UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549








FORM
10-Q








x  Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For the
quarterly period ended June 30,
2008







o  Transition
Report pursuant to 13 or 15(d) of the Securities Exchange Act of
1934





For the
transition period _______ to _______








Commission
File Number:333-140806








Capital City Energy Group,
Inc.


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








Nevada
            
            20-5131044(State
      or other jurisdiction of incorporation or
    organization)
            
            (IRS
      Employer Identification No.)








8351
      N. High Street, Suite 101
              Columbus, Ohio 43235(Address
      of principal executive offices)








(614) 310-1614(Issuer’s
      telephone number)(Former
      name, former address and former fiscal year, if changed since last
      report)







Check
whether the issuer (1) 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 issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days  xYes  o No





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





Large
Accelerated filer o   Accelerated
filer o   Non-accelerated
filer o   Smaller
Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).oYesxNo





State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:There are 27,047,952 shares of Common Stock and 3,111,843 shares of Preferred A
Stock issued and outstanding as of August 18, 2008.







Capital
City Energy Group, Inc.





TABLE OF
CONTENTS





PagePART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements
              3Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              13Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              17Item
      4(T). Controls and Procedures
              17PART
      II - OTHER INFORMATIONItem
      1 Legal Proceedings
              18Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              18Item
      3. Defaults Upon Senior Securities
              18Item
      4. Submission of Matters to a Vote of Security Holders
              18Item
      5. Other Information
              18Item
      6. Exhibits
              18Signatures
              19


- 2
-




PART
I - FINANCIAL INFORMATION





Item 1. Financial
Statements




Our
unaudited financial statements included in this Form 10-Q are as
follows:







4
            Consolidated
      Balance Sheets as of June 30, 2008 and December  31, 2007
      (Unaudited)5
            Consolidated
      Statements of Operations for the three months ended June 30, 2008 and 2007
      (Unaudited)6
            Consolidated
      Statements of Operations for the six months ended June 30, 2008 and 2007
      (Unaudited)7
            Consolidated
      Statements of Cash Flows for the six months ended June 30, 2008 and 2007
      (Unaudited)8 -
      12
            Notes
      to Consolidated Financial Statements
(Unaudited)





- 3
-


CAPITAL
CITY ENERGY GROUP, INC.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





June
      30,
            
            
            December
      31,2008
            
            
            2007ASSETSCURRENT
      ASSETSCash
            
            $
            475,217
            
            
            $
            200,451Accounts receivable and accrued revenues
            
            
            568,588
            
            
            
            411,826Receivables-related parties
            
            
            51,042
            
            
            
            -Other receivables
            
            
            10,223
            
            
            
            -Prepaid expenses
            
            
            63,765
            
            
            
            40,991Prepaid expenses-related parties
            
            
            48,000
            
            
            
            -Total
      Current Assets
            
            
            1,216,835
            
            
            
            656,268PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $15,289 and
      $1,497
            
            
            211,528
            
            
            
            147,261OIL
      AND GAS PROPERTIES, SUCCESSFUL EFFORTS ACCOUNTINGProved
            
            
            9,932,791
            
            
            
            9,529,004Unproved
      properties
            
            
            -
            
            
            
            -Accumulated
      depreciation, depletion and amortization
            
            
            (2,712,245
            )
            
            
            (2,314,141
            )NET
      OIL AND GAS PROPERTIES
            
            
            7,220,546
            
            
            
            7,214,863OTHER
      ASSETSPrepaids
      and deposits-related parties
            
            
            67,000
            
            
            
            -Deposits
            
            
            7,070
            
            
            
            4,485Total
      Other Assets
            
            
            74,070
            
            
            
            4,485TOTAL
      ASSETS
            
            $
            8,722,979
            
            
            $
            8,022,877LIABILITIES
      AND STOCKHOLDERS'EQUITYCURRENT
      LIABILITIESAccounts payable and accrued expenses
            
            $
            239,507
            
            
            $
            360,708Payable-related parties
            
            
            35,538
            
            
            
            -Notes payable-current portion
            
            
            70,620
            
            
            
            100,000Participating interest financing arrangement
            
            
            1,534,279
            
            
            
            -Total
      Current Liabilities
            
            
            1,879,944
            
            
            
            460,708LONG
      TERM LIABILITIESAsset retirement obligation
            
            
            61,624
            
            
            
            -Deferred income tax liability
            
            
            194,129
            
            
            
            163,960Total
      Long Term Liabilities
            
            
            255,753
            
            
            
            163,960TOTAL
      LIABILITIES
            
            
            2,135,697
            
            
            
            624,668STOCKHOLDERS'
      EQUITYPreferred shares: $0.001 par value, 10,000,000 shares
      authorized:
              3,142,650 shares issued and outstanding
            
            
            3,143
            
            
            
            3,143Common shares: $0.001 par value, 90,000,000 shares
authorized:
              27,047,514 and 20,750,740 shares issued and outstanding,
      respectively
            
            
            27,048
            
            
            
            20,751Additional paid-in capital
            
            
            6,863,741
            
            
            
            6,271,727Retained earnings (Accumulated Deficit)
            
            
            (306,650
            )
            
            
            1,102,588Total
      Stockholders' Equity
            
            
            6,587,282
            
            
            
            7,398,209TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            8,722,979
            
            
            $
            8,022,877







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


- 4
-


CAPITAL
CITY ENERGY GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





For
      the Three Months EndedJune
      30,2008
            
            
            2007REVENUESOil
      and gas revenue
            
            $
            724,175
            
            
            $
            646,715Management
      revenue
            
            
            282,608
            
            
            
