UNITED
      STATES




SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      D.C. 20549











Form
      10-QSB





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





For
      the
      quarterly period ended September 30, 2007





o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF 1934





For
      the
      transition period from _________ to
      _________




Commission
      file number 000-30219




Chancellor
      Group, Inc.


(Name
      of
      small business issuer in its charter)


Nevada
              
              87-0438647(State
                  or other jurisdiction of
              
              (I.R.S.
                  Employerincorporation
                  or organization)
              
              Identification
                  No.)




216
      South Price Road, Pampa, TX 79065


(Address
      of principal executive offices)





(806-688-9697)


(Issuer's
      telephone number)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. xYes  oNo





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


o
      Yes  x
      No





APPLICABLE
      ONLY TO CORPORATE ISSUERS




The
      number of shares outstanding the issuer's common stock, $.001 par value, was
      64,802,781 as of November 1, 2007. Transitional Small Business Disclosure Format
      (Check one):


Yes
oNo
x










Table
      of
      Contents


Item
                  1.
              
              Financial
                  Statements
              1Item
                  2.
              
              Management's
                  Discussion and Analysis or Plan of Operation
              14Item
                  4.
              
              Controls
                  and Procedures
              19PART
                  IIItem
                  1.
              
              Legal
                  Proceedings
              20Item
                  6.
              
              Exhibits
              20Signatures
              21EXHIBIT
                  INDEX
              22




ii




Item
      1.
      Financial Statements





Chancellor
      Group, Inc.





I
      N D
      E X


Page
                  No.Balance
                  Sheet as at September 30, 2007 (Unaudited)
              2Statements
                  of Operations For the Three and Nine Months Ended September 30,
                  2007 and
                  2006 (Unaudited)
              4Statements
                  of Cash Flows For the Nine Months Ended September 30, 2007 and
                  2006
                  (Unaudited)
              5Notes
                  to Financial Statements (Unaudited)
              6
  1




ITEM
      1.




CHANCELLOR
      GROUP, INC.


CONSOLIDATED
      BALANCE SHEET


SEPTEMBER
      30, 2007


(UNAUDITED)


ASSETSCurrent
                  AssetsCash
                  in Bank
              
              $
              66,510Revenue
                  Receivable
              
              
              246,675Total
                  Current Assets
              
              
              313,185Fixed
                  AssetsLeasehold
                  Costs - Developed
              
              
              4,938,564Office
                  Building and Equipment
              
              
              126,073Fleet-Road
              
              
              40,476Heavy
                  Field Equipment& Tools
              
              
              402,707Accumulated
                  Depreciation
              
              
              (273,921
              )Total
                  Fixed Assets
              
              
              5,233,899Other
                  AssetsUnamortized
                  Debt Expense
              
              
              85,018Prepaid
                  Long Term Hedge
              
              
              66,600Total
                  Other Assets
              
              
              151,618Total
                  Assets
              
              $
              5,698,702





2





LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilitiesAccounts
                  Payable - Chancellor
              
              $
              109,828Accounts
                  Payable - Gryphon Production
              
              
              130,471Stock
                  Subscription Payable
              
              
              1,602Misc.
                  Accounts Payable & Suspense
              
              
              6,746Current
                  portion of Long Term DebtNote
                  Payable - Senior Debt
              
              
              603,803Installment
                  Loan - Equipment
              
              
              11,065Total
                  Current Liabilities
              
              
              863,515Long
                  Term LiabilitiesNote
                  Payable - Investors
              
              
              5,100Note
                  Payable - Senior Debt
              
              
              1,552,446Note
                  Payable - Subordinated Debt
              
              
              3,797,345Installment
                  Loan - Equipment
              
              
              53,453Total
                  Long Term Liabilities
              
              
              5,408,344Stockholders'
                  equityCommon
                  stock: $.001 parvalue,
                  250,000,000 sharesauthorized,
                  64,802,781shares
                  issued & outstanding
              
