kauffman in compensation
      for attendance at Director’s Meetings.  The Stock Options
      awarded Mr. Kauffman were not vested at the time of his resignation, and
      were forfeited.(6)
                    
                    Mr.
      Beule resigned on September 5, 2008.  Stock Option Awards listed
      above are for Mr. Beule in his capacity as a Director.  As of
      the date of this filing, these options  have
      vested.  Also included in Stock Option Awards was the value of
      all shares issued to Mr. Beule in compensation for attendance at
      Director’s Meetings.  The Stock Options awarded Mr. Beule were
      not vested at the time of his resignation, and were
forfeited.(7)
                    
                    Includes
      value of stock option granted to the executive (or former executive) in
      his capacity as a director of the Company.(8)
                    
                    Value
      of leased vehicles provided the executive during his
      employment.






Outstanding
Equity Awards At Fiscal Year-End


Stock AwardsName
                  Number of Shares or Options
                    That Have Not Vested
                  Market Value of Shares or Unites
      of
                    Stock That Have Not
  VestedJoseph
      Sites
                  920,000





26


Director
Compensation


Name
                      Fees
      Earned or Paid in Cash (1)Timothy
      W. Crawford (resigned)
                      $
      435,250Daniel
      Coffee (resigned)
                      $429,750Joseph
      Smith
                      $
      435,250James
      Bishop (resigned)
                      $
      328,000Lee
      Robinson
                      $
      331,500David
      Tenwick (resigned)
                      $
      320,500





(1)  Each
director received a stock option grant of 125,000 shares upon election to the
board.  Options were subject to a one year cliff vesting period as of
December 31, 2008, only Messrs. Crawford, Coffee, Smith, Bishop, Robinson and
Tenwick held such options.  Also, directors were paid for attendance
at each meeting at a rate of $ 1,500 for each telephonic meeting and $ 5,000 for
each in person meeting.  The amounts listed above included such fees
paid in stock valued as of the closing price of the stock as of the date of each
meeting.





Item 12.               Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters




Equity
Compensation Plans




The
following table provides certain information, as of December 31, 2008, about our
common stock that may be issued upon the exercise of options, warrants and
rights, as well as the issuance of shares granted to employees, consultants or
members of our Board of Directors, under our existing equity compensation
plan




Plan
      Category
                            
                            Number
      of Securities to be issued upon exercise of outstanding options and
      warrants
                            
                            Weighted-average
      exercise price of outstanding options and warrants
                            
                            Number
      of securities remaining available for future issuance under equity
      compensation plansEquity
      compensation plans approved by stockholders
                            
                            2,500,000
                            
                            $
      3.29
                            
                            2,000,000Equity
      plans not approved by security holders (1)
                            
                            0
                            
                            0
                            
                            0Total
                            
                            2,500,000
                            
                            $3.29
                            
                            2,000,000





SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
following table sets forth certain information known to us with respect to the
beneficial ownership of the Common Stock and Series A Preferred Stock as of the
effective date of the Merger by (1) all persons who beneficial owners of 5% or
more of our voting securities, (2) each director, (3) each executive officer,
and (4) all directors and executive officers as a group. The information
regarding beneficial ownership of our capital stock has been presented in
accordance with the rules of the Securities and Exchange Commission. Under these
rules, a person may be deemed to beneficially own any shares of capital stock as
to which such person, directly or indirectly, has or shares voting power or
investment power, and to beneficially own any shares of our capital stock as to
which such person has the right to acquire voting or investment power within 60
days through the exercise of any stock option or other right. The percentage of
beneficial ownership as to any person as of a particular date is calculated by
dividing (a) the number of shares beneficially owned by such person, which
includes the number of shares as to which such person has the right to acquire
voting or investment power within 60 days by (b) the total number of shares
outstanding as of such date, plus any shares that such person has the right to
acquire from us within 60 days. Including those shares in the table does not,
however, constitute an admission that the named stockholder is a direct or
indirect beneficial owner of those shares. Unless otherwise indicated, each
person or entity named in the table has sole voting power and investment power
(or shares that power with that person’s spouse) with respect to all shares of
capital stock listed as owned by that person or entity.





27


Except as
otherwise indicated, all Shares are owned directly and the percentage shown is
based on 32,008,531 shares of Common Stock outstanding determined as of April
30, 2009.





Name
      and address
                            of Beneficial Owner
      1
                          
                          Common
      Stock
                            Beneficial
      Ownership2
                          
                          PercentTimothy
      W. Crawford3
                          
                          3,071,176
                          
                          10%Keith
      J. Kauffman4
                          
                          21,148
                          
                          *Daniel
      R. Coffee5
                          
                          335,837
                          
                          1%Joseph
      A. Smith7
                          
                          1,996,438
                          
                          6%Dave
      Beule10
                          
                          4,691
                          
                          *David
      Tenwick11
                          
                          3,544
                          
                          *James
      Bishop12
                          
                          56,703
                          
                          *Lee
      Robinson13
                          
                          56,703
                          
                          *All
      Officers and Directors as a Group (8 persons)
                          
                          5,230,221
                          
                          16%Other
      5% ownersMichael
      J. McKenzie8
                          
                          2,987,031
                          
                          9%Gary
      T. Sturtz9
                          
                          2,910,818
                          
                          9%Todd
      E. Crawford6
                          
                          3,550,819
                          
                          11%





* Less
than 1%





1.           Unless
otherwise indicated, the business address for each of the individuals is 8351
North High Street, Suite 101, Columbus, Ohio 43235.





2.           May
include shares of Common Stock, shares of our Series A Preferred Stock (which is
currently convertible on a 1:1 basis into Common Stock) and warrants that are
currently exercisable into Common Stock.





3.           Mr.
Crawford was our Chief Executive Officer and Chairman of the
Board.  Includes (a) 516,667 shares of common stock held by The Energy
Acquisition Group, LLC, which shares represent Mr. Crawford’s pecuniary
ownership in such entity, (b) 1,646,530 shares of common stock held by CCSSM
Partners, LLC, which shares represent Mr. Crawford’s pecuniary ownership in such
entity, (c) 128,434 shares of common stock held by The Opportunity Fund, LLC,
which shares represent Mr. Crawford’s pecuniary ownership in such entity, (d)
212,148 shares of common stock issuable upon exercise of warrants held by The
Opportunity Fund, LLC, which shares represent Mr. Crawford’s pecuniary ownership
in such entity, (e) 4,860 shares of common stock owned by Mr. Crawford’s spouse,
and  (f) 4,934 shares of Series A Preferred Stock owned by Mr.
Crawford’s spouse.





4.           Mr.
Coffee was our Chief Operating Officer and a director.  Includes
258,333 shares of common stock held by The Energy Acquisition Group, LLC, which
shares represent Mr. Coffee’s pecuniary ownership in such entity.





5.           Mr.
Crawford was a director.  Includes (a) 516,667 shares of common stock
held by The Energy Acquisition Group, LLC, which shares represent Mr. Crawford’s
pecuniary ownership in such entity, (b)  shares of common stock held
by CCSSM Partners, LLC, which shares represent Mr. Crawford’s pecuniary
ownership in such entity, (c) 642,168 shares of common stock held by The
Opportunity Fund, LLC, which shares represent Mr. Crawford’s pecuniary ownership
in such entity, (d) 212,148 shares of common stock issuable upon exercise of
warrants held by The Opportunity Fund, LLC, which shares represent Mr.
Crawford’s pecuniary ownership in such entity, and (e) 174 shares of Series A
Preferred Stock owned by Mr. Crawford.  Mr. Crawford’s business
address is 1335 Dublin Road, Suite 122D, Columbus, Ohio 43235.





28


6.           Mr.
Smith is a director.  Includes (a) 516,667 shares of common stock held
by The Energy Acquisition Group, LLC, which shares represent Mr. Smith’s
pecuniary ownership in such entity, (b) 789,182 shares of common stock held by
CCSSM Partners, LLC, which shares represent Mr. Smith’s pecuniary ownership in
such entity, (c) 307,791 shares of common stock held by The Opportunity Fund,
LLC, which shares represent Mr. Smith’s pecuniary ownership in such entity, (d)
101,682 shares of common stock issuable upon exercise of warrants held by The
Opportunity Fund, LLC, which shares represent Mr. Smith’s pecuniary ownership in
such entity, and (e) 2,189 shares of Series A Preferred Stock owned by Mr.
Smith.  Mr. Smith’s business address is One Datran Center, 9100 South
Dadeland Boulevard, Penthouse 2 - Suite 1800, Miami, Florida 33156.





7.           Includes
(a) 516,667 shares of common stock held by The Energy Acquisition Group, LLC,
which shares represent Mr. McKenzie’s pecuniary ownership in such entity, (b)
1,646,530 shares of common stock held by CCSSM Partners, LLC, which shares
represent Mr. McKenzie’s pecuniary ownership in such entity, (c) 128,434 shares
of common stock held by The Opportunity Fund, LLC, which shares represent Mr.
McKenzie’s pecuniary ownership in such entity, (d) 212,148 shares of common
stock issuable upon exercise of warrants held by The Opportunity Fund, LLC,
which shares represent Mr. McKenzie’s pecuniary ownership in such entity, (e)
7,450 shares of common stock owned by Mr. McKenzie’s spouse, and  (f)
7,563 shares of Series A Preferred Stock owned by Mr. McKenzie’s
spouse.  Mr. McKenzie’s business address is 1335 Dublin Road, Suite
122D, Columbus, Ohio 43235.





8.           Includes
(a) 516,667 shares of common stock held by The Energy Acquisition Group, LLC,
which shares represent Mr. Sturtz’s pecuniary ownership in such entity, (b)
1,646,530 shares of common stock held by CCSSM Partners, LLC, which shares
represent Mr. Sturtz’s pecuniary ownership in such entity, (c) 128,434 shares of
common stock held by The Opportunity Fund, LLC, which shares represent Mr.
Sturtz’s pecuniary ownership in such entity, and (d) 212,148 shares of common
stock issuable upon exercise of warrants held by The Opportunity Fund, LLC,
which shares represent Mr. Sturtz’s pecuniary ownership in such
entity.  Mr. Sturtz’s business address is 1335 Dublin Road, Suite
122D, Columbus, Ohio 43235.





9.           Dave
Beule is a former director and Chief Accounting Officer, shares owned by Mr.
Beule include shares earned as Director compensation, these shares are held in
the name of Appalachian Basin Capital.  Mr. Beule is the owner of this
entity.  These shares represent Mr. Beule’s pecuniary ownership in
such entity.





10.         David
Tenwick is a former director of the Company.  He owns 3,544 shares of
common stock, which represent payment of Director’s compensation.





11.         Mr.
James Bishop is a former director of the Company.  He owns 6,703
shares of common stock which represent payment of Director’s
compensation.





12.         Lee
Robinson is a current director of the Company.  He owns 8,814 shares
of common stock which represent payment of Director’s compensation.








Other
than the shareholders listed above, we know of no other person who is the
beneficial owner of more than five percent (5%) of the Common Stock (computed on
a fully diluted basis).




The
following shows the beneficial ownership of our Series A Preferred Stock by our
officers and directors.  There are no beneficial owners of more than
five percent (5%) of the Series A Preferred Stock. Except as otherwise
indicated, all shares of Series A Preferred Stock are owned directly and the
percentage shown is based on 3,078,842 shares of Series A Preferred Stock
outstanding determined as of April 30, 2009.