            58,648Total
      Revenues
            
            
            1,006,783
            
            
            
            705,363OPERATING
      EXPENSESLease
      operating costs
            
            
            198,499
            
            
            
            199,185Depreciation
      and depletion
            
            
            200,780
            
            
            
            194,095Selling,
      general and administrative
            
            
            1,225,029
            
            
            
            213,951Total
      Operating Expenses
            
            
            1,654,308
            
            
            
            607,231INCOME
      (LOSS) FROM OPERATIONS
            
            
            (647,525
            )
            
            
            98,132OTHER
      INCOME (EXPENSE)Interest
      Income
            
            
            4,090Interest
      expense
            
            
            (35,961
            )
            
            
            (98,568
            )Total
      Other Income (Expense)
            
            
            (31,871
            )
            
            
            (98,568
            )NET
      INCOME (LOSS) BEFORE INCOME TAXES
            
            
            (679,396
            )
            
            
            (436INCOME
      TAX BENEFIT (EXPENSE)
            
            
            40,813NET
      INCOME (LOSS)
            
            $
            (638,583
            )
            
            $
            (436
            )LESS:
      PREFERRED DIVIDENDS
            
            
            (197,933
            )
            
            
            -NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
            
            $
            (836,516
            )
            
            $
            (436
            )BASIC
      AND DILUTED EARNINGS (LOSS) PER SHARE
            
            $
            (0.03
            )
            
            $
            (0.00BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
            
            
            20,821,349
            
            
            
            18,095,740









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




- 5
-





CAPITAL
CITY ENERGY GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





For
      the Six Months EndedJune
      30,2008
            
            
            2007REVENUESOil
      and gas revenue
            
            $
            1,245,107
            
            
            $
            1,293,430Management
      revenue
            
            
            302,741
            
            
            
            112,081Total
      Revenues
            
            
            1,547,848
            
            
            
            1,405,511OPERATING
      EXPENSESLease
      operating costs
            
            
            403,378
            
            
            
            399,655Share
      based compensation
            
            
            183,561
            
            
            
            -Depreciation
      and depletion
            
            
            387,771
            
            
            
            384,415Selling,
      general and administrative
            
            
            1,581,562
            
            
            
            430,369Total
      Operating Expenses
            
            
            2,556,272
            
            
            
            1,214,439INCOME
      (LOSS) FROM OPERATIONS
            
            
            (1,008,424
            )
            
            
            191,072OTHER
      INCOME (EXPENSE)Other
      income
            
            
            4,090
            
            
            
            -Interest
      expense
            
            
            (38,058
            )
            
            
            (201,344
            )Total
      Other Income (Expense)
            
            
            (33,968
            )
            
            
            (201,344
            )NET
      INCOME (LOSS) BEFORE INCOME TAXES
            
            
            (1,042,392
            )
            
            
            (10,272INCOME
      TAX BENEFIT (EXPENSE)
            
            
            (30,169
            )
            
            
            -NET
      INCOME (LOSS)
            
            $
            (1,072,561
            )
            
            $
            (10,272
            )LESS:
      PREFERRED DIVIDENDS
            
            
            (336,677
            )
            
            
            -NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
            
            $
            (1,409,238
            )
            
            $
            (10,272
            )BASIC
      AND DILUTED EARNINGS (LOSS) PER SHARE
            
            $
            (0.05
            )
            
            $
            (0.00BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
            
            
            21,163,023
            
            
            
            18,095,740







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


- 6
-


CAPITAL
CITY ENERGY GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





For
      the Six Months EndedJune
      30,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
            
            $
            (1,072,561
            )
            
            $
            (10,272
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation,
      depletion and amortization
            
            
            387,771
            
            
            
            384,415Stock
      issued for services
            
            
            141,500
            
            
            
            -Stock
      issued for directors fees
            
            
            61,515
            
            
            
            -Stock
      issued for acquisition of subsidiary
            
            
            3,500
            
            
            
            -Amortization
      of stock options
            
            
            100,546Amortization
      of discount on debt
            
            
            -
            
            
            
            183,334Changes
      in operating assets and liabilities:Increase
      in prepaid expenses and deposits
            
            
            (25,359
            )
            
            
            -Increase
      in prepaid expenses – related party
            
            
            (115,000
            )
            
            
            -Increase
      in accounts receivable and accrued revenue
            
            
            (153,762
            )
            
            
            (72,657
            )Increase
      in accounts receivable – related party
            
            
            (51,042
            )
            
            
            -Increase
      in other assets
            
            
            (10,223
            )
            
            
            -Decrease
      in accounts payable and accrued expenses
            
            
            (121,201
            )
            
            
            (33,932
            )Increase
      in accounts payable – related party
            
            
            35,538
            
            
            
            -Increase
      in deferred tax liability
            
            
            30,169
            
            
            
            -Increase
      in interest payable – participating interest financing
      arrangement
            
            
            34,279
            
            
            
            -Net
      Cash Provided by (Used in) Operating Activities
            
            
            (754,330
            )
            
            
            450,888CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
            
            
            (78,059
            )
            
            
            -Purchase
      of oil and gas properties
            
            
            (318,038
            )
            
            
            -Net
      Cash Used by Investing Activities
            
            $
            (396,097
            )
            
            $CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from notes payable
            
            
            75,144
            
            
            
            -Repayment
      of notes payable
            
            
            (4,524
            
            
            
            -Proceeds
      from financing arrangement
            
            
            1,500,000
            
            
            
