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.

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.

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.

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.

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 financial position, results of operations, or cash flows. Capital City had no capitalized exploratory well costs at June 30, 2008 and December 31, 2007.

Asset Retirement Obligations

Capital City follows the provisions of Financial Accounting Standards Board Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. For Capital City, asset retirement obligations relate to the abandonment of oil and gas producing facilities. The amounts recognized are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate.

Income Taxes

Capital City accounts for income taxes pursuant to SFAS No 109, "Accounting for Income Taxes," which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred taxes are provided on temporary differences between the financial statements and tax basis of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In July 2006, the FASB issued "Accounting for Uncertainty in Income Taxes," an interpretation of FAS 109 ("FIN 48"), effective for years beginning after December 15, 2006. FIN 48 establishes a more-likely-than-not threshold for recognizing the benefits of tax return positions in the financial statements. Also, FIN 48 implements a process for measuring those tax positions which meet the recognition threshold of being ultimately sustained upon examination by the taxing authorities. The adoption of FIN 48 had no material impact to the Company's consolidated financial statements. The Company files tax returns in the United States and states in which it has operations and is subject to taxation. Tax years subsequent to 2004 remain open to examination by U.S. federal and state tax jurisdictions.

Revenue Recognition

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

FAIR VALUE MEASUREMENT