Securities
Authorized for Issuance Under Equity Compensation Plans




As of the
end of the most recent fiscal year of the Company, we had not adopted any equity
incentive plans.  Since then and shortly before the Merger, we have
adopted an equity incentive plan which provides for the issuance of stock
options, restricted stock awards, and other equity-based awards.  Our
board has reserved 2,500,000 shares of Common Stock for issuance under the
Plan.  To date, we have not granted any awards under the Plan, other
than the 125,000 share options granted to each director.




29


Item 13.               Certain Relationships and Related
Transactions




Mr.
Smith, a member of our Board, is greater than a 10% Members in CCSSM Capital
Partners, LLC, which manages The Opportunity Fund, LLC. On July 29, 2008, The
Opportunity Fund, LLC invested $30,000 to purchase 1 Unit being offered under a
private placement memorandum. One Unit consists of 10,000 shares of common stock
at a price of $3.00 per share and one warrant to purchase an additional 10,000
shares of common stock, exercisable over the next 36 months, with an exercise
price of $4.00 per share.





Daniel
Coffee, at a time when he was a member of our Board of Directors, quit claimed
the property he previously owned to the Company whereby for the price of
$541,000.  The property is 1,024 square feet of office space and
approximately 42 acres in Burbank, Ohio.  Mr. Coffee now pays rent to
the company in the amount of $1500 per month.  It is planned to
partition the property and Mr. Coffee will pay $250,000 for the home and
approximately 5 acres.





On April
16, 2008, Ms. Barbara Coffee, wife of our former  director, Mr. Daniel
Coffee, sold her interest in Eastern Well Services, LLC and Avanti Energy
Partners, LLC to the Company for 1,000 shares of the Company’s common stock
valued at $3,500.





On
November 26, 2008, the Company sold a wholly owned well (Covered Bridge #1) to
Capital City Energy Fund XVII for $225,000.





On
December 17, 2007 Capital City Petroleum, Inc., a wholly owned subsidiary of the
Company, entered into an Investment Banking Agreement with Capital City
Consulting Group, Inc.  Capital City Consulting Group LLC is wholly
owned by Capital City Partners, Inc. (controlled by Timothy Crawford, Todd
Crawford and Joseph Smith).  Capital City Consulting Group billed the
Company $649,000 in 2008 for fees in connection with financing, equity raise and
acquisition transactions.





In March,
2009, the Company entered into a placement agreement with Capital City
Securities, Inc., a FINRA registered broker-dealer and a wholly owned subsidiary
of Capital City Partners, Inc., of which our Director Joseph Smith and his
partners have a controlling interest in, to help it raise money to finance
operations.  The agreement calls for the Company to pay 10% commission
for any capital raise, whether in the form of debt or equity.





Item 14.      
        Principal Accountant Fees and
Services




AUDIT
FEES





In 2008
and 2007, accountants billed Capital City approximately $138,993 and $78,713,
respectively, for professional services rendered for the audit of Capital City’s
annual financial statements and review of financial statements included in
Capital City’s Forms 10-QSB or services that are normally provided in connection
with statutory and regulatory filings or engagements in 2007 and
2008.





AUDIT-RELATED
FEES





In 2008,
Capital City’s principal accountant billed it approximately $65,860.27 for
professional services rendered in connection with the audit of the consolidated
financial statements of Hotwell Services, Inc. for the year ended December 31,
2008 included in the Company’s 8-K/A dated April 2, 2009.




TAX
FEES





Hall
Kistler charged $2,345.82 to Capital City regarding tax advice, tax compliance
and tax planning during 2007 and 2008.






30


ALL OTHER
FEES





No other
fees were billed to Capital City by Hall Kistler during 2007 and 2008 other than
those described in this report.





No hours
expended by audit firms in their engagement to audit Capital City’s financial
statements for the most recent fiscal year were attributable to work performed
by persons other than the audit firms’ full-time permanent employees. The Audit
Committee has approved 100% of all services performed by audit firms for Capital
City and disclosed above.




AUDIT
COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES





The
Capital City Audit Committee (the “Committee”), at the time, comprised of
Messrs. James Bishop, Robinson and Smith, pre-approved Hall Kistler as the
Company’s independent auditor for the year-ended December 31, 2008 and
adopted the following guidelines regarding the engagement of the Company’s
independent auditor to perform services for the Company:





For audit
services (including statutory audit engagements as required under local country
laws), the independent auditor will provide the Committee with an engagement
letter during the January-March quarter of each year outlining the scope of the
audit services proposed to be performed during the fiscal year. If agreed to by
the Committee, this engagement letter will be formally accepted by the Committee
at its first or second quarter meeting.





The
independent auditor will submit to the Committee for approval an audit services
fee proposal after acceptance of the engagement letter.





For
non-audit services, company management will submit to the Committee for approval
(during the second or third quarter of each fiscal year) the list of non-audit
services that it recommends the Committee engage the independent auditor to
provide for the fiscal year. Company management and the independent auditor will
each confirm to the Committee that each non-audit service on the list is
permissible under all applicable legal requirements. In addition to the list of
planned non-audit services, a budget estimating non-audit service spending for
the fiscal year will be provided. The Committee will approve both the list of
permissible non-audit services and the budget for such services. The Committee
will be informed routinely as to the non-audit services actually provided by the
independent auditor pursuant to this pre-approval process.





To ensure
prompt handling of unexpected matters, the Committee delegates to either member
thereof the authority to amend or modify the list of approved permissible
non-audit services and fees. Either member will report action taken to the
Committee at the next Committee meeting.





The
independent auditor must ensure that all audit and non-audit services provided
to the Company have been approved by the Committee. The Controller or Chief
Financial Officer will be responsible for tracking all independent auditor fees
against the budget for such services and report at least annually to the
Committee.








31


Item 15.       
Exhibits
and Financial Statement Schedules





(a)       (1)
Financial Statements.





The Consolidated Financial Statements
are located beginning on page __ of this report.





(2)
Financial Statement Schedules.





None.





(3) Exhibits.





32
 
 CAPITAL
      CITY ENERGY GROUP, INC.CONSOLIDATED
      BALANCE SHEETSDecember
      31,2008
                                                                        
                                                                        
                                                                        2007ASSETS
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        (as
      restated)CURRENT
      ASSETSCash
                                                                        
                                                                        $
                                                                        438,766
                                                                        
                                                                        
                                                                        $
                                                                        200,451Accounts
      receivable and accrued revenues
                                                                        
                                                                        
                                                                        694,466
                                                                        
                                                                        
                                                                        
                                                                        414,826Receivables
      - related party
                                                                        
                                                                        
                                                                        47,192
                                                                        
                                                                        
                                                                        
                                                                        –Inventory
                                                                        
                                                                        
                                                                        178,356
                                                                        
                                                                        
                                                                        
                                                                        –Prepaid
      expenses
                                                                        
                                                                        
                                                                        28,879
                                                                        
                                                                        
                                                                        
                                                                        40,991Total
      Current Assets
                                                                        
                                                                        
                                                                        1,387,659
                                                                        
                                                                        
                                                                        
                                                                        656,268PROPERTY
      AND EQUIPMENT, net of accumulated depreciationof
      $36,106 and $1,497
                                                                        
                                                                        
                                                                        5,028,230
                                                                        
                                                                        
                                                                        
                                                                        147,261OIL
      AND GAS PROPERTIES, SUCCESSFUL EFFORTS ACCOUNTING, NET
                                                                        
                                                                        
                                                                        4,245,839
                                                                        
                                                                        
                                                                        
                                                                        7,214,863OTHER
      ASSETSGoodwill
                                                                        
                                                                        
                                                                        2,622,422
                                                                        
                                                                        
                                                                        
                                                                        –Deposits
                                                                        
                                                                        
                                                                        44,905
                                                                        
                                                                        
                                                                        
                                                                        4,485Total
      Other Assets
                                                                        
                                                                        
                                                                        2,667,326
                                                                        
                                                                        
                                                                        
                                                                        4,485TOTAL
      ASSETS
                                                                        
                                                                        $
                                                                        13,329,055
                                                                        
                                                                        
                                                                        $
                                                                        8,022,877LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                                                                        
                                                                        $
                                                                        3,198,366
                                                                        
                                                                        
                                                                        $
                                                                        360,708Notes
      payable-current portion
                                                                        
                                                                        
                                                                        175,665
                                                                        
                                                                        
                                                                        
                                                                        100,000Capital
      Offering
                                                                        
                                                                        
                                                                        527,121Participating
      interest financing arrangement
                                                                        
                                                                        
                                                                        1,500,000
                                                                        
                                                                        
                                                                        
                                                                        –Total
      Current Liabilities
                                                                        
                                                                        
                                                                        5,401,151
                                                                        
                                                                        
                                                                        
                                                                        460,708LONG
      TERM LIABILITIESAsset
      Retirement Obligation
                                                                        
                                                                        
                                                                        86,917
                                                                        
                                                                        
                                                                        
                                                                        –Notes
      payable-current portion
                                                                        
                                                                        
                                                                        211,725Deferred
      income tax liability
                                                                        
                                                                        
                                                                        2,572,941
                                                                        
                                                                        
                                                                        
                                                                        2,098,883Total
      Long Term Liabilities
                                                                        
                                                                        
                                                                        2,871,583
                                                                        
                                                                        
                                                                        
                                                                        2,098,883STOCKHOLDERS'
      EQUITYPreferred
      shares: $0.001 par value, 10,000,000 shares authorized;XXXXXXand 3,142,650
      shares issued and outstanding, respectively
                                                                        
                                                                        
                                                                        3,112
                                                                        
                                                                        
                                                                        
                                                                        3,143Common
      shares: $0.001 par value, 90,000,000 shares authorized;XXXXXX and 20,750,740
      shares issued and outstanding, respectively
                                                                        
                                                                        
                                                                        29,120
                                                                        
                                                                        
                                                                        
                                                                        20,751Additional
      paid-in capital
                                                                        
                                                                        
                                                                        15,574,724
                                                                        
                                                                        
                                                                        
                                                                        6,271,727Retained
      earnings (accumulated deficit)
                                                                        
                                                                        
                                                                        (10,550,636
                                                                        )
                                                                        
                                                                        
                                                                        (832,335
                                                                        )Total
      Stockholders' Equity
                                                                        
                                                                        
                                                                        5,056,320
                                                                        
                                                                        
                                                                        
                                                                        5,463,286TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                        
                                                                        $
                                                                        13,329,054
                                                                        
                                                                        
                                                                        $
                                                                        8,022,8770.62
                                                                        
                                                                        
                                                                        