            -Costs
      incurred by the Energy Funds not included in
    re-capitalization
            
            
            -
            
            
            
            (1,521,638
            )Proceeds
      from exercise of warrants
            
            
            191,250
            
            
            
            -Dividends
      paid on preferred stock
            
            
            (336,677
            )
            
            
            -Net
      Cash Provided by (Used in) Financing Activities
            
            
            1,425,193
            
            
            
            (1,521,638
            )NET
      INCREASE (DECREASE) IN CASH
            
            
            274,766
            
            
            
            (1,070,750
            )CASH
      AT BEGINNING OF PERIOD
            
            
            200,451
            
            
            
            1,169,749


CASH
      AT END OF PERIOD
            
            $
            475,217
            
            
            $
            98,999SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCASH PAID FOR:Interest
            
            $
            1,682
            
            
            $
            11,109Income taxes
            
            $
            -
            
            
            $
            -NON
      CASH INVESTING AND FINANCING ACTIVITIES:Common
      stock issued for debt
            
            $
            100,000
            
            
            $
            -Recapitalization
      of common stock on reverse merger
            
            $
            6,060
            
            
            $
            -Asset
      retirement obligation incurred
            
            $
            61,624
            
            
            $
            -





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


- 7
-
 CAPITAL
CITY ENERGY GROUP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








Note 1.   Basis of
Presentation





The
accompanying unaudited interim consolidated financial statements of Capital City
Energy Group, Inc. (“Capital City”) have been prepared in accordance with
accounting principles generally accepted in the United States of America and the
rules of the Securities and Exchange Commission, and should be read in
conjunction with the audited financial statements and notes thereto contained in
Capital City’ annual report filed with the SEC on Form 8-K/A for the year ended
December 31, 2007. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods presented have
been reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the consolidated financial statements which would substantially duplicate the
disclosure contained in the audited financial statements for the most recent
fiscal year ending December 31, 2007 as reported in Form 8-K/A have been
omitted.





Note 2.   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 (the “Company”).  On September 28, 2006,
the Company 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. All references to shares authorized and outstanding have
been restated to reflect the conversion on a retroactive basis.





At June
30, 2008, Capital City managed oil and gas investments for two energy funds
(Capital City Energy Fund XIV, LLC and Capital City Energy Fund XVI, LP). 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%. The gross
number of wells in which these two Funds owned an interest is 69 and the number
of net wells is 3.82.





The
Company’s results of operations are dependent on four sources of revenue. The
first being the 2% 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 third source of
revenue the Company receives is through consulting fees earned by Eastern Well
Services, LLC a wholly subsidiary.  Eastern Well Services is an
oilfield service company which is transitioning from receiving consulting fees
from oil & gas operating companies to a becoming a full service oilfield
service company and charging for services such as wireline, logging, testing and
other well completion services.  The fourth source of revenue which
accounts for the majority of revenue earned in the first six months is the oil
& natural gas revenue received from the fractional ownership interests in
more than 178 wells located in 12 different states.





The first
six months was a transition period for the Company as we 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. We acquired Avanti Energy Partners
during the first six months of the year which is managing the Capital City
Energy Funds and will transition to a full service oil and natural gas operating
company before the end of 2008.  We completed a second acquisition in
the first six months in the oilfield service sector,  The company
acquired was Eastern Well Services and began operations through consulting oil
and natural gas operating companies on their well completion in the continental
United States and Internationally.





We moved
our accounting offices to North Canton, Ohio which affords the Company greater
opportunity to employ quality oil and gas staff accountants from the large pool
of oil and gas accounting people without the added cost of relocating them to
Columbus, Ohio our corporate offices. We also leased a facility situated on 30
acres in Burbank, Ohio for the Headquarters of Eastern Well Services. This
facility will allow Eastern to service oil and gas operating companies for their
well completion in the Northeastern Ohio area, Northwestern Pennsylvania area
and Northwestern New York as they move to become a full service oilfield service
company.




- 8
-
  CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)







Note
3.   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.





Capital
City'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 Capital City to concentration of credit
risk consist of cash. At June 30, 2008, Capital City had approximately $475,000
in cash in excess of federally insured limits. Capital City maintains cash
accounts only at large high quality financial institutions and Capital City
believes the credit risk associated with cash held in banks is
remote.





Capital
City'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 June 30, 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
June 30, 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.





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.





Oil
and Gas Properties, Successful Efforts Method





Capital
City 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.





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 Capital City'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.





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.


- 9
-
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





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.





In April
2005, the FASB issued Staff Interpretation No. 19-1 ("FSP 19-1") Accounting for
Suspended Well Costs, which provides guidance on the accounting for exploratory
well costs and proposes an amendment to FASB -35- Statement No. 19 ("FASB 19"),
Financial Accounting and Reporting by Oil and Gas Producing Companies. The
guidance in FSP 19-1 applies to enterprises that use the successful efforts
method of accounting as described in FASB 19. The guidance in FSP 19-1 did not
have a material impact our consolidated financial position, results of
operations, or cash flows. Capital City had no capitalized exploratory well
costs at June 30, 2008 and December 31, 2007.





Asset
Retirement Obligations




Capital
City 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 Capital City, 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.




Income
Taxes





Capital
City 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. 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.





In July
2006, the FASB issued "Accounting for Uncertainty in Income Taxes," an
interpretation of FAS 109 ("FIN 48"), effective for years beginning after
December 15, 2006. FIN 48 establishes a more-likely-than-not threshold for
recognizing the benefits of tax return positions in the financial statements.
Also, FIN 48 implements 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. The Company files tax returns in
the United States and states in which it has operations and is subject to
taxation. Tax years subsequent to 2004 remain open to examination by U.S.
federal and state tax jurisdictions.





