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
      1934For
      the quarterly period ended  September 30,
      2008oTransition
      Report pursuant to 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition periodto
      ___________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[X] Yes [ ]
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 ___ Accelerated filer ___Non-accelerated filer ___ 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).[  ] Yes  [X] No





State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:There are 27,448,302 shares of Common Stock and 3,112,120 shares of Preferred A
Stock issued and outstanding as of November 6, 2008.

















TABLE OF
      CONTENTS
            PagePART I - FINANCIAL INFORMATIONItem 1.
            Financial Statements
            3Item 2.
            Management’sDiscussion and Analysis
            17Item 3.
            Quantitativeand Qualitative DisclosuresAbout Market Risk
            22Item 4T.
            Controls and Procedures
            22PART II - OTHER INFORMATIONItem 1.
            Legal Proceedings
            23Item 2.
            Unregistered Sales of Equity Securities and
      Useof
Proceeds
            23Item 3.
            Defaults Upon Senior
    Securities
            23Item 4.
            Submission of Matters to a Vote of
      SecurityHolders
            23Item 5.
            Other Information
            23Item 6.
            Exhibits
            23




- 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 September 30,
      2008 and December  31, 2007
(Unaudited)5
            Consolidated Statements of Operations for the
      Three Months Ended September 30, 2008 and 2007
      (Unaudited)6
            Consolidated Statements of Operations for the Nine
      Months Ended September 30, 2008 and 2007
  (Unaudited)7
            Consolidated Statements of Stockholders’ Equity
      from December 31, 2007 through September 30,2008 (Unaudited)8
            Consolidated Statements of Cash Flows for the Nine
      Months Ended September 30, 2008 and 2007(Unaudited);9 - 16
            Notes to Consolidated Financial Statements
      (Unaudited)











- 3
-


CAPITAL CITY ENERGY GROUP,
INC.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)




September
      30
            
            
            December
      31,2008
            
            
            2007ASSETSCURRENT
      ASSETSCash
            
            $
            394,412
            
            
            $
            200,451Accounts
      receivable and accrued revenues
            
            $
            650,384
            
            
            $
            414,826Receivables
      Related Party
            
            
            59,941
            
            
            
            0Other
      receivables
            
            
            10,223
            
            
            
            0Prepaid
      Expenses
            
            
            14,518
            
            
            
            40,991Prepaid
      Rent Related Parties
            
            
            50,675
            
            
            
            0Total
      Current Assets
            
            
            1,179,253
            
            
            
            656,268PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $38,185 and
      $1,497
            
            
            436,214
            
            
            
            147,261OIL
      AND GAS PROPERTIES, SUCCESSFUL EFFORTS ACCOUNTINGProved
            
            
            9,934,842
            
            
            
            9,529,004 9,529,004,Accumulated
      depreciation, depletion and amortization
            
            
            (2,903,774
            )
            
            
            (2,314,141
            )NET
      OIL AND GAS PROPERTIES
            
            
            7,031,068
            
            
            
            7,214,863OTHER
      ASSETSPrepaid
      Deposits – related parties
            
            
            67,000Deposits
            
            
            7,445
            
            
            
            4,485Total
      Other Assets
            
            
            74,445
            
            
            
            4,485TOTAL
      ASSETS
            
            $
            8,720,980
            
            
            $
            8,022,877LIABILITIES
      AND Stockholder
Equity   STOCKHOLDERS'EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
            
            $
            488,578
            
            
            $
            360,708Notes
      payable-current portion
            
            
            70,164
            
            
            
            100,000Participating
      interest financing arrangement
            
            
            1,621,251Total
      Current Liabilities
            
            
            2,079,993
            
            
            
            460,708LONG
      TERM LIABILITIESAsset
      Retirement Obligation
            
            
            62,624Deferred
      income tax liability
            
            
            
            
            
            
            163,960Total
      Long Term Liabilities
            
            
            62,624
            
            
            
            163,960STOCKHOLDERS'
      EQUITYPreferred
      shares: $0.001 par value, 10,000,000 shares authorized; 3,112,120 and
      3,142,650 shares issues and outstanding respectively
            
            
            3,112
            
            
            
            3,143Common
      shares: $0.001 par value, 90,000,000 shares authorized; 27,448,301and
      20,750,740 shares issued and outstanding, respectively
            
            
            27,448
            
            
            
            20,751Additional
      paid-in capital
            
            
            7,501,474
            
            
            
            6,271,727Retained
      earnings (accumulated deficit)
            
            
            (953,668
            )
            
            
            1,102,588Total
      Stockholders' Equity
            
            
            6,578,366
            
            
            
            7,398,209TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            8,720,980
            
            
            $
            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 EndedSeptember
      30,2008
            
            
            2007REVENUESOil
      and gas revenue
            
            $
            760,849
            
            
            $
            28,818Management
      revenue
            
            
            22,702
            
            
            
            65,882Total
      Revenues
            
            
            783,551
            
            
            