                                                                        –The
      accompanying notes are an integral part of these consolidated financial
      statements.
   33
   CAPITAL
      CITY ENERGY GROUP, INC.Consolidated
      Statements of Stockholders' Equity  Additional
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  TotalPreferred
      Stock
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Common
      Stock
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Paid-In
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Accumulated
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Stockholders'Shares
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Amount
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Shares
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Amount
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Capital
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  Deficit
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  EquityBalance,
      January 1, 2007
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  3,142,650
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  3,143
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  18,095,740
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  18,096
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  7,382,111
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  (1,019,936
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  6,383,414Common
      stock issued for cashat
      $1.00 per share
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  2,155,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  2,155
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  2,152,845
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  2,155,000Common
      stock issued upon exerciseof
      warrants at $0.025 per share
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  250,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  250
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  6,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  6,250Common
      stock issued upon exerciseof
      warrants at $0.10 per share
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  250,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  250
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  24,750
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  25,000Costs
      incurred by the Energy Fundsnot
      included in the recapitization
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (3,293,979
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (3,293,979
                                                                                                                                                  )Net
      loss for the year endedDecember
      31, 2007
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  187,601
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  187,601Balance
      as of December 31, 2007
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  3,142,650
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  3,143
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  20,750,740
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  20,751
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  6,271,727
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (832,335
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  5,463,286Recapitalization
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  6,060,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  6,060
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (6,060
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –Common
      stock issued for debtat
      $3.36 per share
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  29,796
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  30
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  99,970
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  100,000Common
      stock issued for servicesat
      $3.00 per share
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  40,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  40
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  119,960
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  120,000Common
      stock issued for servicesat
      $2.11 per share
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  10,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  10
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  21,490
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  21,500Amortization
      of stock options
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  -
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  100,546
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  100,546Stock
      issued for directors' fees
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  38,735
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  39
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  102,727
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  102,766Common
      stock issued for acquisition ofsubsidiaries
      at $3.50 per share
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  1,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  1
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  3,499
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  3,500Common
      stock and warrants issued
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  10,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  10
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  29,990
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  30,000Dividends
      paid on preferred stock
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  -
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (533,081
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (533,081
                                                                                                                                                  )Stock
      issued on warrant exercises
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  432,500
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  432
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  648,319
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  648,751Employee
      compensation expense
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  45,000
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  45
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  109,305
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  109,350Conversion
      of preferred stock
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (30,530
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (31
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  30,530
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  30
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  1
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –Issuance
      of common stock for assets
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  1,672,644
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  1,672
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  8,073,250
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  8,074,922Net
      loss for the year endedDecember
      31, 2008
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  –
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (9,185,220
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  (9,185,220
                                                                                                                                                  )Balance
      as of December 31, 2008
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  3,112,120
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  3,112
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  29,120,945
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  29,120
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  15,574,724
                                                                                                                                                  
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  (10,550,636
                                                                                                                                                  )
                                                                                                                                                  
                                                                                                                                                  $
                                                                                                                                                  5,056,320The
      accompanying notes are an integral part of these consolidated financial
      statements.
   34
 
  CAPITAL
CITY ENERGY GROUP, INC.
 Consolidated
Statements of Cash Flows
 For
      the Years EndedDecember
      31,2008
                                                                          
                                                                          
                                                                          2007OPERATING
      ACTIVITIESNet
      loss
                                                                          
                                                                          $
                                                                          (9,185,220
                                                                          )
                                                                          
                                                                          $
                                                                          187,601Adjustments
      to reconcile net loss to netused
      by operating activities:Services
      contributed by officersand
      shareholders
                                                                          
                                                                          
                                                                          –
                                                                          
                                                                          
                                                                          
                                                                          5,000Common
      stock issued for services
                                                                          
                                                                          
                                                                          353,616
                                                                          
                                                                          
                                                                          
                                                                          –Amortization
      of stock options
                                                                          
                                                                          
                                                                          100,546
                                                                          
                                                                          
                                                                          
                                                                          –Amortization
      of discount on debt
                                                                          
                                                                          
                                                                          –
                                                                          
                                                                          
                                                                          
                                                                          458,333Depreciation,
      depletion, and accretion
                                                                          
                                                                          
                                                                          2,109,918
                                                                          
                                                                          
                                                                          
                                                                          776,031Gain
      on sale of assets
                                                                          
                                                                          
                                                                          –
                                                                          
                                                                          
                                                                          
                                                                          (100,690
                                                                          )Impairment
      of oil and gas properties
                                                                          
                                                                          
                                                                          5,095,085
                                                                          
                                                                          
                                                                          
                                                                          –Changes
      in operating assets and liabilitiesChange
      in accounts receivable
                                                                          
                                                                          
                                                                          (279,640
                                                                          )
                                                                          
                                                                          
                                                                          633Change
      in related party receivables
                                                                          
                                                                          
                                                                          (47,192
                                                                          )
                                                                          
                                                                          
                                                                          –Change
      in inventory
                                                                          
                                                                          
                                                                          (178,356
                                                                          )
                                                                          
                                                                          
                                                                          –Change
      in prepaid expenses
                                                                          
                                                                          
                                                                          12,112
                                                                          
                                                                          
                                                                          
                                                                          (45,476
                                                                          )Change
      in accounts payableand
      accrued expenses
                                                                          
                                                                          
                                                                          2,837,658
                                                                          
                                                                          
                                                                          
                                                                          355,614Change
      in asset retirement obligation
                                                                          
                                                                          
                                                                          86,917
                                                                          
                                                                          
                                                                          
                                                                          –Change
      in deferred income tax liability
                                                                          
                                                                          
                                                                          474,058
                                                                          
                                                                          
                                                                          
                                                                          (5,000
                                                                          )Net
      Cash Provided by Operating Activities
                                                                          
                                                                          
                                                                          1,379,502
                                                                          
                                                                          
                                                                          
                                                                          1,632,046INVESTING
      ACTIVITIESPurchase
      of oil and gas properties
                                                                          
                                                                          
                                                                          (1,094,012
                                                                          )
                                                                          
                                                                          
                                                                          –Purchase
      of fixed assets
                                                                          
                                                                          
                                                                          (2,566,936
                                                                          )Sale
      of oil and gas properties
                                                                          
                                                                          
                                                                          –
                                                                          
                                                                          
                                                                          
                                                                          146,035Purchase
      of long-term assets
                                                                          
                                                                          
                                                                          (40,420
                                                                          )
                                                                          
                                                                          
                                                                          –Net
      Cash (Used in) Provided byInvesting
      Activities
                                                                          
                                                                          $
                                                                          (3,701,368
                                                                          )
                                                                          
                                                                          $
                                                                          146,035The
      accompanying notes are an integral part of these consolidated financial
      statements.
   35
  CAPITAL
      CITY ENERGY GROUP, INC.Consolidated
      Statements of Cash
Flows
  For
      the Years EndedDecember
      31,FINANCING
      ACTIVITIES
                                                          
                                                          2008
                                                          
                                                          
                                                          2007Preferred dividends
                                                          
                                                          $
                                                          (533,081
                                                          )
                                                          
                                                          $
                                                          –Funds
      not included in recapitalization
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          (3,293,979
                                                          )Contributed capital
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          2,186,250Cash
      received on notes payable
                                                          
                                                          
                                                          2,414,511
                                                          
                                                          
                                                          
                                                          –Payments
      on notes payable
                                                          
                                                          
                                                          –
                                                          
                                                          
                                                          
                                                          (850,000
                                                          )Sale
      of common stock for cash
                                                          
                                                          
                                                          678,751
                                                          
                                                          
                                                          
                                                          –Net
      Cash Provided by (Used In)Financing
      Activities
                                                          
                                                          
                                                          2,560,181
                                                          
                                                          
                                                          
                                                          (1,957,729
                                                          )NET
      DECREASE IN CASH
                                                          
                                                          
                                                          238,315
                                                          
                                                          
                                                          
                                                          (179,648
                                                          )CASH
      AT BEGINNING OF PERIOD
                                                          
                                                          
                                                          200,451
                                                          
                                                          
                                                          
                                                          380,099CASH
      AT END OF PERIOD
                                                          
                                                          $
                                                          438,766
                                                          
                                                          
                                                          $
                                                          200,451SUPPLEMENTAL
      DISCLOSURES OFCASH
      FLOW INFORMATIONCASH
      PAID FOR:Interest
                                                          
                                                          $
                                                          –
                                                          
                                                          
                                                          $
                                                          –Income
      Taxes
                                                          
                                                          $
                                                          –
                                                          
                                                          
                                                          $
                                                          –The
      accompanying notes are an integral part of these consolidated financial
      statements.
   36
  CAPITAL
      CITY ENERGY GROUP, INC.CONSOLIDATED
      STATEMENTS OF
OPERATIONS
  For
      the Years EndedDecember
      31,2008
                                                                
                                                                
                                                                2007(as
      restated)REVENUESOil
      and gas revenue
                                                                
                                                                $
                                                                2,350,387
                                                                
                                                                
                                                                
                                                                2,677,086Management
      revenue
                                                                
                                                                
                                                                733,403
                                                                
                                                                
                                                                
                                                                223,615Total
      Revenues
                                                                
                                                                
                                                                3,083,790
                                                                
                                                                
                                                                
                                                                2,900,701OPERATING
      EXPENSESLease
      operating costs
                                                                
                                                                
                                                                750,515
                                                                
                                                                
                                                                
                                                                548,452Depreciation,
      depletion and accretion
                                                                
                                                                
                                                                2,109,918
                                                                
                                                                
                                                                
                                                                776,031Impairment
      of Oil and Gas Assets
                                                                
                                                                
                                                                5,095,085
                                                                
                                                                
                                                                
                                                                –Selling,
      general and administrative
                                                                
                                                                
                                                                4,291,272
                                                                
                                                                
                                                                
                                                                842,558Bad
      debt expense
                                                                
                                                                
                                                                115,458
                                                                
                                                                
                                                                
                                                                –Dry
      hole expense
                                                                
                                                                
                                                                –
                                                                
                                                                
                                                                
                                                                –Total
      Operating Expenses
                                                                
                                                                
                                                                12,362,247
                                                                
                                                                
                                                                
                                                                2,167,041LOSS
      FROM OPERATIONS
                                                                
                                                                
                                                                (9,278,457
                                                                )
                                                                
                                                                
                                                                733,660OTHER
      INCOME (EXPENSE)Interest
      and other income
                                                                
                                                                
                                                                187,794
                                                                
                                                                
                                                                
                                                                100,690.00Interest
      expense
                                                                
                                                                
                                                                (258,517
                                                                )
                                                                
                                                                
                                                                (482,789
                                                                )Total
      Other Income (Expense)
                                                                
                                                                
                                                                (70,723
                                                                )
                                                                
                                                                
                                                                (382,099
                                                                )LOSS
      BEFORE INCOME TAXES
                                                                
                                                                
                                                                (9,349,180
                                                                )
                                                                
                                                                
                                                                351,561INCOME
      TAX BENEFIT (EXPENSE)
                                                                
                                                                
                                                                163,960
                                                                
                                                                
                                                                
                                                                (2,098,885
                                                                )NET
      LOSS
                                                                
                                                                $
                                                                (9,185,220
                                                                )
                                                                
                                                                $
                                                                (1,747,322
                                                                )LESS:
      PREFERRED DIVIDENDS
                                                                
                                                                
                                                                (533,081
                                                                )
                                                                
                                                                
                                                                –NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
                                                                
                                                                
                                                                (9,718,301
                                                                )
                                                                
                                                                
                                                                (1,747,322
                                                                )BASIC
      AND FULLY DILUTED LOSS PER COMMON SHARE
                                                                
                                                                $
                                                                (0.38
                                                                )
                                                                
                                                                $
                                                                (0.09
                                                                )BASIC
      AND FULLY DILUTED WEIGHTED AVERAGENUMBER
      OF COMMON SHARES OUTSTANDING
                                                                
                                                                
                                                                24,099,521
                                                                
                                                                
                                                                
                                                                19,423,240The
      accompanying notes are an integral part of these consolidated financial
      statements.
    37
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Note 1.Organization and Business
Operations
 
 On May 2,
2003, Capital City Marketing Services, LLC (“Marketing”) was formed as an Ohio
limited liability company. On September 30, 2003, Marketing changed its name to
Capital City Petroleum, LLC (“Petroleum LLC”).  On September 28, 2006,
Petroleum LLC was merged with Capital City Petroleum, LLC, a Delaware limited
liability company. The main purpose of the Company was to form and manage the
oil and gas interests of various Capital City Energy Funds (the “Funds”). On
October 18, 2007, the Company was converted into Capital City Petroleum, Inc., a
Delaware corporation.
 