Revenue
Recognition




Capital
City recognizes oil and natural gas revenue under the sales method of accounting
for its interests in producing wells as oil and natural gas is produced and sold
from those 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.




Income
(Loss) per Share of Common Stock





Basic and
diluted net income per share calculations are presented in accordance with
Financial Accounting Standards Statement 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 2,763,049 warrants at June
30, 2008 that were out of the money and are therefore
anti-dilutive.





Share-Based
Compensation





As of
December 31, 2007, Capital City had not issued any share-based payments to its
employees.





The
Company adopted SFAS No. 123-R "Accounting for Stock-Based Compensation -
Revised" effective January 1, 2006, using the modified prospective method. 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. During
the six months ended June 30, 2008, stock options were valued with the following
weighted average assumptions used for grants; dividend yield of 0.00 percent;
expected volatility of 40.25%; risk-free interest rate of 3.29% and expected
lives of 1 year. Compensation expense related to options granted in the first
six months of 2008 and 2007 was $86,182 and $-0-, respectively.




- 10
-
  CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Recently
Issued Accounting Pronouncements





No
recently issued accounting pronouncements are expected to have a significant
effect on Capital City’s consolidated 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                      Oil
and Gas Properties





Oil and
gas properties are stated at cost. Depletion expense for the six months ended
June 30, 2008 and 2007 amounted to $387,771, and $384,415, respectively. Gains
and losses on sales and disposals are included in the statements of operations.
As of June 30, 2008 and December 31, 2007 oil and gas properties consisted of
the following:





June 30,
              2008
            
            
            December 31, 2007Well
      Equipment
            
            $
            1,810,321
            
            
            $
            1,429,311Intangible
      Drilling Costs
            
            
            4,585,651
            
            
            
            5,630,066Leasehold
      Improvements
            
            
            3,536,819
            
            
            
            2,469,627Total
            
            
            9,932,791
            
            
            
            9,529,004Accumulated
      Depletion
            
            
            (2,712,245
            )
            
            
            (2,314,141
            )Net
      Oil and Gas Properties
            
            $
            7,220,546
            
            
            $
            7,214,863





Note
5                      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.





During
the six months ended June 30, 2008, the Company purchased office equipment under
secured financing agreements. The financing agreements will become long-term
capital leases or purchase contracts if the Company does not pay them in full
during July 2008. The contracts bear interest at 21.5% per annum.





Note
6                      Equity
Transactions





On March
11, 2008, the Company split its common shares on a 10 to 1 basis. All amounts in
the consolidated financial statements and footnotes reflect the common stock
split on a retroactive basis.





On March
12, 2008, we entered into an Investor Relations contract with CEOcast, Inc for a
period of 12 months at which time we issued 40,000 shares of our Common Stock
for the upfront engagement fee, a $15,000 retainer and have agreed to pay a
monthly consulting fee of $7,500, the contract expires on March 12,
2009.





On March
28, 2008, the Company issued 29,796 shares of its common stock to the Eagle
Foundation in lieu of a cash payment for a note payable that was previously
entered into by the Company.  The original note was executed in the
amount of $400,000, which had been subsequently paid down in previous quarters
to $100,000.  The issuance of 29,796 shares of common stock retired
the note in its entirety.





On April
16, 2008, the Company issued 1,000 shares of its common stock to Ms. Barbara
Coffee as consideration for the acquisition of Eastern Well Services, LLC which
then became a wholly owned subsidiary.





On April
16, 2008, the Company issued 10,000 shares of its common stock to
SmallCapVoice.com as an advance payment for Investor Relations services to be
performed for the second quarter for the promotion of our Company’s business
plan.


- 11
-
 CAPITAL
CITY ENERGY GROUP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





Note
7                      Warrants







As of
June 30, 2008 and December 31, 2007, the Company has outstanding 2,020,000
warrants for the purchase of its common shares at $1.50 per share, 344,000
warrants for the purchase of its common shares at $1.25 per share, 928,800
warrants for the purchase of its common shares at $1.00 per share and 25,000
warrants for the purchase of its common shares at $.10 per share.  As of
the time of this filing, we have had several shareholders elect to exercise
their warrants.  To date we have received $202,500 to purchase 135,000
shares of our common stock.




Note
8                      Related Party
Transactions





The
Company entered into an Investment Banking agreement with Capital City
Consulting Services, LLC on January 1, 2008, the Managing Director of this
company is Joseph T. Smith who is also a Director of Capital City Energy Group.
Capital City Consulting Group was paid $157,500 in consulting fees pursuant to
this agreement for the first six months of 2008.





The
Company receives a management fee for various direct participation programs that
it manages for individual investors. These direct participation programs are
Capital City Energy Fund XIV, Capital City Energy Fund XVI and NGO Program #1
and Program #2.  The total amount of management fees received for
these direct participation programs during the first six months of 2008 was
$$20,675.





At a
meeting of our Board of Directors held on June 23, 2008, the Board voted to pay
Mr. Timothy W. Crawford, CEO, his annual salary in stock via a deferred
compensation plan in the form of stock to be paid on the last trading day of
each month at a price equal to the average of the last bid and ask for the
trading day.  No payments or issuances of stock have yet been
made.  The deferred compensation plan is in the process of being
established.