            94,700OPERATING
      EXPENSESLease
      operating costs
            
            
            181,685
            
            
            
            6,729Dry
      hole expense
            
            
            0
            
            
            
            48,000Depreciation,
      depletion and accretuib
            
            
            215,425
            
            
            
            -Selling,
      general and administrative
            
            
            889,361
            
            
            
            283,612Total
      Operating Expenses
            
            
            1,289,349
            
            
            
            338,341LOSS
      FROM OPERATIONS
            
            
            (505,798
            )
            
            
            (243,641
            )OTHER
      INCOME (EXPENSE)Interest
      and otherincome
            
            
            1,505
            
            
            
            0Interest
      expense
            
            
            (140,447
            )
            
            
            (3,299
            )Total
      Other Income (Expense)
            
            
            (138,942
            )
            
            
            (3,299
            )LOSS
      BEFORE INCOME TAXES
            
            
            (644,740
            )
            
            
            (246,940
            )INCOME
      TAX BENEFIT (EXPENSE)
            
            
            194,129
            
            
            
            -NET
      LOSS
            
            $
            (450,611
            )
            
            $
            (246,940
            )BASIC
      AND FULLY DILUTED LOSS PER SHARE
            
            $
            (0.03
            )
            
            $
            (0.01
            )BASIC
      AND FULLY DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
      OUTSTANDING
            
            
            21,018,228
            
            
            
            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 Nine Months EndedSeptember
      30,2008
            
            
            2007REVENUESOil
      and gas revenue
            
            $
            2,005,957
            
            
            $
            28,818Management
      revenue
            
            
            325,443
            
            
            
            177,965Total
      Revenues
            
            
            2,331,400
            
            
            
            206,782OPERATING
      EXPENSESLease
      operating costs
            
            
            587,945
            
            
            
            7,175Depreciation,
      depletion and accretion
            
            
            603,196
            
            
            
            -Selling,
      general and administrative
            
            
            2,654,484
            
            
            
            694,008Dry
      hole expense
            
            
            
            
            
            
            60,500Total
      Operating Expenses
            
            
            3,845,625
            
            
            
            761,683LOSS
      FROM OPERATIONS
            
            
            (1,514,225
            )
            
            
            (554,901
            )OTHER
      INCOME (EXPENSE)Interest
      and Other income
            
            
            5,595Interest
      expense
            
            
            (178,505
            )
            
            
            21,309Total
      Other Income (Expense)
            
            
            ( 172,910
            )NET
      LOSS BEFORE INCOME TAXES
            
            
            (1,687,135
            )
            
            
            (576,210
            )INCOME
      TAX BENEFIT
            
            
            163,960
            
            
            
            0NET
      LOSS
            
            $
            (1,523,175
            )
            
            $
            (576,210
            )BASIC
      AND FULLY DILUTED  (LOSS) PER SHARE
            
            $
            (0.10
            )
            
            $
            (0.02
            )BASIC
      AND FULLY DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
      OUTSTANDING
            
            
            20,868,294
            
            
            
            18,095,740











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


- 6
-


CAPITAL
CITY ENERGY GROUP, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(Unaudited)





Additional
            
            Stock
            
            
            
            
            TotalPreferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-In
            
            Subscriptions
            
            Retained
            
            
            Stockholders'Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            Payable
            
            Earnings
            
            
            EquityBalance
      as of
              December
      31, 2007
            
            
            3,142,650
            
            
            
            3,143
            
            
            
            20,750,740
            
            
            
            20,751
            
            
            
            6,271,727
            
            
            
            
            1,102,588
            
            
            
            7,398,209juRecapitalization
            
            
            -
            
            
            
            -
            
            
            
            6,060,000
            
            
            
            6,060
            
            
            
            (6,060
            )
            
            
            
            -
            
            
            
            -Common
      stock issued for debt at $3.36 per share
            
            
            -
            
            
            
            -
            
            
            
            29,796
            
            
            
            30
            
            
            
            99,970
            
            
            
            
            -
            
            
            
            100,000Common
      stock issued for services at $3.00 per share
            
            
            -
            
            
            
            -
            
            
            
            40,000
            
            
            
            40
            
            
            
            119,960
            
            
            
            
            -
            
            
            
            120,000SmallCapVoice
            
            
            
            
            
            
            
            
            
            
            10,000
            
            
            
            10
            
            
            
            21,490
            
            
            
            
            
            
            
            
            21,500Value
      of options granted
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            100,546
            
            
            
            
            -
            
            
            
            100,546Directors
      Fees
            
            
            
            
            
            
            
            
            
            
            38,735
            
            
            
            39
            
            
            
            102,727
            
            
            
            
            
            
            
            
            102,766Common
      stock issued for subsidiary at $3.50 per share
            
            
            -
            
            
            
            -
            
            
            
            1,000
            
            
            
            1
            
            
            
            3,499
            
            
            
            
            -
            
            
            