 The term
“Company” refers to Capital City Energy Group, Inc., it’s predecessors and it
wholly owned subsidiaries unless otherwise specified.
 
 The
Company was in transition throughout 2008 as it moved from receiving the
majority of revenue from the Fund Management Division of the Company in 2007 and
previous years to receiving the majority of revenue from the direct ownership of
interests in energy properties.
 
 The
Company acquired Avanti Energy Partners during the first six months of the year
which is managing the Capital City Energy Funds and transitioned to a full
service oil and natural gas operating company before the end of
2008.  A second acquisition was transacted in the first half of 2008
in the oilfield service sector. The Company acquired was Eastern Well
Services,  LLC and began operations through consulting oil and natural
gas operating companies on their well completion in the continental United
States and internationally.
 
 On
December 11, 2008, Capital City Energy Fund XIV, LLC (the “LLC”) merged with and
into Capital City Petroleum, Inc., a wholly-owned subsidiary of the
Company.  Pursuant to the merger, the members of the LLC received
698,551 shares of the Company’s unregistered common stock based on the
distribution provisions of the limited liability company agreement of the
LLC.
 
 Additionally,
on December 11, 2008, Capital City Energy Fund XVI, LP (the “LP”) merger with
and into Capital City Petroleum, Inc.  Pursuant to the merger, the
partners of the LP received 820,546 shares of the Company’s unregistered common
stock based on the distribution provisions of the limited partnership agreement
of the LP.
 
 The
Company acquired 100% of the stock of Hotwell Services Inc. (“Hotwell”), an
emerging oilfield service company operating in the Appalachian Basin, on
December 31, 2008.  The Company purchased Hotwell for $5,000,000,
through the issuance of 2,777,778 shares of common stock valued at $1.80 per
share.
 
 Revenue
Sources
 
 The
Company’s results of operations are dependent on four sources of revenue within
our Triad Business Model.
 
 The Fund
Management Division has two sources of income. The first being the 23% annual
management fees earned for managing the Capital City Energy Funds and the second
being the difference between the prices received by the Company for its
natural gas and crude oil products and the cost to find, develop, produce and
market such resources.
 
 The
Strategic Acquisition Division contains the third source of revenue the Company
receives through consulting fees earned by Eastern Well Services, LLC a wholly
subsidiary.  Eastern Well Services is an oilfield service company
which throughout 2008 derived revenue from consulting fees.  With the
  38
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Company’s
acquisition of Hotwell Services, Inc. on December 31, 2008, beginning in 2009
will derive revenue charging for services such as wireline, logging, testing and
other well completion services.
 
 The
Principal Investment Division contains our primary and fourth source of revenue
which accounts for 70% of revenue earned in 2008 which is the oil and natural
gas revenue received from the ownership interests in more than 60 energy
properties located in 10 different states.
 
 At December
31, 2008, Capital City managed oil and gas investments for one energy fund
(Capital City Energy Fund XVIII, LP) for which a management fee is earned. These
investments consisted of non-operating oil and gas working interests in wells in
Louisiana, Ohio, Texas, Pennsylvania, Alabama, Nebraska, Colorado, Oklahoma and
Arkansas with net revenue interests ranging from 50.00% to 0.0013%.
 
 Note
2.   Summary of Significant Accounting Policies
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
 
 The
Company's consolidated financial statements are based on a number of significant
estimates, including oil and gas reserve quantities which are the basis for the
calculation of depreciation, depletion and impairment of oil and gas properties,
and timing and costs associated with its retirement obligations.
 
 Cash
and Cash Equivalents
 
 Cash and
cash equivalents include cash in banks and financial instruments which mature
within three months of the date of purchase.
 
 Concentration
of Credit Risk
 
 Financial
instruments that potentially subject the Company to concentration of credit risk
consist of cash. At December 31, 2008, the Company had approximately no cash in
excess of federally insured limits (the FDIC insured deposits have been
temporarily increased to $250,000).  The Company maintains cash
accounts only at large high quality financial institutions and the Company
believes the credit risk associated with cash held in banks is
remote.
 
 The
Company's receivables primarily consist of accounts receivable from oil and gas
sales. Accounts receivable are recorded at invoiced amount and generally do not
bear interest. Any allowance for doubtful accounts is based on management's
estimate of the amount of probable losses due to the inability to collect from
customers. As of December 31, 2008, no allowance for doubtful accounts has been
recorded and none of the accounts receivable have been
collateralized.
 
 Fair
Value of Financial Instruments
 
 As of
December 31, 2008, the fair value of cash, accounts receivable, and accounts
payable, including amounts due to and from related parties, if any, approximate
carrying values because of the short-term maturity of these
instruments.
 
 39
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Principles
of Consolidation
 
 The
Company’s financial statements include the accounts of the Company and its
wholly owned subsidiaries: Eastern Well Services, LLC, Capital City Petroleum,
Inc. and Hotwell Services, Inc. The operations of Hotwell are not included in
the consolidated statements of operations because the acquisition occurred on
December 31, 2008. All significant intercompany transactions have been
eliminated in the consolidation.
 
 Oil
and Gas Properties, Successful Efforts Method
 
 The
Company uses the successful efforts method of accounting for oil and gas
producing activities. Under the successful efforts method, costs to acquire
mineral interests in oil and gas properties, to drill and equip exploratory
wells that find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed as incurred.  We evaluate our proved oil and
gas properties for impairment on a field-by-field basis whenever events or
changes in circumstances indicate that an asset’s carrying value may not be
recoverable.  The Company follows Statement of Financial Accounting
Standards (SFAS)
No. 144, Impairment of
Long-Lived Assets, for these evaluations. Unamortized capital costs are
reduced to fair value if the undiscounted future net cash flows from our
interest in the property’s estimated proved reserves are less than the asset’s
net book value.
 
 Unproved
oil and gas properties that are individually significant are periodically
assessed for impairment of value, and a loss is recognized at the time of
impairment by providing an impairment allowance. Other unproved properties are
amortized based on the Company's experience of successful drilling and average
holding period. Capitalized costs of producing oil and gas properties, after
considering estimated dismantlement and abandonment costs and estimated salvage
values, are depreciated and depleted by the unit-of-production method. Support
equipment and other property and equipment are depreciated over their estimated
useful lives.
 
 Under
SFAS No. 19, Financial
Accounting and Reporting by Oil and Gas Producing Companies, drilling
costs for exploratory wells are initially capitalized but generally must be
charged to expense unless the wells are determined to be successful within one
year after completion of drilling. Circumstances that permit continued
capitalization of exploratory drilling costs are addressed by the Financial
Accounting Standards Board (FASB) under Staff Position
(FSP) No. 19-1,
Accounting for Suspended Well
Costs. The one-year limitation may be exceeded for an exploratory well
only if sufficient reserves have been found to justify its completion and
sufficient progress has been made in assessing the reserves and the economic and
operating viability of the project. If the exploratory well does not meet both
criteria, its capitalized costs are expensed, net of any salvage value. Annual
disclosures are required under FSP No. 19-1 to provide information about
management’s evaluation of capitalized exploratory well costs, including
disclosure of (i) net changes from period to period in the costs for wells
that are pending the determination of proved reserves, (ii) the amount of
any exploratory well costs that have been capitalized for more than one-year
after the completion of drilling and (iii) an aging of suspended
exploratory well costs and the number of wells affected. See Note 2 – Oil
and Gas Properties.
 
 On the
sale or retirement of a complete unit of a proved property, the cost and related
accumulated depreciation, depletion, and amortization are eliminated from the
property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income. On the sale of an entire interest in an unproved
property for cash or cash equivalent, gain or loss on the sale is recognized,
taking into consideration the amount of any recorded impairment if the property
had been assessed individually.
 
 If a
partial interest in an unproved property is sold, the amount received is treated
as a reduction of the cost of the interest retained.
 
 40
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Property
and Equipment
 
 The cost
of leasehold improvement and office equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets, which range from three to five years.
  Consolidation
of Variable Interest Entities
 
 The
Company evaluates and consolidates where appropriate its less than
majority-owned investments pursuant to Financial Accounting Standards Board
(FASB) Interpretation No. 46, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN
46).  A variable interest entity (VIE) is a corporation, partnership,
trust, or any other legal structure used for business purposes that does not
have equity investors with proportionate voting rights or has equity investors
that do not provide sufficient financial resources for the entity to support its
activities.  FIN 46 requires a VIE to be consolidated by a company if
that company is the primary beneficiary of the VIE.  The primary
beneficiary of a VIE is an entity that is subject to a majority of the risk of
loss from the VIE’s activities or entitled to receive a majority of the entity’s
residual returns, or both. The Company has determined that the Capital City
Energy Funds qualify as VIEs, however, they have determined that the Company is
not the primary beneficiary. Accordingly, the Company has not consolidated the
Capital City Energy Funds.
 
 Asset
Retirement Obligations
 
 The
Company follows the provisions of Financial Accounting Standards Board Statement
No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). The fair
value of an asset retirement obligation is recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made. The present
value of the estimated asset retirement costs is capitalized as part of the
carrying amount of the long-lived asset. For the Company, asset retirement
obligations relate to the abandonment of oil and gas producing facilities. The
amounts recognized are based upon numerous estimates and assumptions, including
future retirement costs, future recoverable quantities of oil and gas, future
inflation rates and the credit-adjusted risk-free interest rate.
 
 Goodwill
and Other Intangible Assets
 
 The
Company used the purchase method of accounting for its acquisition of
Hotwell.  The acquisition results in an allocation of purchase price
to goodwill.  The cost of Hotwell was first allocated to identifiable
assets based on estimated fair values. The excess of the purchase price over the
fair value of identifiable assets acquired, net of liabilities assumed, is
recorded as goodwill.
 
 Under
SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), the
Company evaluates goodwill for impairment at the reporting unit level at least
annually, or more frequently if triggering events occur or other impairment
indicators arise which might impair recoverability.   To
determine if there is any impairment, management determined whether the fair
value of any of its reporting units is greater than its carrying value. If the
fair value of a reporting unit is less than its carrying value, then the implied
fair value of goodwill must be calculated and compared to its carrying value to
measure the amount of impairment, if any. The Company’s evaluation has noted no
instances of impairment of goodwill at December 31, 2008.
 
 Income
Taxes
 
 The
Company accounts for income taxes pursuant to SFAS No 109, "Accounting for
Income Taxes," which requires recognition of deferred income tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in our financial statements or tax returns. Deferred taxes are
provided on temporary differences between the financial statements and tax basis
of assets using the enacted tax rates that are expected to apply to taxable
income when the temporary differences are expected to reverse.
  41
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
 
 On
January 1, 2007, the Company adopted "Accounting for Uncertainty in Income
Taxes," an interpretation of FAS 109 (FIN 48), FIN 48 established a
more-likely-than-not threshold for recognizing the benefits of tax return
positions in the financial statements. Also, FIN 48 implemented a process for
measuring those tax positions which meet the recognition threshold of being
ultimately sustained upon examination by the taxing authorities. The adoption of
FIN 48 had no material impact to the Company's consolidated financial
statements.
 