On August
11, 2008, Mr. Timothy W. Crawford, our CEO issued a letter to our Board of
Directors stating that effective immediately and retroactively, he elected to
perform his duties as CEO without compensation for the 2008 calendar
year.


Timothy
W.





Mr.
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.  The Opportunity Fund, LLC has invested $100,000 in the NGO
Production Participation Program.





Daniel
Coffee (“Lessor”), member of our Board of Directors, has entered into a lease
agreement with the Company whereby the Company leases from Lessor approximately
1,024 rentable square feet of office space and approximately 30 acres (the
“Premises”) in Burbank, Ohio.  The term of the lease is ten years
beginning on June 1, 2008, and ending on June 30, 2018.





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.





- 12
-




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





THE
FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
UNAUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT. THE TERMS "CAPITAL CITY," "WE," "US" AND "OUR" REFER TO CAPITAL CITY
ENERGY GROUP, INC.





OVERVIEW
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





This
report includes "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934. These forward-looking statements may relate to such matters as anticipated
financial performance, future revenues or earnings, business prospects,
projected ventures, new products and services, anticipated market performance
and similar matters. When used in this report, the words "may," "will,"
"expect," "anticipate," "continue," "estimate," "project," "intend," and similar
expressions are intended to identify forward-looking statements regarding
events, conditions, and financial trends that may affect our future plans of
operations, business strategy, operating results, and financial position. We
caution readers that a variety of factors could cause our actual results to
differ materially from the anticipated results or other matters expressed in
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include:





The
sufficiency of existing capital resources and our ability to raise additional
capital to fund cash requirements for future operations, uncertainties involved
in the rate of growth of our business and acceptance of any products or
services, volatility of the stock market - particularly within the energy sector
and general economic conditions.





Although
we believe the expectations reflected in these forward-looking statements are
reasonable, such expectations cannot guarantee future results, levels of
activity, performance or achievements.





All
forward-looking statements included in this report and all subsequent written or
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary statements.
The forward-looking statements speak only as of the date made, other than as
required by law, and we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.





MANAGEMENT’S
ANALYSIS OF OPERATIONS





Capital
City Energy Group, Inc., through its consolidated operations, is an independent
oil and natural gas company currently focused on the execution of its Triad
business model.  The Triad business model includes our Fund Management
Division, Principal Investment Division and Strategic Acquisition
Division.





The Fund
Management Division is overseen by our wholly owned subsidiary, Avanti
Energy Partners, LLC.  This Division markets income oriented direct
participation programs directly to regional Broker-Dealers and are called the
Capital City Energy Funds.  We have focused on expanding our
distribution channels for these funds through the first 6 months of 2008 and
have grown the distribution from one Broker-Dealer with 30 Brokers at the
beginning of 2008 to more than 6 Broker-Dealers with over 600
Brokers.





We have
committed to sponsor vendor conferences over the next couple of months for 4
separate regional Broker-Dealers, where we will highlight our Energy Funds to
the individual Brokers.  The growth in distribution has been costly to
the Company over the last 2 quarters, which we believe will be recovered by in
significant revenue growth for Capital City over the next several
quarters.





The Principal
Investment Division is also overseen by our wholly owned subsidiary,
Avanti Energy Partners, LLC (“Avanti”).  We continued to bring well
positions online in some of the major basins of the continental United
States.  We participated in one of the last remaining well and acreage
positions operated by Grand Energy in the Barnett Shale natural gas formation in
central Texas.  Avanti continues its strategy of diversifying its
portfolio of oil and natural gas investments and is benefiting from strong well
performance in the prolific Barnett Shale in central Texas, dual zone
completions in the Buda and Georgetown in Southeast Texas, deeper oil production
from the Louisiana Gulf Coast and the Smackover trend in Alabama.  We
have continued our participation the Woodford Shale in southern Oklahoma and the
Fayetteville Shale in central Arkansas.  However, as we continue to
diversify our portfolio of energy properties our focus is shifting to our own
backyard in the Appalachian Basin and Oklahoma area where we will have the
ability to perform our own well completion through our wholly owned subsidiary
Eastern Well Services, LLC thus increasing our overall net
margins.  We have acquired several acreage positions in the
Appalachian Basin that will be developed in the 3rd quarter
with the expectation to bring these new well positions online and generating
revenue for the company within the 4th quarter
of 2008.  Our goal is to partner with a local oil and gas operator in
the area to oversee the drilling and operation of these planned wells, which has
been customary with the other positions in our portfolio.





The Strategic
Acquisition Division made significant strides through Eastern Well
Services, LLC (“Eastern”), a wholly owned subsidiary.  Eastern opened
its Corporate Headquarters in Burbank, Ohio. Situated on 30 acres, this facility
anticipates being fully operational with wireline services late in the 3rd quarter
of 2008.  Eastern tripled its management and staff to 8 full time
employees in Ohio and Oklahoma and expects to triple their staff again in the
3rd
quarter of 2008 as both locations become fully operational in oil field
services.  Eastern’s contract to provide consulting engineers for well
completion with Saber Exploration, Pty Limited in Botswana, South Africa has
grown from 2 full time consulting engineers to 5 full time consulting
engineers.  Saber Exploration was contracted by the Botswana
Government to drill coalbed methane wells to fuel power generation facilities
within Botswana.  This Division continues active negotiations with oil
field service companies for acquisition to strengthen the Division and
Eastern.





- 13
-


Our
Mission





To
maximize both ethically and responsibly the total returns to the owners of the
company --- our shareholders.