            3,500Stock
      subscriptions payable
              (506
      Offering)
            
            
            -
            
            
            
            -
            
            
            
            10,000
            
            
            
            
            
            
            
            30,000
            
            
            
            
            
            
            
            
            30,000Dividends
      paid on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            (533,084
            )
            
            
            (533,084
            )Warrant
      Purchases
            
            
            
            
            
            
            
            
            
            
            432,500
            
            
            
            568
            
            
            
            648,182
            
            
            
            
            
            
            
            
            648,750Employee
      Compensation
            
            
            
            
            
            
            
            
            
            
            45,000
            
            
            
            45
            
            
            
            109,305
            
            
            
            
            
            
            
            
            109,350Converted
      Preferred to common stock
            
            
            (30,530
            )
            
            
            (30
            )
            
            
            30,530
            
            
            
            30
            
            
            
            
            
            
            
            
            
            
            
            
            0Adjustment
      to Actual
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (126
            )
            
            
            126Net
      income for the nine months ended September 30, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            (1,523,171
            )
            
            
            (1,523,171
            )Balance,
      September 30, 2008
            
            
            3,112,120
            
            
            $
            3,113
            
            
            
            27,448,301
            
            
            $
            27,448
            
            
            $
            7,501,473
            
            
            
            $
            (953,667
            )
            
            $
            6,578,366








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





- 7
-


CAPITAL
CITY ENERGY GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)




For
      the Nine Months EndedSeptember
      30,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet loss
            
            $
            (1,523,172
            )
            
            $
            (10,272
            )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation and depletion
            
            
            602,196
            
            
            
            384,415Common stock issued for services
            
            
            357,116
            
            
            
            -Accretion
            
            
            1,000Stock Option Compensation Expense
            
            
            100,546Gain on sale of assets
            
            
            0
            
            
            
            -Amortization of discount on debt
            
            
            -
            
            
            
            183,334Deferred Income Taxes
            
            
            (163,960
            )Changes
      in operating assets and liabilities:Increase in accounts receivable
            
            
            (282,750
            )
            
            
            (72,657
            )Increase in accounts receivable – related party
            
            
            (11,850
            )(Increase) decrease  in prepaid expenses and
      deposits
            
            
            (53,710
            )
            
            
            -Increase in deposits – related party
            
            
            (48,000
            )Increase (decrease) in accounts payable and accrued
    expenses
            
            
            80,998
            
            
            
            (33,932
            )Net
      Cash Used in Operating Activities
            
            
            (941,596
            )
            
            
            450,888CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment
            
            
            (304,184
            )
            
            
            -Purchase of oil and gas properties
            
            
            (344,220
            )Net
      Cash Provided by Investing Activities
            
            
            (648,404
            )CASH
      FLOWS FROM FINANCING ACTIVITIESRepayment of notes payable
            
            
            (4,980
            )
            
            
            -Proceeds from notes payable
            
            
            143,274
            
            
            
            -Costs incurred by the Energy Funds not included in
      re-capitalization
            
            
            -
            
            
            
            (1,521,638
            )Proceeds from financing arrangement
            
            
            1,500,000Proceeds from exercise of warrants
            
            
            678,750Dividends paid on preferred stock
            
            
            (533,084
            )
            
            
            -Net
      Cash used in Financing Activities
            
            
            1,783,961
            
            
            
            (1,521,638
            )NET INCREASE (DECREASE) IN CASH
            
            
            193,961
            
            
            
            (1,070,750
            )CASH AT BEGINNING OF PERIOD
            
            
            200,451
            
            
            
            1,169,749CASH
      AT END OF PERIOD
            
            $
            394,412
            
            
            $
            98,999SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCASH PAID FOR:Interest
            
            $
            125,384
            
            
            $
            11,109Income taxes
            
            $
            -
            
            
            $
            -NON CASH INVESTING AND FINANCING ACTIVITIES:Common stock issued for debt
            
            $
            100,000
            
            
            $
            -






The
accompanying notes are an integral part of these consolidated financial
statements.  - 8
-
 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’s 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 September
30, 2008, Capital City managed oil and gas investments for three energy
funds (Capital City Energy Fund XIV, LLC, Capital City Energy Fund XVI, LP and
Capital City Energy fund XVIII, 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
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 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
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 is transitioning from receiving consulting fees from oil & gas
operating companies to becoming a full service oilfield service company and
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 90% of revenue earned in the first nine months is the oil and
natural gas revenue received from the ownership interests in more than 110
energy properties located in 12 different states.





The first
nine 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,  LLC 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 professionals from the large pool of
oil and gas professionals 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.




- 9
-




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 September 30, 2008, Capital City had approximately
$144,412 (the FDIC insured deposits have been temporarily increased to $250,000)
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 September 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
September 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.





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.





- 10
-


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






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 September 30, 2008 and December 31, 2007.





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





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.





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 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 2,763,049 warrants at September 30, 2008 that were out of
the money and are therefore anti-dilutive.