 Revenue
Recognition
 
 The
Company recognizes oil and natural gas revenue as production is extracted and
sold from it’s interests in producing wells as oil and natural gas wells. Oil
and natural gas sold by Capital City is not significantly different from Capital
City’s share of production.  Revenues from management fees are
recognized in the preceding month at end of each calendar quarter and paid in
arrears.
 
 Share-Based
Compensation
 
 The
Company follows SFAS No. 123-R "Accounting for Stock-Based Compensation -
Revised". Under FASB Statement 123(R), the Company estimates the fair value of
each stock option award at the grant date by using the Black-Scholes option
pricing model.
 
 Comprehensive Income and
Loss
 
 The
accompanying consolidated financial statements do not include statements of
comprehensive income (loss) since the Company had no items of comprehensive
income or loss for the years reported.
  Recently
Adopted Accounting Pronouncements
 
 In
December 2008, the SEC amended its oil and gas reporting rules under the
Exchange Act and Industry Guides. The revisions are intended to provide
investors with a more meaningful
and comprehensive understanding of oil and gas reserves by aligning the oil and
gas disclosure requirements
with current industry practices and technology. The amendments will be effective
for fiscal years ending on
or after December 31, 2009 and will significantly impact reserve and resource
reporting for all E&P companies.
 
 In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (FSP FAS
157-4).  FSP FAS 157-4 provides guidance on estimating fair value when
market activity has decreased and on identifying transactions that are not
orderly.  Additionally, entities are required to disclose in interim
and annual periods the inputs and valuation techniques used to measure fair
value.  This FSP is effective for interim and annual periods ending
after June 15, 2009.  The Company does not expect the adoption of FSP
FAS 157-4 will have a material impact on its financial condition or results of
operation.
 
 In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active,” (FSP FAS
157-3), which clarifies application of SFAS 157 in a market that is not
active.  FSP FAS 157-3 was effective upon issuance, including prior
periods for which financial statements have not been issued.  The
adoption of FSP FAS 157-3 had no impact on the Company’s results of operations,
financial condition or cash flows.
 
 42
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 In
December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities.”  This disclosure-only FSP
improves the transparency of transfers of financial assets and an enterprise’s
involvement with variable interest entities, including qualifying
special-purpose entities.  This FSP is effective for the first
reporting period (interim or annual) ending after December 15, 2008, with
earlier application encouraged.  The Company adopted this FSP
effective January 1, 2009.  The adoption of the FSP had no impact
on the Company’s results of operations, financial condition or cash
flows.
 
 In
December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1).  FSP FAS
132(R)-1 requires additional fair value disclosures about employers’ pension and
postretirement benefit plan assets consistent with guidance contained in
SFAS 157.  Specifically, employers will be required to disclose
information about how investment allocation decisions are made, the fair value
of each major category of plan assets and information about the inputs and
valuation techniques used to develop the fair value measurements of plan assets.
This FSP is effective for fiscal years ending after December 15,
2009.  The Company does not expect the adoption of FSP FAS 132(R)-1
will have a material impact on its financial condition or results of
operation.
 
 In
September 2008, the FASB issued exposure drafts that eliminate qualifying
special purpose entities from the guidance of SFAS No. 140, “Accounting for
Transfers and Servicing of Financial  Assets and  Extinguishments of
Liabilities,” and  FASB  Interpretation 46 (revised December 2003),
“Consolidation of  Variable  Interest Entities − an
interpretation of ARB  No. 51,” as well as other
modifications.  While the proposed revised pronouncements have not
been finalized and the proposals are subject to further public comment, the
Company anticipates the changes will not have a significant impact on the
Company’s financial statements.  The changes would be effective March
1, 2010, on a prospective basis.
 
 In
June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
(FSP EITF 03-6-1). FSP EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the computation of earnings per share under
the two-class method as described in FASB Statement of Financial Accounting
Standards No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning on or after
December 15, 2008 and earlier adoption is prohibited. We are not required
to adopt FSP EITF 03-6-1; neither do we believe that FSP EITF 03-6-1 would have
material effect on our consolidated financial positionand results of
operations if adopted.
 
 Recently
Adopted Accounting Pronouncements
 
 In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts-and interpretation of FASB Statement No. 60”.SFAS No. 163 clarifies
how Statement 60 applies to financial guarantee insurance contracts, including
the recognition and measurement of premium revenue and claims liabilities. This
statement also requires expanded disclosures about financial guarantee insurance
contracts. SFAS No. 163 is effective for fiscal years beginning on or after
December 15, 2008, and interim periods within those years. SFAS No. 163 has no
effect on the Company’s financial position, statements of operations, or cash
flows at this time.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”.SFAS No. 162 sets forth
the level of authority to a given accounting pronouncement or document by
category. Where there might be conflicting guidance between two categories, the
more authoritative category will prevail. SFAS No. 162 will become effective 60
days after the SEC approves the PCAOB’s amendments to AU Section 411 of the
AICPA Professional Standards. SFAS No. 162 has no effect on the Company’s
financial position, statements of operations, or cash flows at this
time.
 
 In March
2008, the FASB, issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.This standard requires companies to provide
  43
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 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. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company has not yet adopted the
provisions of SFAS No. 161, but does not expect it to have a material impact on
its financial position, results of operations or cash flows.
 
 In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS No. 123 (R), Share-Based
Payment.  In particular, the staff indicated in SAB 107 that it
will accept a company's election to use the simplified method, regardless of
whether the company has sufficient information to make more refined estimates of
expected term. At the time SAB 107 was issued, the staff believed that more
detailed external information about employee exercise behavior (e.g., employee
exercise patterns by industry and/or other categories of companies) would, over
time, become readily available to companies. Therefore, the staff stated in SAB
107 that it would not expect a company to use the simplified method for share
option grants after December 31, 2007. The staff understands that such detailed
information about employee exercise behavior may not be widely available by
December 31, 2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007. The
Company currently uses the simplified method for “plain vanilla” share options
and warrants, and will assess the impact of SAB 110 for fiscal year 2009. It is
not believed that this will have an impact on the Company’s financial position,
results of operations or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No.
51.  This statement 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 that should be
reported as equity in the consolidated financial statements. Before this
statement was issued, limited guidance existed for reporting noncontrolling
interests. As a result, considerable diversity in practice existed. So-called
minority interests were reported in the consolidated statement of financial
position as liabilities or in the mezzanine section between liabilities and
equity. This statement improves comparability by eliminating that diversity.
This statement is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009,
for entities with calendar year-ends). Earlier adoption is prohibited. The
effective date of this statement is the same as that of the related Statement
141 (revised 2007). The Company will adopt this Statement beginning March 1,
2009. It is not believed that this will have an impact on the Company’s
financial position, results of operations or cash flows.
 
 Recently
Adopted Accounting Pronouncements
 
 In
December 2007, the FASB, issued FAS No. 141(R)  (revised 2007), Business Combinations.’This
Statement replaces FASB Statement No. 141, Business Combinations, but
retains the fundamental requirements in Statement 141.  This
Statement establishes principles and requirements for how the acquirer: (a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This statement
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. An entity may not apply it before that date. The
effective date of this statement is the same as that of the related FASB
Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements.  The Company will adopt this
statement beginning March 1, 2009. It is not believed that this will have an
impact on the Company’s financial position, results of operations or cash
flows.
  44
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 In
February 2007, the FASB, issued SFAS No. 159,The Fair Value Option for Financial
Assets and Liabilities—Including an Amendment of FASB Statement No.
115.  This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities. Most of the provisions in FAS 159 are elective;
however, an amendment to FAS 115 Accounting for Certain Investments
in Debt and Equity Securities applies to all entities with available for
sale or trading securities. Some requirements apply differently to entities that
do not report net income. SFAS No. 159 is effective as of the beginning of an
entities first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that fiscal year and also
elects to apply the provisions of SFAS No. 157 Fair Value
Measurements.  The Company adopted SFAS No. 159 beginning March
1, 2008. The adoption of this pronouncement did not have an impact on the
Company’s financial position, results of operations or cash flows.
 
 Reclassification
 
 Certain
amounts in prior periods have been reclassified to conform to current period
presentation.
 
 Note
4.   Going Concern
 
 The
Company’s financial statements are prepared using generally accepted accounting
principles in the United States of America applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business.  The ability of the Company to continue as
a going concern is dependent on the Company obtaining adequate capital to fund
operating losses until it becomes profitable. If the Company is unable to obtain
adequate capital, it could be forced to cease operations.  The Company
has incurred cumulative operating losses through December 31, 2008 of
$10,550,636 and had a net loss  of $9,185,220 at December 31,
2008.   Revenues for the year ended December 31, 2008 were not
sufficient to cover our operating costs and we continue to generate negative
cash flows from operations.  There can be no assurance that the
Company can or will be able to generate sufficient revenue or complete any debt
or equity financing that might be needed to support operations in the
future.
 
 In order
to continue as a going concern, the Company will need, among other things,
additional capital resources. Management’s plan is to obtain such resources for
the Company by obtaining capital from management and significant shareholders
sufficient to meet its minimal operating expenses and seeking equity and/or debt
financing. However, management cannot provide any assurances that the Company
will be successful in accomplishing any of its plans.
 
 The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going
concern.  The Company is in the process of raising additional capital
through a related party private fund management company.
 
 Note
5.   Business Combination
 
 The
Company acquired 100% of the stock of Hotwell , an emerging oilfield service
company operating in the Appalachian Basin, on December 31,
2008.  Accordingly, the accompanying consolidated financial statements
of Capital City include the assets and liabilities of Hotwell as of
December 31, 2008. The Company purchased Hotwell for $5,000,000, through
the issuance of 2,777,778 shares of common stock valued at $1.80 per share on
December 31, 2008.
  The
purchase price paid by the Company consisted of the following:
  45
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Cash
      paid for transaction costs
                                    
                                    $
                                    363,247Capital City
      common stock issued to sellers (2,777,778shares)
      (1)
                                    
                                    
                                    5,000,000Capital City
      warrants issued for transaction costs to acquire186,837 shares of
      common stock at $1.80 per share (2)
                                    
                                    
                                    146,325Total
      purchase price paid
                                    
                                    $
                                    5,509,572
  December 31,
      2008Fair
      ValueAssets
      Acquired:Cash
                                  
                                  $
                                  72,990Accounts
      Receivable
                                  
                                  
                                  480,410Inventory
                                  
                                  
                                  178,356Prepaid
      Expenses
                                  
                                  
                                  99,119Property
      and Equipment, net
                                  
                                  
                                  4,126,121Rental
      Security deposit
                                  
                                  
                                  28,550Total
      Assets Acquired
                                  
                                  
                                  4,985,546Liabilities
      Assumed:Accounts
      Payable and Bank Overdraft
                                  
                                  
                                  1,269,533Related
      Party Loans
                                  
                                  
                                  115,075Total
      Liabilities Assumed
                                  
                                  
                                  1,384,608Excess
      of assets acquired over liabilities assumed (Goodwill)
                                  
                                  
                                  1,908,634Fair
      value of assets acquired net of liabilities assumed
                                  
                                  $
                                  5,509,572
  (1)
                The
      common stock was valued at $1.80 per share, which approximates the quoted
      market price of the common stock as of the end of the day previous to the
      acquisition.
 (2)
                The
      fair value of warrants to purchase common stock at $1.80 per share was
      based on the quoted market price of common stock as of the end of the day
      previous to the acquisition, an estimated life of 3 years, volatility of
      65% and a risk free interest rate of
1.0%.
 