RESULTS OF OPERATIONS:





REVENUES





Revenues
increased to $1,547,848 during the first six months of 2008, compared to revenue
of $1,405,511  during the first six months of 2007.





Management
revenues increased to $302,741 over first six months due the Capital City Energy
Funds, the acquisition of Eastern Well Services, and Avanti Energy Partners
compared to $112,081 for same period in 2007.





Total net
oil and gas production realized from principal investments was 8,892 barrels of
oil and 59,230 thousand cubic feet (MCF) of natural gas for the first six months
of 2008.  Production for first six months of 2007 was 9,288 barrels of
oil and 61,597 thousand cubic feet (MCF) of natural gas.





Average
commodity price realized on the principal investment portfolio production for
the first six months of 2008 was $97.82 per barrel of oil, and $7.99 per
thousand cubic feet (MCF) of natural gas.  Pricing for the first six
months of 2007 was $81 per barrel of oil and $8 per thousand cubic feet (MCF) of
natural gas.





LEASE
OPERATING EXPENSES





For the
first six months of 2008, lease operating expenses (LOE) increased to $403,378
compared to $399,655 during the first six months of 2007 due to increased levels
of field production from the principle investment portfolio. Typical LOE
expenses include operating labor and field supervision, water hauling and
disposal fees, communications, fuel and lease vehicles, and environmental and
safety compliance.





DEPRECIATION
AND DEPLETION





Depreciation
and depletion expenses totaled $387,771 for the first six months of 2008,
slightly below the results for the first six months of 2007 of
$384,415.  This decrease is not unexpected due to the depletion of the
reserves of the producing wells in the portfolio.





SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES





For the
six month period ending June 30, 2008, the general and administrative expenses
totaled $1,581,562 which was a sharp increase for the same period in 2007 of
$430,369.  The increase in operating expenses was driven by
significant one-time costs associated with our reverse merger into a public
entity in March of 2008 and the execution of our Triad model business plan as
further outlined.





The cost
associated with our reverse merger into a public company such as Legal,
Accounting and Investment Banking fees were substantial for the first six months
of 2008. The accounting rules which apply to reverse merger accounting for SEC
reporting purposes did not allow our firm to capitalized these significant costs
which had to be expensed as they occurred. These expenses were paid from
revenues generated by the Company during this period rather through the
customary capital raising activities or debt incurred by most companies that
elect to become public. The costs associated with our reverse merger totaled in
excess of $500,000.





·
            The
      one-time build out expense and expansion of the North Canton, Ohio
      Accounting Office including additional staff accountants increased the
      operating expenses in excess of $140,000 for the first six
      months.




·
            The
      one-time build out expenses for our Burbank, Ohio wireline facility for
      Eastern Well Services increased the operating expenses in excess of
      $150,000 for the first six months.




·
            The
      addition of staff for Eastern Well Services and Avanti Energy Partners
      increased operating expenses by nearly $55,000 for the first six
      months.




·
            Engaged
      two new investor relation firms and engaged a national public relations
      firm to market the company, its stock and the Capital City Energy
      Funds.  They received shares valued at more than $136,000 in
      addition to their monthly consulting
fees.




·
            Options
      were granted to officers and directors of the company which were valued at
      $86,000 for the quarter.




·
            Investor
      relations,public relations and general marketing costs associated with
      being public were approximately $177,000 for the first six
      months




- 14
-






INTEREST
EXPENSE





Interest
expense of $38,058 for the first six months of 2008 was down substantially from
its level of $201,344 recorded for the first six months of 2007.  Last
year it was necessary for us to impute interest expense on the convertible debt
relating to the beneficial conversion feature attached to the convertible
debt.  Once the debt was converted and /or paid, the interest expense
was eliminated.





INCOME
TAX EXPENSE





Income
tax expense was $30,169 for the six month period ending June 30,
2008.  During the first six months of 2007, we were organized as a
limited liability company and the company flowed all tax expense and benefit to
its members.





NET
INCOME





Net loss
for the six months ended June 30, 2008 was $1,072,561, compared to a net loss of
$10,272 for the same period ended 2007 due to the factors described
above.





LIQUIDITY
AND CAPITAL RESOURCES





As of
June 30, 2008, we had total current assets of $1,256,835.  The current
assets consisted mainly of cash in the amount of $475,215, prepaid expenses in
the amount of $111,765 and accounts receivable in the amount of
$619,630.





Our total
current liabilities as of June 30, 2008 were $1,879,944.  The current
liabilities consist of accounts payable and accrued expenses in the amount of
$275,042, and notes payable-current portion in the amount of
$25,491.  In addition, we had $7,538,255 in stockholders’ equity as of
June 30, 2008.   This compares to current assets of $1,216,835
and total liabilities of $2,135,697 for the period ended December 31,
2007.





Assets at
December 31, 2007 consisted of cash in the amount of $200,451, prepaid expenses
of $40,991 and accounts receivable in the amount of
$414,826.  Liabilities as of December 31, 2007 consisted of accounts
payable and accrued expenses in the amount of $360,708 and notes payable-related
party in the amount of $100,000 remaining payable for the period ended December
31, 2007.  We have adequate capital to fund our ongoing operations for
at least the next twelve months.  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.





CASH
FLOW FROM OPERATING ACTIVITIES





For the
six-month period ended June 30, 2008, net cash used in operating activities was
$754,330, versus net cash used in operating activities of $450,888 for the
six-month period ended June 30, 2007 principally due to higher general and
administrative costs incurred in corporate development activities.