- 11
-


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





Share-Based
Compensation





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.


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 nine months ended
September 30, 2008 and 2007 amounted to $602,196, and $0, respectively. Gains
and losses on sales and disposals are included in the statements of operations.
As of September 30, 2008 and December 31, 2007 oil and gas properties
consisted of the following:





September
      30, 2008
            
            
            December
      31, 2007Well
      Equipment
            
            $
            1,812,372
            
            
            $
            1,429,311Intangible
      Drilling Costs
            
            $
            5,081,518
            
            
            $
            5,630,066Leasehold
      Improvements
            
            $
            3,065.083
            
            
            $
            2,469,627Total
            
            $
            9,932,791
            
            
            $
            9,529,004Accumulated
      Depletion
            
            $
            (
      2,903,774
            )
            
            
            (2,314,141
            )Net
      Oil and Gas Properties
            
            $
            7,055,199
            
            
            $
            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.





Note
6.   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.




- 12
-


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







Note
7.   Warrants and Options





Options





As of
September 30, 2008 three directors of the Company held options to purchase
375,000 shares of common stock at an exercise price of $3.29 per
share.  Those options, which were granted in April, 2008, do not vest
until April, 2009.





As of
September 30, 2008 there have been no stock options or fixed priced stock
options issued for payment of services provided to the company and none is
expected to be issued for the 2008 calendar year.





Warrants





As of
December 31, 2007 the Company had outstanding 2,155,000 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.   To date we have
received $648,750 to purchase 432,500 shares of our common
stock.  There are 1,722,500 existing warrants yet to be
exercised.





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.  The company has exercised its right to call the
warrants on their one year anniversary date, which ranges from January 1, 2008
through October 23, 2008.  Through indications of interest the company
anticipates approximately 50% of these warrants to be exercised before the end
of the 2008 calendar year and to date has received $648,750 to purchase 432,500
shares of our common stock.  There are 1,722,500 existing warrants yet
to be exercised.





Exercise
      Price
            
            
            Number
      of Warrants Outstanding
            
            Date
      Warrants Expire
            
            Exercisable
      Number of Warrants Remaining$
            0.10
            
            
            
            25,000
            
            12/31/2009
            
            
            25,000$
            1.00
            
            
            
            928,800
            
            12/31/2011
            
            
            928,800$
            1.25
            
            
            
            344,000
            
            10/30/2012
            
            
            344,000$
            1.50
            
            
            
            1,722,500
            *
            12/31/2009
              Through
              10/23/2010
            
            
            1,722,500$
            4.00
            
            
            
            10,000
            
            7/29/2011
            
            
            10,0003,030,300
            
            
            
            
            3,030,300





Note: The
$1.50 warrants have all been called by the company and must be exercised or
purchased by the company before the end of the 2008 calendar year.





Stock
Options





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.





September
      30, 2008Dividend
      yield
            
            
            0.00
            %Expected
      volatility
            
            
            40.25
            %Risk free
      interest
            
            
            3.29
            %Expected
      lives
            
            1
      year




- 13
-




CAPITAL CITY ENERGY GROUP,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





No stock
options have been issued to employees.  A summary of the status of
Capital City’s stock options to directors as of September 30, 2008 is presented
below:





Shares
            
            
            Weighted
      Average Exercise Price September 30, 2008Outstanding
      at beginning of period
            
            
            0
            
            
            
            0Granted
            
            
            750,000
            
            
            $
            3.29Exercised
            
            
            0
            
            
            
            0Forfeited
            
            
            (375,000
            )
            
            $
            3.29Outstanding
      but unexercisable at end of period
            
            
            375,000
            
            
            $
            3.29





Note 8.   Related Party
Transactions





On August
11, 2008, Timothy W. Crawford, our CEO, elected to perform his duties as CEO
without compensation for the 2008 calendar year applied on a retroactive
basis.  Mr. Crawford stated that he wanted to align his interests with
those of the shareholders and thus wanted to assist the company in deferring the
enormous cost associated with the company being public in its first year by
forgoing any compensation.  Mr. Crawford is a beneficial owner of
almost 10% of the Company’s common stock.





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.  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.





On
September 11, 2008 The Energy Acquisition Group, an affiliated company,
purchased Mr. Kauffman’s, a former director, 250,000 shares of common stock in
the Company.





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.  The Company
prepaid $115,000 of rent on the lease.





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.





Note
9. Commitments and Contingencies





Upon the
termination date of Capital City Energy fund XVIII, LP, (the Fund) the Company
is obligated to purchase all of the Fund’s assets for a purchase price equal to
ten times the revenue of the Fund for the immediately prior fiscal quarter to
the termination date of the Fund. The Company, at its discretion, may pay the
purchase price in cash, its own common stock or a combination of the two. The
Fund termination date is the earlier of (a) the written consent of a majority of
the investors, (b) the investors receiving distributions from the Fund 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 September 30, 2008, the
Fund has not recognized revenue to date.