 Note
6.   Oil and Gas Properties
 
 Oil and
gas properties are stated at cost. Depletion expense for the year ended December
31, 2008 and 2007 amounted to $1,739,908 and $776,031, respectively. Gains and
losses on sales and disposals are included in the statements of operations. At
December 31, 2008 an inmpairmrent of oil and gas properties $ 5,095,085was
recorded based upon reserved engineers estimates.  As of
December 31, 2008 and 2007 oil and gas properties consisted of the
following:
 
 Capitalized Costs for Oil and
Gas
 Producing
Activities
  2008
                            
                            
                            2007Unproved
      properties
                            
                            $
                            19,338
                            
                            
                            $
                            0Proved Properties
                            
                            
                            12,951,633
                            
                            
                            
                            9,529,004Total
                            
                            
                            12,951,633
                            
                            
                            
                            9,529,004Accumulated Depletion
                            
                            
                            (8,789,479)
                            
                            
                            
                            (2,314,141)Net
      Oil and Gas Properties
                            
                            $
                            4,162,154
                            
                            
                            $
                            7,214,863
 
 46
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Costs
Incurred in Oil and Gas Acquisition
 And Development
Activities
  2008
                        
                        
                        2007Proved Properties
                        
                        $
                        3,590,803
                        
                        
                        $
                        —Unproved Properties
                        
                        
                        19,338
                        
                        
                        
                        —Well Equipment
                        
                        
                        75,000
                        
                        
                        
                        —Total
                        
                        $
                        3,685,141
                        
                        
                        $
                        —
 
 Note
7.   Participating Interest Financing Arrangement
 
 The
Company entered into a series of financing agreements for aggregate proceeds of
$1,500,000 whereby participating revenue interests were conveyed to individual
lenders in certain oil and gas properties owned by the Company. The principal
terms of the agreements provided for a production payment from the net revenue
interests in certain wells in which the Company owns a working interest;
provides a minimum return on investment of 12% in the first year only; and
provides a put option to the holders in Month 13. The put option provides the
holder the sole right to put the participating revenue interest to the Company
for the original principal amount. The put options expire during the period
March to May of 2009. The Company determined that these transactions were
financings as the put option creates a debt obligation until such option
expires, at which time, the transactions will be recorded as a sale. Any gain or
loss on the sale of the properties would then be recognized in the statements of
operations.
 
 Note
8.   Stockholders’ Equity
 
 On July
29, 2008, pursuant to an exempt offering under Reg. D, Rule 506 of the
Securities Act of 1933, as amended, an affiliate of the Company, The Opportunity
Fund, LLC purchased 10,000 shares of common stock at $3.00 per share and
warrants to purchase an additional 10,000 shares of common stock, exercisable
over the next 36 months, with a strike price of $4.00 per share. This offering
has been terminated. Total proceeds from the offering were $30,000.
 
 During
the year ended December 31, 2008 the Company issued 50,000 shares of common
stock for services rendered in the amount of $141,500.  The Company
issued an additional 29,796 shares of common stock as payment on debts totaling
$100,000.  The Company also issued 38,735 shares of common stock for
director’s fees and other compensation expense for an aggregate total of
$102,766.  The Company issued 30,530 shares of common stock in
exchange for preferred stock on a one-share-for-one-share basis and an
additional 442,500 shares upon the exercise of warrants for proceeds of
$678,751.  The Company issued 7,732,644 shares of common stock in the
acquisition of subsidiary entities, including the related recapitalization
effects.
  47
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note
9.   Warrants and Options
 
 Warrants
 
 Pursuant
to a Private Placement completed by the Company on October 31, 2007 the Company
issued 2,155,000 warrants exercisable at $1.50 per share for a period of 3 years
but subject to being called by the Company for $0.10 per warrant one year after
their issue date.  At December 31, 2007, there were 1,632,500 warrants
exercisable.
 
 The
Company exercised its right to call the warrants on their one year anniversary
date, which ranged from January 1, 2008 through October 23, 2008, which required
them to be exercised by the holder or purchased by the
Company.  522,500 of the warrants were exercised while the remaining
1,632,500 were purchased by the Company in 2008.
 Options
 
 The
Corporation has available up to 2,500,000 shares to issue under its 2008
Incentive Plan to key employees and directors of the Corporation. Options to
purchase shares of common stock are granted at the market price of the common
stock on grant date and expire ten years from issuance.
 
 The fair
values of the stock options granted are estimated at the date of grant using the
Black-Scholes option pricing model.  The model is sensitive to changes
in assumptions which can materially affect the fair value estimate. The
Corporation’s method of estimating expected volatility is based on volatility of
its peers since that Company has only had operations for a short time. The
expected dividend yield is estimated based on the Company’s expected dividend
rate over the term of the options. The expected term of the options is based on
the management’s estimate, and the risk-free interest rate is based on
U.S. Treasuries with a term approximating the expected life of the
options.
 
 As of
December 31, 2008, four directors of the Company held options to purchase
500,000 shares of common stock at an exercise price of $3.29 per share. Those
options, which were granted in April and May 2008, do not vest until April and
May 2009 and are exercisable for 5 years from issuance.
  Capital
City estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2008.
 
 Expected
      volatility
                          
                          40.25
                          %Risk
      free interest
                          
                          3.29
                          %Expected
      lives
                          
                          1
      yearDividend
      yield
                          
                          0.00
                          %
  A summary
of the status of Capital City’s stock options to directors as of December 31,
2008 is presented below:
 
 Shares
                          
                          
                          Weighted
      Average Exercise PriceOutstanding
      at beginning of year
                          
                          
                          —
                          
                          
                          
                          —Granted
                          
                          
                          875,000
                          
                          
                          $
                          3.29Exercised
                          
                          
                          —
                          
                          
                          
                          —Forfeited
                          
                          
                          (375,000
                          )
                          
                          $
                          3.29Outstanding
      but unexercisable at end of year
                          
                          
                          500,000
                          
                          
                          $
                          3.29
 
  48
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Need
to disclose the remaining unamortized expense at 12/31/08.
 
 Note 10. Income
Taxes
 
 The
following table sets forth the components of income tax expense for each of the
years presented in the consolidated financial statements.
 
 Year
      Ended December 31,2008
                                    
                                    2007Current
                                    
                                    $
                                    163,960
                                    
                                    
                                    $
                                    (158,960
                                    )Deferred
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (5,000
                                    )Total
      income tax (expense) benefit
                                    
                                    $
                                    163,960
                                    
                                    
                                    $
                                    (163,960
                                    )
 
 Year
      Ended December 31,2008
                                      
                                      
                                      2007Income
      tax (expense) benefit computed at statutory combined
      basic income tax rates
                                      
                                      $
                                      2,928,503
                                      
                                      
                                      $
                                      (163,960
                                      )Increase
      (decrease) in income tax resulting from:Valuation
      allowance
                                      
                                      
                                      (2,764,543
                                      )
                                      
                                      
                                      —Non-deductible
      expenses
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Total
      income tax (expense) benefit
                                      
                                      $
                                      163,960
                                      
                                      
                                      $
                                      (163,960
                                      )
 
 The
following table sets forth the components of our deferred income tax liabilities
as of the end of each of the years presented in the consolidated financial
statements.
  2008
                                  
                                  
                                  2007Net
      operating loss carry-forward
                                  
                                  $
                                  2,764,543
                                  
                                  
                                  $
                                  —Oil
      and gas properties
                                  
                                  
                                  (2,572,941
                                  )
                                  
                                  
                                  (2,098,883
                                  )Property
      and equipment
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Less
      valuation allowance
                                  
                                  
                                  (2,126,525
                                  )
                                  
                                  
                                  —Deferred
      tax liabilities
                                  
                                  $
                                  (1,934,923
                                  )
                                  
                                  $
                                  (2,098,883
                                  )
 
 Note 11. Earnings
(Loss) Per Share
 
 The
following table shows the computation of basic and diluted earnings per share
(EPS) for each of the
years presented.
  Numerator:
                                                  
                                                  2008
                                                  
                                                  
                                                  2007Net
      income (loss) as reported for basic EPS
                                                  
                                                  $
                                                  (9,718,301
                                                  )
                                                  
                                                  $
                                                  187,601Adjustments
      for diluted EPS
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Net
      income (loss) for diluted EPS
                                                  
                                                  $
                                                  (9,718,301
                                                  )
                                                  
                                                  $
                                                  187,601
  Denominator:
                            
                            2008
                            
                            
                            2007Weighted
      average shares for basic EPS
                            
                            
                            24,099,521
                            
                            
                            
                            19,423,240Effect
      of dilutive securities:Stock
      options
                            
                            
                            —
                            
                            
                            
                            —Warrants
                            
                            
                            —
                            
                            
                            
                            —
  49
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Adjusted
      weighted average shares and assumed conversions for dilutive
      EPS
                                      
                                      
                                      24,099,521
                                      
                                      
                                      
                                      19,423,240Basic
      EPS
                                      
                                      $
                                      (0.38
                                      )
                                      
                                      $
                                      0.01Diluted
      EPS
                                      
                                      $
                                      (0.38
                                      )
                                      
                                      $
                                      0.01
 Basic and
diluted net income per share calculations are presented in accordance with SFAS
No. 128 and are calculated on the basis of the weighted average number of common
shares outstanding during the year. Common stock equivalents are excluded from
the calculation when a loss is incurred as their effect would be anti-dilutive.
The basic income per share of common stock is based on the weighted average
number of shares issued and outstanding at the date of the financial statements.
Capital City had 3,030,300 warrants at December 31, 2008 and 2007 that were
out of the money and are therefore anti-dilutive.
 
 Note 12.Related Party
Transactions
 
 Mr.
Timothy W. Crawford and Joseph Smith, both members of our Board of Directors,
are greater than 10% Members in CCSSM Capital Partners, LLC, which manages The
Opportunity Fund, LLC. On July 29, 2008, The Opportunity Fund, LLC invested
$30,000 to purchase 1 Unit being offered under a private placement memorandum.
One Unit consists of 10,000 shares of common stock at a price of $3.00 per share
and one warrant to purchase an additional 10,000 shares of common stock,
exercisable over the next 36 months, with an exercise price of $4.00 per
share.
 
 Daniel
Coffee, member of our Board of Directors, quit claimed the property he
previously owned to the Company for the price of $541,000.  The
property is 1,024 square feet of office space and approximately 35 acres in
Burbank, Ohio.  Mr. Coffee now pays rent to the company in the amount
of $1500 per month.  It is planned to partition the property, with Mr.
Coffee retaining  the home and approximately 5 acres.
 
 On April
16, 2008, Ms. Barbara Coffee, wife of our director, Mr. Daniel Coffee, sold her
interest in Eastern Well Services, LLC and Avanti Energy Partners, LLC to the
Company for 1,000 shares of the Company’s common stock valued at
$3,500.
 
 On
November 26, 2008 Capital City Energy Group sold a wholly owned well (Covered
Bridge #1) to Capital City Energy Fund XVII for $225,000.
 