CASH
FLOW FROM INVESTING ACTIVITIES





For the
six-month period ended June 30, 2008, net cash used in investing activities was
$396,097, primarily attributed to our purchase of equipment and oil and gas
properties , versus net cash used in investing activities of $0 for the six
month period ended June 30, 2007.  Our investing activities were funded
from cash generated from operations and financing





CASH
FLOW FROM FINANCING ACTIVITIES





For the
six-month period ended June 30, 2008, net cash provided by financing activities
was $1,425,193, primarily attributed to$ 1,500,000 of proceeds from notes
payable, versus net cash used in financing activities of $1,521,638 for the six
month period ended June 30, 2007.





HEDGING





We did
not hedge any of our oil or natural gas production during 2008 and have not
entered into any such hedges from June 30, 2008 through the date of this
filing.





CONTRACTUAL
COMMITMENTS





None.





- 15
-






OFF-BALANCE
SHEET ARRANGEMENTS





As of
June 30, 2008, we had no off-balance sheet arrangements.





RELATED
PARTY TRANSACTIONS





At a
meeting of our Board of Directors held on June 23, 2008, the Board voted to pay
Mr. Timothy W. Crawford, CEO, his annual salary in stock via a deferred
compensation fund in the form of stock to be paid on the last trading day of
each month at a price equal to the average of the last bid and ask for the
trading day.  No payments or issuances of shares have yet been
made.  The deferred compensation fund is in the process of being
established.





Subsequent
to the Board of Directors meeting held on June 23, 2008 wherein it was decided
to pay Mr. Timothy Crawford’s annual salary in stock via a deferred compensation
fund, on August 11, 2008, Mr. Timothy W. Crawford, our CEO issued a letter to
our Board of Directors stating that effective immediately and retroactively, he
has elected to perform his duties as CEO without compensation for the 2008
calendar year.  Mr. Crawford further indicated that since we had
incurred additional costs as a public entity that we did not have as a private
company, and as one of the Company’s largest beneficial shareholders, he felt it
was appropriate to help defray some of the expenses by eliminating his
compensation this year, in order to enhance Capital City’s
earnings.





Mr.
Crawford and Joseph Smith, both members of our Board of Directors are greater
than 10% members of CCSSM Partners, LLC, which manages the Opportunity Fund,
LLC.  The Opportunity Fund, LLC has invested $100,000 in the NGO
Production Participation Program.





Daniel
Coffee (“Lessor”), our Chief Operating Officer and a member of our Board of
Directors, has entered into a lease agreement with the Company whereby the
Company leases from Lessor approximately 1,024 rentable square feet of office
space and approximately 30 acres and identified as 920 West Easton, Burbank,
Ohio 44214.  The term of the lease shall be ten years beginning on or
about the 1st day of
June, 2008, and ending on June 30, 2018, unless sooner terminated in accordance
with the terms in the lease.





Ms.
Barbara Coffee, wife of Mr. Coffee, sold the rights to Eastern and Avanti to the
Company for the sum of $3,500.  Ms. Coffee elected to be compensated
in stock rather than cash.  Pursuant to that, on April 16, 2008, the
Company issued Ms. Coffee 1,000 shares of our common stock, valued at $3.50 per
share.





CRITICAL
ACCOUNTING POLICIES





Critical
Accounting Policies





Oil
and Gas Properties, Successful Efforts Method





Capital
City 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.





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 Capital City'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.





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.





In April
2005, the FASB issued Staff Interpretation No. 19-1 ("FSP 19-1") Accounting for
Suspended Well Costs, which provides guidance on the accounting for exploratory
well costs and proposes an amendment to FASB -35- Statement No. 19 ("FASB 19"),
Financial Accounting and Reporting by Oil and Gas Producing Companies. The
guidance in FSP 19-1 applies to enterprises that use the successful efforts
method of accounting as described in FASB 19. The guidance in FSP 19-1 did not
have a material impact our consolidated financial position, results of
operations, or cash flows. Capital City had no capitalized exploratory well
costs at June 30, 2008 and December 31, 2007.





- 16
-


Asset
Retirement Obligations




Capital
City 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 Capital City, 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.




Income
Taxes




Capital
City 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. 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.





In July
2006, the FASB issued "Accounting for Uncertainty in Income Taxes," an
interpretation of FAS 109 ("FIN 48"), effective for years beginning after
December 15, 2006. FIN 48 establishes a more-likely-than-not threshold for
recognizing the benefits of tax return positions in the financial statements.
Also, FIN 48 implements 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. The Company files tax returns in
the United States and states in which it has operations and is subject to
taxation. Tax years subsequent to 2004 remain open to examination by U.S.
federal and state tax jurisdictions.





Revenue
Recognition




Capital
City recognizes oil and natural gas revenue under the sales method of accounting
for its interests in producing wells as oil and natural gas is produced and sold
from those wells. Oil and natural gas sold by Capital City is not significantly
different from Capital City’s share of production.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK





Market
risk is the risk of loss arising from adverse changes in market rates and
prices. We are exposed to risks related to increases in the prices of fuel and
raw materials consumed in exploration, development and production. We do not
engage in commodity price hedging activities.





ITEM
4T. CONTROLS AND PROCEDURES





MANAGEMENT'S
EVALUATION ON THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND
PROCEDURES





Our
principal executive officer and principal financial officer have reviewed and
continue to evaluate the effectiveness of our controls and procedures over
financial reporting and disclosure (as defined in the Securities Exchange Act of
1934 ("Exchange Act") Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this quarterly report. The term "disclosure controls and procedures"
is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating our controls and procedures over
financial reporting and disclosure, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and our
management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.