- 14
-




CAPITAL CITY ENERGY GROUP,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)







Note
10. Managed Funds





The
Managed Funds are called the Capital City Energy Funds.  The Funds
consist of Capital City Energy Fund XIV, Capital City Energy Fund XVI and
Capital City Energy Fund XVII.





Avanti
serves as the advisor to the Funds through the selection and purchase of energy
properties on behalf of the Funds and earns a 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.  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.





Capital
City Energy Fund XVII was structured slightly different from the current Funds
managed by Avanti in that at 48 months from the closing of the Fund or 100%
return of the members contributed capital, Capital City Energy Group will
acquire the Funds energy properties at a predetermined formula which is payable
in common stock of the company or cash at the sole discretion of the
company.





Note
11. Segment Information





We have
three reporting segments which share in the corporate overhead:





The Fund Management Division -This Division is operated by Avanti Energy Partners, LLC and has
historically marketed direct participation programs to regional broker-dealers
and financial professionals.  These Funds are marketed under the name
of “Capital City Energy Funds.





The Principal Investment Division –
This Division is currently managed by Avanti Energy Partners,
LLC.Capital City currently owns more than 110 fractional
interests in various energy properties located in 12 different states and
operated by some of the largest oil and natural gas companies in the
country.  These energy properties include deep oil wells in Northwest
Texas, Oklahoma and Louisiana, natural gas wells in the Barnett and Fayetteville
Shale, coal-bed methane wells in the Dakotas, oil wells in the Powder River
Basin of Wyoming, and natural gas pipelines in the Gulf Coast.





The Strategic Acquisition Division –
This Division consists of Eastern Well Services, LLC an oilfield services
company.Eastern opened its Corporate Headquarters in Burbank,
Ohio during the past quarter. Situated on 30 acres, this facility is completing
construction of three additional bays for a total of six bays to house wireline
trucks and equipment. This facility anticipates being fully operational with
wireline services late in 2008.  Eastern recently opened an office in
Hominy, Oklahoma with three fulltime employees and has targeted numerous
oilfield service companies to acquire over the next several months.






- 15
-


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






Corporate
overhead





The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Capital City evaluates performances
based on profit or loss from operations before income taxes, not including
nonrecurring gains and losses.  Capital City's reportable segments are
strategic business units that offer different operations and marketing
strategies. Capital City's areas of operations are principally in the
United States. No single geographic area is significant to the consolidated
financial statements.





Consolidated
revenues from external customers, operating income (loss), and identifiable
assets were as follows:





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue:Fund
      Management Division
            
            $
            29,694
            
            
            $
            -
            
            
            $
            43,619
            
            
            $
            -Principal
      Investment Division
            
            
            765,209
            
            
            
            94,700
            
            
            
            2,154,123
            
            
            
            206,782Strategic
      Acquisition Division
            
            
            20,999
            
            
            
            -
            
            
            
            106,270
            
            
            
            -Corporate
            
            
            345
            
            
            
            -
            
            
            
            345
            
            
            
            -Total revenue
            
            $
            816,247
            
            
            $
            94,700
            
            
            $
            2,304,357
            
            
            $
            206,782Income
      (loss) from operations:
            
            
            -Fund
      Management Division
            
            $
            7.081
            
            
            $
            -
            
            
            $
            17,162
            
            
            $
            -Principal
      Investment Division
            
            
            232,298
            
            
            
            (243,641)
            
            
            
            (159,513)
            
            
            
            (554,901)Strategic
      Acquisition Division
            
            
            (68,594)
            
            
            
            --
            
            
            
            23,546
            
            
            
            -Corporate
            
            
            (676,581)
            
            
            
            -
            )
            
            
            (1,393,201)
            
            
            
            -Total income (loss) from operations
            
            
            (505,796)
            
            
            
            (243,641)
            )
            
            
            (1,512,006)
            
            
            
            (554,901)Other
      income (expense)
            
            
            (138,943)
            
            
            
            (3,299)
            
            
            
            (175,125)
            
            
            
            (21,309)Net
      loss before income tax
            
            $
            (644,739)
            
            
            $
            (246,940)
            )
            
            $
            (1,687,131)
            
            
            $
            (576,210September
      30, 2008
            
            
            
            December
      31, 2007Identifiable
      assets:Fund
      Management
            
            
            
            
            
            
            
            
            
            $
            17,362
            
            
            $
            -Principal
      Investment
            
            
            
            
            
            
            
            
            
            
            7,497,567
            
            
            
            8,022,877Strategic
      Acquisition Division
            
            
            
            
            
            
            
            
            
            
            473,694
            
            
            
            -Corporate
            
            
            
            
            
            
            
            
            
            
            732,357
            
            
            
            -Total identifiable assets
            
            
            
            
            
            
            
            
            
            $
            8,720,980-
            
            
            $
            8,022,877





- 16
-




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





Our
Business Plan





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 Oilfield Services
Division.