 On
December 17, 2007 Capital City Petroleum, Inc., a wholly owned subsidiary of the
Company, entered into an Investment Banking Agreement with Capital City
Consulting Group, Inc.  Capital City Consulting Group LLC is wholly
owned by Capital City Partners, Inc. (controlled by Timothy Crawford, Todd
Crawford and Joseph Smith).  Capital City Consulting Group billed the
Company $649,000 in 2008 for fees in connection with financing, equity raise and
acquisition transactions.
  Note
13.   Commitments and Contingencies
 
 Upon the
termination date of Capital City Energy Fund XVII, LP, the Company is obligated
to purchase all of the Capital City Energy Fund XVII, LP’s assets for a purchase
price equal to ten times the revenue of the Capital City Energy Fund XVII, LP
for the immediately prior fiscal quarter to the termination date of the Capital
City Energy Fund XVII, LP. The Company, at its discretion, may pay the purchase
price in cash, its own common stock or a combination of the two. The Capital
City Energy Fund XVII, LP termination date is the earlier of (a) the written
consent of a majority of the investors, (b) the investors receiving
distributions from the Capital City Energy Fund XVII, LP in the amount of their
original capital contributions or (c) the four year anniversary date after the
final closing date of the fund.  As of December 31, 2008, the Capital
City Energy Fund XVII, LP has not recognized revenue to date.
 
 50
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Capital
City incurred operating lease expenses of $134,858 in 2008 and $15,901 in 2007.
As of December 31, 2008, we had future obligations under operating leases
and other commercial commitments in the amounts listed below.
  Year2009
                                                  
                                                  $
                                                  1,597,4252010
                                                  
                                                  
                                                  52,1802011
                                                  
                                                  
                                                  53,0582012
                                                  
                                                  
                                                  41,2412013
      and thereafter
                                                  
                                                  
                                                  —Total
                                                  
                                                  $
                                                  1,743
      ,903
 
 Note 15.   Managed
Funds
 
 The
Managed Funds are called the Capital City Energy Funds.  The Fund
consists of Capital City Energy Fund XVII, LP.
 
 Avanti
serves as the advisor to the Managed Funds through the selection and purchase of
energy properties on behalf of the Funds and earns a 1% or 2% annual management
fee for these services provided. The Funds incur all the costs associated with
the distribution to the members, tax reporting, geological studies and all other
ancillary accounting costs. The Funds are 99.9% owned by the members with the
Managing General Partner owning .01% of the Fund. The members receive 99.9% of
all the income received from the energy properties owned by the Fund until they
receive 100% of their contributed capital.  Upon the members receiving
100% of their contributed capital, the income received by the Fund is split 80%
to the members and 20% to Avanti.
  Note
16.   Segment Information
 
 We have
four reporting segments which share in the corporate overhead:
 
  
 51
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
16.   Segment Information (continued)
 
 Consolidated
revenues from external customers, operating income (loss), and identifiable
assets were as follows:
 
 Years ended
      December 31,2008
                                  
                                  
                                  2007Revenue:Fund Management Division
                                  
                                  $
                                  274,906
                                  
                                  
                                  $
                                  223,615Principal Investment Division
                                  
                                  
                                  2,349,405
                                  
                                  
                                  
                                  2,677,086Strategic Acquisition Division
                                  
                                  
                                  459,134
                                  
                                  
                                  
                                  —Corporate
                                  
                                  
                                  345
                                  
                                  
                                  
                                  —Total
      revenue
                                  
                                  $
                                  3,083,790
                                  
                                  
                                  $
                                  2,900,701Income
      (loss) from operations:Fund Management Division
                                  
                                  $
                                  188,815
                                  
                                  
                                  $
                                  —Principal Investment Division
                                  
                                  
                                  (6,074,289)
                                  
                                  
                                  
                                  733,660Strategic Acquisition Division
                                  
                                  
                                  (175,324)
                                  
                                  
                                  
                                  —Corporate
                                  
                                  
                                  (2,850,751)
                                  
                                  
                                  
                                  —Total
      income (loss) from operations
                                  
                                  
                                  (8,911,549)
                                  
                                  
                                  
                                  733,660Other income (expense)
                                  
                                  
                                  (70,723
                                  )
                                  
                                  
                                  (382,099
                                  )Net
      loss before income tax
                                  
                                  $
                                  (8,983,254)
                                  
                                  
                                  $
                                  351,561
  December
      31,2008
                          
                          
                          2007Identifiable
      assets:Fund Management
                          
                          $
                          530,837
                          
                          
                          $
                          —Principal Investment
                          
                          
                          5,134,988
                          
                          
                          
                          8,022,877Strategic Acquisition Division
                          
                          
                          696,930
                          
                          
                          
                          —Oilfield Services
                          
                          
                          6,894,180
                          
                          
                          
                          —Corporate
                          
                          
                          988,145
                          
                          
                          
                          —Total
      identifiable assets
                          
                          $
                          14,245,080
                          
                          
                          $
                          8,022,877
 
 Note
17.   Restatement of Financial Statements
 
 The
company restated its balance sheet as of December 31, 2007 to reflect the
deferred income tax liability associated with the acquisition of the Oil and Gas
Funds.  The restatement resulted in the increase of deferred tax
liability by $1,934,923 and the decrease of retained earnings by
$1,934,923.
 
 52
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note 18.Supplementary Information on Oil and
Gas Development and Producing Activities
 
 (a) General.
This Note provides audited information on our oil and gas development and
producing activities in accordance with SFAS No. 69, Disclosures about Oil and Gas
Producing Activities.
 
 (b) Results
of Operations from Oil and Gas Producing Activities. The following table
shows the results of operations from our oil and gas producing activities during
the years presented in the consolidated financial statements. Results of
operations from these activities are determined using historical revenues,
production costs (including production related taxes) and depreciation,
depletion and amortization of the capitalized costs subject to amortization.
General and administrative expenses and interest expense are excluded from this
determination.
  2008
                                  
                                  
                                  2007Proved
      properties
                                  
                                  $
                                  12,743,212
                                  
                                  
                                  $
                                  9,529,004Unproved
      properties
                                  
                                  
                                  19,338
                                  
                                  
                                  
                                  —Gathering
      line
                                  
                                  
                                  75,000
                                  
                                  
                                  
                                  —Total
                                  
                                  $
                                  12,837,550
                                  
                                  
                                  $
                                  9,529,004Accumulated
      depletion
                                  
                                  
                                  (8,791,711
                                  )
                                  
                                  
                                  (2,314,141)Total
                                  
                                  $
                                  4,045,839
                                  
                                  
                                  $
                                  7,214,863
 
 (c) Capitalized
Costs for Oil and Gas Producing Activities. For each of the years
presented in the consolidated financial statements, the following table sets
forth the components of capitalized costs for our oil and gas producing
activities, all of which are conducted within the continental United
States.
  2008
                                
                                
                                2007Proved
      properties
                                
                                $
                                12,743,212
                                
                                
                                $
                                9,529,004Unproved
      properties
                                
                                
                                19,338
                                
                                
                                
                                —Gathering
      line
                                
                                
                                75,000
                                
                                
                                
                                —12,837,550
                                
                                
                                
                                9,529,004Accumulated
      depletion
                                
                                
                                (8,791,711
                                )
                                
                                
                                (2,314,141
                                )Net
      oil and gas properties
                                
                                $
                                4,045,839
                                
                                
                                $
                                7,214,863
 
 (d) Costs
Incurred in Oil and Gas Acquisition and Development Activities. The
following table lists the costs we incurred in oil and gas acquisition and
development activities for the years presented in the consolidated financial
statements.
  Property acquisition
      costs:
                          
                          2008
                          
                          
                          2007Unproved
      properties
                          
                          $
                          3,590,803
                          
                          
                          $
                          —Proved
      properties
                          
                          
                          19,338
                          
                          
                          
                          —Gathering
      line costs
                          
                          
                          75,000
                          
                          
                          
                          —Total
                          
                          $
                          3,685,141
                          
                          
                          $
                          —
  53
 
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 Note 19.
Supplementary Oil and Gas Reserve Information – Unaudited
 
 (a) General.
Our estimated net proved developed producing oil and gas reserves and the
present value of estimated cash flows from those reserves are summarized below.
The reserve information is unaudited. The reserves were estimated by James
Engineering, Inc. independent petroleum engineers, in accordance with
regulations of the Securities and Exchange Commission, using market or contract
prices and costs as of December 31, 2008.   These prices and
costs were held constant over the estimated life of the reserves. There are
numerous uncertainties inherent in estimating quantities and values of proved
oil and gas reserves and in projecting future rates of production and the timing
of development expenditures, including factors involving reservoir engineering,
pricing and both operating and regulatory constraints. All reserve estimates are
to some degree speculative, and various classifications of reserves only
constitute attempts to define the degree of speculation involved. Accordingly,
oil and gas reserve information represents estimates only and should not be
construed as being exact. The Company did not have year end reserve reports
prepared for December 31, 2007 or 2006.
 
 (b) Estimated
Oil and Gas Reserve Quantities. Our ownership interests in estimated
quantities of proved developed producing oil and gas reserves are summarized
below for December 31, 2008. The reserve changes were not calculated due to the
lack of prior years reserve for December 31, 2007 and 2006
 
 Natural
      Gas(Mmcf)
                                  
                                  
                                  Crude
      Oil, Condensateand Natural Gas Liquids(Mbbls)2008
                                  
                                  
                                  2008Proved
      developed producing reserves at end of year
                                  
                                  
                                  248,889
                                  
                                  
                                  
                                  40,198
 
 (c) Standardized
Measure of Discounted Future Net Cash Flows. The standardized measure of
discounted future net cash flows from our estimated proved oil and gas reserves
is provided for the financial statement user as a common base for comparing oil
and gas reserves of enterprises in the industry and may not represent the fair
market value of our oil and gas reserves or the present value of future cash
flows of equivalent reserves due to various uncertainties inherent in making
these estimates. Those factors include changes in oil and gas prices from
year-end prices used in the estimates, unanticipated changes in future
production and development costs and other uncertainties in estimating
quantities and present values of oil and gas reserves.
 
 The
following table presents the standardized measure of discounted future net cash
flows from our ownership interests in proved oil and gas reserves as of December
31, 2008. The standardized measure of future net cash flows as of
December 31, 2008 are calculated using weighted average prices in effect
were $8.42 per Mcf of natural gas and $98.27 per barrel of oil. The resulting
estimated future cash inflows are reduced by estimated future costs to develop
and produce the estimated proved reserves based on year-end cost levels. Future
income taxes are based on year-end statutory rates, adjusted for any operating
loss carryforwards and tax credits. The future net cash flows are reduced to
present value by applying a 10% discount rate. The standardized measure of
discounted future net cash flows is not intended to represent the replacement
cost or fair market value of our oil and gas properties.
 
 Year
      Ended
                                                  December
      31,(In
      thousands)
                                                
                                                2008Future
      cash inflows
                                                
                                                $
                                                5,957,575Future
      production costs
                                                
                                                
                                                ( 3,163,150
                                                )Future
      income tax expenses
                                                
                                                
                                                (945,869
                                                )Undiscounted
      future net cash flows
                                                
                                                
                                                2,221,63010%
      annual discount for estimated timing of cash flows
                                                
                                                
                                                (945,869
                                                )Standardized
      measure of discounted future net cash flows
                                                
                                                $
                                                1,275,761
  (d) Changes
in Standardized Measure of Discounted Future Net Cash Flows. Due to the
lack of reserve reports as December 31, 2007 the changes in standardized measure
of discounted net cash flows cannot be calculated for 2007.
 