An
evaluation was performed under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2008. Based on that evaluation, our management,
including our chief executive officer and chief financial officer, has concluded
that our disclosure controls and procedures were not effective as of June 30,
2008.





The
principal reasons that our disclosure and procedure controls were determined to
be ineffective was due principally to the number of adjustments identified by
our auditors in their review of the quarterly financial
statements.  Our assessment considered the recent increase in
disclosure and procedure controls following our reverse merger into a public
company.  We concluded that we need to implement additional disclosure
controls and procedures related to the evaluation of accounting policies and
procedures used in our accounting records particularly related to oil and gas
accounting matters and increased training of personnel in SEC reporting
requirements.  Management is developing a plan to enhance controls in
these areas to ensure the accurate and timely filing of its SEC
reports.




CHANGES
IN INTERNAL CONTROL





We made
no changes to our internal control over financial reporting during the quarter
ended June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.


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PART
II - OTHER INFORMATION





Item
1.   Legal Proceedings





We are
not a party to any pending legal proceeding. We are not aware of any pending
legal proceeding to which any of our officers, directors, or any beneficial
holders of 5% or more of our voting securities are adverse to us or have a
material interest adverse to us.





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





On April
16, 2008, we issued 29,796 shares of our Common Stock to the Eagle Foundation in
lieu of a cash payment for a note payable that was previously entered into by
the Company.  The original note was executed in the amount of
$400,000, which had been subsequently paid down in previous quarters to
$100,000.  The issuance of 29,796 shares of Common Stock retired the
note in its entirety.





On April
16, 2008, we issued 1,000 shares of Common Stock to Ms. Barbara Coffee to
satisfy amounts owed to Ms. Coffee for the acquisition of Eastern and Avanti,
wholly owned subsidiaries of Capital City.





On July
7, 2008, we issued 10,000 shares of our common stock to SmallCapVoice.com as an
advance payment for Investor Relations services to be performed for the second
quarter for the promotion of our company’s business plan.





On July
29, 2008, we issued a Confidential Private Placement Memorandum (the
“Offering”).   We are offering  a maximum (the “Maximum Offering”) of
334 Units, each Unit consisting of 10,000 shares of the Company’s Common Stock,
par value $0.001 per share and 10,000 Warrants to purchase shares of the
Company’s Common Stock at a strike price of $4.00 per share.  Each
Unit will be sold for $30,000.  This Offering is being made on a “best
efforts” basis, for sale only to persons who (a) qualify for an exemption under
Section 4(2) under the Securities Act and Regulation D promulgated thereunder as
“accredited investors” (as such term is defined under such Regulation D) and up
to no more than 35 non-accredited investors (“Acceptable Non-Accredited
Investors”) who satisfy suitability standards acceptable to the Company;
(b) qualify for an exemption under Regulation S or Rule 144A promulgated under
the Securities Act, or; (c) qualify for an exemption under the securities laws
of the applicable jurisdiction.  The minimum investment is
$30,000.  The Offering will continue until the earlier of (i) the sale
of all of the shares in the Offering and (ii) December 31, 2008, unless extended
by the Company at its sole discretion for up to an additional 90
days.  We may, however, withdraw, cancel or modify the Offering
without notice.  As of the submission of this filing, we have sold one
unit to an existing shareholder





Item
3.    Defaults upon Senior Securities





None.





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





No
matters have been submitted to our security holders for a vote, through the
solicitation of proxies or otherwise, during the period ended June 30,
2008.





Item
5.   Other Information




On August
18, 2008, Mr. Keith Kaufman resigned his position on the Board of Directors and
as President of Capital City, effective immediately. Mr. Kaufman’s resignation
from the Board of Directors was solely for the purpose of creating a vacancy for
the appointment of Mr. David A. Tenwick. There were no known disagreements with
Mr. Kaufman any matters relating to our operation, policies or
practices. Mr. Kaufman will remain the Chief Executive Officer of
Avanti.




On August
18, 2008, the Board of Directors of the Company filled the vacancy created by
Mr. Kaufman's resignation by appointing Mr. David A. Tenwick. Mr. Tenwick will
fill this position until our next regularly scheduled shareholder meeting at
which time he may stand for reelection by the shareholders who are permitted to
vote in that election.




Mr.
Tenwick is the Chairman of the Board of Directors of Adcare Health Systems, Inc.
("Adcare").  Prior to founding Adcare, Mr. Tenwick was an independent
business consultant from 1982 to 1990. Through this capacity, he has served as a
director and an officer of several businesses, including Douglass Financial
Corporation, a surety company, and AmeriCare Health & Retirement, Inc., a
long-term care management company. From 1967 until 1982, Mr. Tenwick was a
director and an officer of Nucorp Energy, Inc., a company which he co-founded.
Nucorp Energy was a public company which invested in oil and gas properties and
commercial and residential real estate. Prior to founding Nucorp, he was an
enforcement attorney for the United States Securities and Exchange
Commission.




Item
6.                           Exhibits





Exhibit
      Number
            
            Description
      of Exhibit3.1
            
            Articles
      of Incorporation (1)3.2
            
            By-Laws
      (1)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 Financial 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 Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002





(1)
            Previously
      included as an exhibit to the 8-KA filed on March 14,
  2008.





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SIGNATURES





In
accordance with the requirements of the Securities and 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:
            August
      19, 2008By:       
      /s/ David
      Beule
              David Beule
              Title:
      Chief Financial Officer, Principal Accounting
  Officer










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