We have
continued to build the foundations of the company for the benefit of our
shareholders in order to grow the company into a vertically integrated oil and
gas company by investing in our three separate Divisions.  We have
accomplished this by investing in people that are well seasoned in the oil and
gas industry.  We can only become the best by hiring the
best.





Doug
Crawford joined the organization during the past quarter as our Chief Accounting
Officer to oversee our Accounting Group located in our North Canton, Ohio
office.  He was formerly CFO and a Director of Ports Petroleum
Corporation in Wooster, Ohio; a $750,000,000 wholesaler of gasoline which
operates 80 Fuel Marts in 15 States.  He will remain on the Board of
Directors of Ports Petroleum Corporation and has no relationship to the CEO of
Capital City.





Chuck
Kendall joined the organization in the past quarter as Director of Business
Development and Land Management.  He has more than 30 years of oil and
gas experience to the Company. His expertise lies in supervising land leasing,
right-of-way acquisitions, drill site surveying and permitting of new wells and
large lease-acquisitions programs which included an 80,000-acre program for
Belden & Blake Corp. in Eastern Ohio.  He owned Petroleum Land
Services, which later became PetroSearch, Inc. which provided land-related
services to oil and gas companies throughout the Appalachian basin. Prior
clients included Great Lakes Energy Partners, Mason-Dixon Energy, Schreiner Oil
& Gas Inc., GonzOil Inc. and Cardinal Oil Company





The Fund
Management Division is overseen by our wholly owned subsidiary, Avanti
Energy Partners, LLC (“Avanti”).  This Division has historically
marketed direct participation programs to regional broker-dealers, called the
“Capital City Energy Funds.”  We have focused on expanding our
distribution channels for these funds through the first 9 months of 2008 and
have grown the distribution from one broker-dealer with 30 brokers at the
beginning of 2008 to more than 8 broker-dealers with over 1,200 brokers. The
focus for distribution of the Capital City Energy Funds through-out the
remainder of 2008 will target financial planning firms, Certified Public
Accounting firms and small family offices.





The
reason for this shift in distribution channels signals our growth strategy into
becoming a fully integrated oil and natural gas company.  Avanti has
now become an oil and gas operating company, operating our own wells and not
just partnering with other oil and gas operators.





- 17
-






We closed
our most recent fund, Capital City Energy Fund XVII LP, on November 7, 2008,
which will be our last fund structured as a limited partnership.  We
began a new chapter for our highly successful Capital City Energy Funds on
November 10, 2008 due to the overwhelming demand from high net worth individuals
and institutions to invest alongside Avanti in oil and gas
ventures.  This structure has a higher minimum investment, allowing us
to reduce the distribution costs significantly, while providing the qualified
investors higher first year tax write-offs, quicker return of their contributed
capital and direct ownership in the oil or natural gas wells.





The first
“fund” of this type began accepting partners on November 10, 2008 and we believe
it will be warmly received by investors.  This project is called “Capital City Energy Fund – Homer
Prospect 1.”  The Homer Prospect  is a 10 well
drilling program located in Medina and Ashland County, Ohio targeting the
Clinton Sandstone formation with total well depths ranging from 2,700’ to
3,000’.  This project is surrounded by other wells currently in
operation that have produced an average of approximately 35 million cubic feet
of natural gas per well during their first year of production. Overall, the
cumulative life of each well is expected to produce approximately 175 million
cubic feet of natural gas.





These
wells will be operated and primarily owned by Avanti.  We have
targeted five wells to be drilled before the end of the year and the balance to
be drilled before March 31, 2009.  We anticipate our wholly owned
subsidiary Eastern Well Services, LLC ("Eastern") will perform some of the well
completion services.  Securities offered will not be or have not been
registered under the Act and may not be offered or sold in the United States
absent registration or an applicable exemption from registration
requirements





The Principal
Investment Division is also overseen by our wholly owned subsidiary,
Avanti.  We now currently own more than 110 fractional interests in
various energy properties located in 12 different states and operated by some of
the largest oil and natural gas companies in the country.  These
energy properties include deep oil wells in Northwest Texas, Oklahoma and
Louisiana, natural gas wells in the Barnett and Fayetteville Shale of Texas,
coal-bed methane wells in the Dakotas and pipelines in the Gulf
Coast.  The Powder River Basin continues to be a strong producing
region for the Principal Investment Division. Our key well in Niobrara County,
Wyoming, produced net revenue of $289,803 on an investment of $179,682 in the
third quarter. Avanti will continue to seek prospects yielding this type of
return.





However,
holding true to our statements announced in the second quarter of this year our
focus has shifted to our own backyard in the Appalachian Basin and Oklahoma area
where we will have the ability to operate our own wells through our wholly owned
subsidiary Avanti and also perform our own well completion through another
wholly owned subsidiary Eastern thus increasing our overall net
margins.  We have acquired numerous acreage positions in the
Appalachian Basin that will be drilled and completed in the current quarter with
the expectation to bring these new wells online and generating revenue for the
company before the end of the year.