 54
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 Note 19.
Supplementary Oil and Gas Reserve Information –
Unaudited  (Continued)
 
 Supplementary
Selected Quarterly Financial Data – Unaudited
  The
following table provides unaudited supplementary financial information on our
results of operations for each quarter in the two-year period ended
December 31, 2008
 
 (In thousands, except per share
amounts)
  Year
      Ended December 31,2008
                      
                      20074th
                      
                      3rd
                      
                      2nd
                      
                      1st
                      
                      4th
                      
                      3rd
                      
                      2nd
                      
                      1stRevenues
                      
                      $
                      20,964
                      
                      
                      $
                      15,216
                      
                      
                      $
                      16,078
                      
                      
                      $
                      17,945
                      
                      
                      $
                      19,310
                      
                      
                      $
                      14,851
                      
                      
                      $
                      18,340
                      
                      
                      $
                      27,319Income
      (loss) beforeincome
      taxes
                      
                      
                      923
                      
                      
                      
                      68
                      
                      
                      
                      (647
                      )
                      
                      
                      79
                      
                      
                      
                      2,160
                      
                      
                      
                      616
                      
                      
                      
                      1,804
                      
                      
                      
                      1,566Net
      income (loss)
                      
                      
                      257
                      
                      
                      
                      (59
                      )
                      
                      
                      (761
                      )
                      
                      
                      (254
                      )
                      
                      
                      508
                      
                      
                      
                      136
                      
                      
                      
                      723
                      
                      
                      
                      625Diluted
      EPS
                      
                      
                      0.01
                      
                      
                      
                      0.00
                      
                      
                      
                      (0.03
                      )
                      
                      
                      (0.01
                      )
                      
                      
                      0.02
                      
                      
                      
                      0.01
                      
                      
                      
                      0.03
                      
                      
                      
                      0.03Common
      stock pricerange:High
                      
                      $
                      7.59
                      
                      
                      $
                      8.33
                      
                      
                      $
                      8.89
                      
                      
                      $
                      7.25
                      
                      
                      $
                      8.25
                      
                      
                      $
                      9.95
                      
                      
                      $
                      9.40
                      
                      
                      $
                      12.35Low
                      
                      
                      5.50
                      
                      
                      
                      6.50
                      
                      
                      
                      6.70
                      
                      
                      
                      6.02
                      
                      
                      
                      6.38
                      
                      
                      
                      6.54
                      
                      
                      
                      6.86
                      
                      
                      
                      7.16
 
 
  
 55


Exhibit
      No.
                              Description2.1
                              Agreement
      of Merger and Plan of Merger (1)2.2
                              Membership
      Interest Purchase Agreement (1)2.3
                              Plan
      and Agreement of Merger – Fund XIV(2)2.4
                              Plan
      and Agreement of Merger – Fund XVI (2)2.5
                              Merger
      Agreement (3)3.1
                              Amended
      and Restated Bylaws (1)10.1
                              Capital
      City Energy Group, Inc. Stock Option Plan (1)10.1.1*
                              Form
      of Option Agreement10.2
                              Contribution
      Agreement with Zenith Fund V, LLC, dated October 29, 2007
    (1)10.3
                              Contribution
      Agreement with Zenith Fund VI, LLC, dated October 29, 2007
    (1)10.4
                              Contribution
      Agreement with Zenith Fund VIII, LLC, dated October 29, 2007
      (1)10.5
                              Contribution
      Agreement with Zenith Fund IX, LLC, dated October 29, 2007
    (1)10.6
                              Contribution
      Agreement with Zenith Fund X, LLC, dated October 29, 2007
    (1)10.7
                              Contribution
      Agreement with Zenith Fund XI, LLC, dated October 29, 2007
    (1)10.8
                              Contribution
      Agreement with Capital City Energy, LLC, dated October 29, 2007
      (1)10.9
                              Investment
      Banking Agreement, dated August 1, 2006 (1)10.10
                              Investment
      Banking Agreement, dated December 17, 2007 (1)10.11
                              Assignment
      and Sale of Ownership Interest, dated January 22, 2008
  (1)10.12
                              Promissory
      Note, dated June 8, 2007 (1)10.13
                              Participation
      Agreement, dated March 28, 2008, by and between Capital City Petroleum,
      Inc. and The Opportunity Fund, LLC (4)10.14
                              Employment
      Agreement (3)10.15
                              Option
      Agreement (3)10.16
                              Accounts
      Receivable Financing Agreement dated March 27, 2009 between Hotwell
      Services, Inc. and Crestmark Commercial Capital Lending LLC
      (5)10.17
                              Guaranty
      by Capital City Energy Group, Inc. (5)16.1
                              Letter
      from Moore and Associates to the Securities and Exchange Commission dated
      June 30, 2008 (6)16.2
                              Letter
      from Moore and Associates to the Securities and Exchange Commission dated
      July 14, 2008
(7)






56


16.3
                                                                    Letter
      from Moore and Associates to the Securities and Exchange Commission dated
      July 22 2008 (8)16.4
                                                                    Letter
      from GBH CPAs, PC to the Securities and Exchange Commission dated January
      27, 2009 (9)21*
                                                                    List
      of Subsidiaries24.1*
                                                                    Powers
      of Attorney (contained on signature page)31.1*
                                                                    Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200231.2*
                                                                    Certification
      of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1*
                                                                    Certification
      of Chief Executive Officer and Chief Accounting Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002




*  Filed herewith.





(1)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      March 13, 2008 (File No. 333-140806).(2)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      December 18, 2008 (File No. 333-140806).(3)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      January 7, 2009 (File No. 333-140806).(4)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      March 28, 2008 (File No. 333-140806).(5)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed
      on  April 2, 2009 (File No. 333-140806).(6)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on June
      30, 2008 (File No. 333-140806).(7)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on July
      14, 2008 (File No. 333-140806).(8)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on July
      22, 2008 (File No. 333-140806).(9)
              Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      January 27, 2009 (File No.
333-140806).





























57


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.






Capital
      City Energy Group, Inc.Date:  May
      18, 2009
                By:
                /s/ Douglas
      CrawfordDouglas
      CrawfordPrincipal
      Executive Officer/Chief Financial Officer







KNOW ALL MEN BY THESE PRESENTS, that each individual whose
signature appears below hereby constitutes and appoints _______________ and
____________________, and each of them individually, his or her true and lawful
agent, proxy and attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to (i) act on, sign and file with the Securities and
Exchange Commission any and all amendments to this report together with all
schedules and exhibits thereto, (ii) act on, sign and file with the Securities
and Exchange Commission any and all exhibits to this report and any and all
exhibits and schedules thereto, (iii) act on, sign and file any and all such
certificates, notices, communications, reports, instruments, agreements and
other documents as may be necessary or appropriate in connection therewith and
(iv) take any and all such actions which may be necessary or appropriate in
connection therewith, granting unto such agents, proxies and attorneys-in-fact,
and each of them individually, full power and authority to do and perform each
and every act and thing necessary or appropriate to be done, as fully for all
intents and purposes as he or she might or could do in person, and hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact, any of them or any of his, her or their substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.





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







Signatures
                              Titles
                              Date/s/
      Douglas
      Crawford
                              Principal
      Executive Officer, Principal Financial and Accounting Officer,
      Director
                              May 18,
      2009Douglas
      Crawford/s/
      Lee
      A. Robinson
                              Director
                              May 18,
      2009Lee
      A. Robinson/s/
      Joseph
      Sites
                              Director
                              May 18,
      2009Joseph
      Sites/s/
      Joseph
      Smith
                              Director
                              May 18,
      2009Joseph
      Smith












58


Exhibit
Index





Exhibit
      No.
                Description2.1
                Agreement
      of Merger and Plan of Merger (1)2.2
                Membership
      Interest Purchase Agreement (1)2.3
                Plan
      and Agreement of Merger – Fund XIV(2)2.4
                Plan
      and Agreement of Merger – Fund XVI (2)2.5
                Merger
      Agreement (3)3.1
                Amended
      and Restated Bylaws (1)10.1
                Capital
      City Energy Group, Inc. Stock Option Plan (1)10.1.1*
                Form
      of Option Agreement10.2
                Contribution
      Agreement with Zenith Fund V, LLC, dated October 29, 2007
    (1)10.3
                Contribution
      Agreement with Zenith Fund VI, LLC, dated October 29, 2007
    (1)10.4
                Contribution
      Agreement with Zenith Fund VIII, LLC, dated October 29, 2007
      (1)10.5
                Contribution
      Agreement with Zenith Fund IX, LLC, dated October 29, 2007
    (1)10.6
                Contribution
      Agreement with Zenith Fund X, LLC, dated October 29, 2007
    (1)10.7
                Contribution
      Agreement with Zenith Fund XI, LLC, dated October 29, 2007
    (1)10.8
                Contribution
      Agreement with Capital City Energy, LLC, dated October 29, 2007
      (1)10.9
                Investment
      Banking Agreement, dated August 1, 2006 (1)10.10
                Investment
      Banking Agreement, dated December 17, 2007 (1)10.11
                Assignment
      and Sale of Ownership Interest, dated January 22, 2008
  (1)10.12
                Promissory
      Note, dated June 8, 2007 (1)10.13
                Participation
      Agreement, dated March 28, 2008, by and between Capital City Petroleum,
      Inc. and The Opportunity Fund, LLC (4)10.14
                Employment
      Agreement (3)10.15
                Option
      Agreement (3)10.16
                Accounts
      Receivable Financing Agreement dated March 27, 2009 between Hotwell
      Services, Inc. and Crestmark Commercial Capital Lending LLC
      (5)10.17
                Guaranty
      by Capital City Energy Group, Inc. (5)16.1
                Letter
      from Moore and Associates to the Securities and Exchange Commission dated
      June 30, 2008 (6)16.2
                Letter
      from Moore and Associates to the Securities and Exchange Commission dated
      July 14, 2008 (7)16.3
                Letter
      from Moore and Associates to the Securities and Exchange Commission dated
      July 22 2008 (8)16.4
                Letter
      from GBH CPAs, PC to the Securities and Exchange Commission dated January
      27, 2009 (9)17.1
                Letter
      of resignation from Timothy W. Crawford.(10)21*
                List
      of Subsidiaries24.1*
                Powers
      of Attorney (contained on signature page)31.1*
                Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200231.2*
                Certification
      of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1*
                Certification
      of Chief Executive Officer and Chief Accounting Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002





*  Filed
herewith.


(1)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      March 13, 2008 (File No. 333-140806).(2)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      December 18, 2008 (File No. 333-140806).(3)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      January 7, 2009 (File No. 333-140806).(4)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      March 28, 2008 (File No. 333-140806).(5)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed
      on  April 2, 2009 (File No. 333-140806).(6)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on June
      30, 2008 (File No. 333-140806).(7)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on July
      14, 2008 (File No. 333-140806).(8)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on July
      22, 2008 (File No. 333-140806).(9)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on
      January 27, 2009 (File No. 333-140806).(10)
            Incorporated
      by reference to the Current Report of Registrant on Form 8-K filed on May
      7, 2009 (File No. 333-140806).













59