The Strategic
Acquisition Division continues to make significant strides through
Eastern, a wholly owned subsidiary.  Eastern opened its Corporate
Headquarters in Burbank, Ohio in the past quarter. Situated on 30 acres, this
facility is completing construction of three additional bays for a total of six
bays to house wireline trucks and equipment and anticipates being fully
operational with wireline services late in 2008.  Eastern recently
opened an office in Hominy, Oklahoma with three fulltime employees and has
targeted numerous oilfield service companies to acquire over the next several
months.





Our
Mission





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





RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2008:





REVENUES





On a
consolidated basis revenues increased to $2,005,957 and our net loss was
$1,523,171 during the first nine months of 2008, compared to revenue of
$28,817and a net loss of 281,920 recorded during the first nine months of
2007.





Management
revenues increased to $298,401over first nine months due the Capital City Energy
Funds, the acquisition of Eastern  and Avanti compared to $177,965for
same period in 2007.





Total net
oil and gas production realized from principal investments was 10,439 barrels of
oil and 63,136 thousand cubic feet (MCF) of natural gas for the first nine
months of 2008.  The comparative data for the same period of 2007 was
83 barrels of oil and 2449 thousand cubic feet (MCF) of natural
gas.





Average
commodity price realized on the principal investment portfolio production for
the first nine months of 2008 was $99.68 per barrel of oil and $7.98 per
thousand cubic feet (MCF) of natural gas.   The comparative data
for the same period of 2007 was $43.34 per barrel of oil and $4.88 per thousand
cubic feet (MCF) of natural gas.





LEASE
OPERATING EXPENSES AND DRY HOLE EXPENSE





For the
first nine months of 2008, lease operating expenses (LOE) increased to $587,945
compared to $7,175 during the first nine months of 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.





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DEPRECIATION
AND DEPLETION





Depreciation
and depletion expenses totaled $602,196 for the first nine months of 2008, above
the results for the first nine months of 2007 of $0. 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
nine month period ending September 30, 2008, the general and administrative
expenses totaled $2,626,222 which was an increase over expenses of $694,008
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 $178,505 for the first nine months of 2008 was up substantially from
its level of $21,309 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.





INCOME
TAX EXPENSE





We had an
income tax benefit of $163,960 for the nine months ended September
30.  For the first nine months of 2007, the Company was operated as a
LLC and did not accrue for income tax expenses.





NET
INCOME





Net loss
for the quarter ended September 30, 2008 was $450,610, compared to a net loss of
246,940for the same period ended 2007





LIQUIDITY
AND CAPITAL RESOURCES





As of
September 30, 2008, we had total current assets of $1,195,579.  The
current assets consisted mainly of cash in the amount of $394,412, prepaid
expenses in the amount of $24,741and accounts receivable and accrued revenues in
the amount of $650,384





Our total
current liabilities as of September 30, 2008 were $2,079,990.  The
current liabilities consist of accounts payable and accrued expenses in the
amount of $441,696, notes payable-current portion in the amount of $138,294 and
$1,500,000 of debt related to a participating interest financing
arrangement.  In addition, we had $6,578,366 in stockholder’s equity
as of September 30, 2008.


.


We have
adequate capital to fund our ongoing operations.  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
nine-month period ended September 30, 2008, net cash used in operating
activities was $941,596 versus net cash provided by operating activities of
$681,561 for the nine-month period ended September 30, 2007.





CASH
FLOW FROM INVESTING ACTIVITIES





For the
nine-month period ended September 30, 2008, net cash provided by investing
activities was $648,404  primarily   attributed to our
lease acquisition and continued rework program. For the nine month period ended
September 30, 2007 net cash provided by investing was $318,860.  Our
investing activities were funded from the use of cash from operations and
financing.





CASH
FLOW FROM FINANCING ACTIVITIES





For the
nine-month period ended September 30, 2008, net cash provided in financing
activities was 1,783,961 versus net cash used in financing activities of
($874,647) for the nine month period ended September 30, 2007.





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HEDGING





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





RESERVES





The
present value of the proved developed producing reserves, discounted at 10%
(PV-10) per year, stood at $7,030,938 as of July 1, 2008, and represented a 12%
increase in PV-10 present value of the portfolio from June 1, 2007.  This
is due to a much stronger commodity price environment for both crude oil and
natural gas during this same period.





As of
July 1, 2008, net proved developed producing oil reserves stood at 168,950
barrels, which was a 51% increase over the period ending June 1, 2007.  In
addition, net proved developed producing gas reserves stood at 385,675 MCF
(thousand cubic feet), which represented a 2% decrease over the period ending
June 1, 2007.





The
reserve report for the Company was completed by James Engineering, Inc. located
in Marietta, Ohio for the period ending July 1, 2008.  Previously, a
reserve report was completed by Netherland, Sewell & Associates of Houston,
Texas for the period ending June 1, 2007.  The reserve estimates were
prepared in accordance with generally accepted petroleum engineering and
evaluation principles as set forth in the Standards Pertaining to the Estimating
and Auditing of Oil and Gas Reserves promulgated by the Society of Petroleum
Engineers.





The
Society of Petroleum Engineers and the Securities and Exchange Commission
generally define proved reserves as those oil, natural gas, and natural gas
liquids which upon analysis of geological and engineering data appear with
reasonable certainty to be recoverable in the future from known oil and gas
reservoirs under existing economic and operating conditions.  Proved
developed reserves are proved reserves that are expected to be recovered from
existing wells with existing equipment and operating methods.  Proved
developed producing reserves are proved developed reserves to be produced from
completion intervals open to production in existing wells.





CONTRACTUAL
COMMITMENTS





None.





OFF-BALANCE
SHEET ARRANGEMENTS





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





RELATED
PARTY TRANSACTIONS





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.  Mr. Crawford stated that he wanted to align his interests with
those of the shareholders and thus wanted to assist the company in deferring the
enormous cost associated with the company being public in its first year by
forgoing any compensation.  Mr. Crawford is a beneficial owner of
almost 10% of the Company’s common stock.





On
September 11, 2008, The Energy Acquisition Group, an affiliated company
repurchased Mr. Kauffman’s 250,000 shares of common stock in the company
subsequently redistributed the shares to its remaining members.





Mr. Keith
Kauffman, David Beule, Todd Crawford and John Harsh resigned from the Board of
Directors in order to create vacancies on the board for a majority of
independent directors, as required for listing on the American Stock Exchange or
any other major exchange.  These former directors surrendered an
aggregate of 500,000 Stock Options that had previously been granted to
them.  None of the options had vested in any amount.





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.  On July 29, The Opportunity Fund, an Ohio LLC managed by
Timothy W. Crawford, our CEO and Chairman of the Board of Directors; Mr. Joseph
Smith, Director; Mr. Todd Crawford, Former Director/Beneficial Owner; Gary
Sturtz, Beneficial Owner and Mr. Michael McKenzie, Beneficial Owner purchased
one Unit  pursuant to a Rule 506 private placement memorandum that we
have in effect at this time.  One Unit  consists of 10,000
shares of stock and a warrant to purchase an additional 10,000 shares of common
stock for $4.00 per share for thirty-six (36) months following the date of
purchase of the Unit.





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The
following table lists shares of common stock that were paid to each member of
our Board of Directors as compensation for their participation on our Board of
Directors for the third quarter:





DIRECTOR                                                                                     AMOUNT OF SHARES
ISSUED


Timothy
Crawford                                                                                                 
 3,206


Daniel
Coffee                                                                                                           3,206


Joseph
Smith                                                                                                           3,206


Lee
Robinson                                                                                                           3,206


David Beule (former
director)                                                                                1,946


Keith Kauffman (former
director)                                                                          1,946


James
Bishop                                                                                                           3,206


David
Tenwick                                                                                                          714


TOTAL                                                                                                                
 20,636





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 financialposition, results ofoperations, 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.




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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.




FAIR
VALUE MEASUREMENT





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 accounting officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of September 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 September
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





The
Company has engaged various consultants to evaluate, document and assist
management in the implementation of controls and procedures over financial
reporting and disclosure.





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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





During
the first nine months of 2008 we received $648,750 to purchase 432,500 shares of
our common stock.  There are 1,722,500 existing warrants yet to be
exercised that have also been called by the Company.These warrants were called by the
company and the warrant holders elected to exercise their right to purchase the
Common stock.





Item
3.     Defaults upon Senior Securities





None.





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





We held
the first annual meeting of our stockholders on October 23, 2008 in Columbus,
Ohio.  As of the September 19, 2008 record date for the meeting, there
were 27,347,283 shares of our common stock issued and
outstanding.  Our Bylaws state that it is necessary to have a quorum
of fifty percent (50%) of the issued and outstanding shares in order for any
items voted on to be passed.  Proxies for 14,950,599 shares or
fifty-five percent (55%) were received.  The first item to be voted on
was the re-election of six (6) directors to our Board of Directors; Mr. Timothy
Crawford, Mr. Daniel Coffee, Mr. Joseph Smith, Mr. Lee Robinson, Mr. James
Bishop, and Mr. David Tenwick.  The second item to come before the
stockholders for a vote was the ratification of our change of auditors to GBH
CPAs, PC.    All proxies received were voted in favor of the
two items placed before the stockholders for a vote.





Item
5.     Other Information





None.




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 toSection 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 toSection 302 of the Sarbanes-Oxley Act of
      200232.1
            
            Certification of Chief Executive Officer and Chief
      Accounting Officer pursuant to 18 U.S.C. Section1350, 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.








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:
            November
      14, 2008By:       
      /s/ Douglas
      Crawford
              Douglas Crawford
              Title:
      Chief Accounting Officer





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