              
              60,755Preferred
                  Series B stock:$1,000
                  par value,250,000
                  shares authorized,-0-
                  issued and outstandingPaid
                  in capital
              
              
              3,199,583Accumulated
                  deficit
              
              
              (3,323,438
              )Net
                  Income (Loss)
              
              
              (510,056
              )Total
                  Stockholders' Equity
              
              
              (628,911
              )Total
                  Liabilities AndStockholders'
                  Equity
              
              $
              5,698,702See
                  Notes to Consolidated Financial
                  Statements
  3




CHANCELLOR
      GROUP, INC.


CONSOLIDATED
      STATEMENT OF OPERATIONS


(UNAUDITED)


Nine
                  Months Ended
                September
                  30,
              
              Three
                  Months Ended
                September
                  30,2007
              
              2006
              
              2007
              
              2006Sales-
                  Net of RoyaltiesOil
              
              $
              1,156,335
              
              $
              -
              
              $
              887,862
              
              $
              -Natural
                  Gas
              
              
              192,536
              
              
              
              
              
              170,624Other
                  Incomes
              
              
              2,165
              
              
              -
              
              
              2,165
              
              
              -1,351,036
              
              
              
              
              
              1,060,651Severance
                  Taxes
              
              
              66,762
              
              
              
              
              
              52,881Marketing
                  Fees
              
              
              8,669
              
              
              
              
              
              7,194Royalties
                  Paid
              
              
              10,454
              
              
              
              
              
              10,454Net
                  Revenues
              
              
              1,265,151
              
              
              -
              
              
              988,647
              
              
              -Operating
                  expensesLease
                  Operating Exp
              
              
              268,803
              
              
              
              
              
              180,646Other
                  Operating
              
              
              653,762
              
              
              
              
              
              299,365General&
                  Admin
              
              
              165,298
              
              
              35,145
              
              
              77,213
              
              
              17,612Depreciation,
                  Depletion,and
                  Amortization
              
              
              273,922
              
              
              
              
              
              137,109
              
              
              -Total
                  OperatingExpenses
              
              
              1,361,785
              
              
              35,145
              
              
              694,333
              
              
              17,612Income
                  (loss) fromOperations
              
              
              (
                  96,634
              )
              
              (35,145
              )
              
              (295,789
              )
              
              (17,612
              )Other
                  Income (Expenses)Organization
                  Costs
              
              
              (49,299
              )
              
              
              
              
              -Hedge
                  CostAmortization
              
              
              (22,200
              )
              
              
              
              
              (11,100
              )Total
                  Other Inc.(Exp.)
              
              
              (71,499
              )
              
              
              
              
              (11,100
              )Financing
                  ChargesInterest
              
              
              313,584
              
              
              
              
              
              274,271Bank
                  Fees Amortization
              
              
              28,339
              
              
              
              
              
              14,170Total
                  Financing Cost
              
              
              341,923
              
              
              -
              
              
              288,441
              
              
              -Income
                  (loss) beforeprovision
                  for incometaxes
              
              
              (510,056
              )
              
              (35,145
              )
              
              (3,752
              )
              
              (17,612
              )Provision
                  for income tax
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              
              ($510,056
              )
              $
              (35,145
              )
              
              ($3,752
              )
              
              ($17,612
              )Net
                  income (loss)per share (Basic and fully diluted)
              
              $
              (*
              )
              $
              (*
              )
              $
              (*
              )
              $
              (*
              )Weighted
                  averagenumber
                  of commonshares
                  outstanding
              
              
              63,016,406
              
              
              57,513,748
              
              
              64,577,781
              
              
              59,105,030




*less
      than $.01 per share




See
      Notes
      to Consolidated Financial Statements




4




CHANCELLOR
      GROUP, INC.


CONSOLIDATED
      STATEMENT OF CASH FLOWS


(UNAUDITED)




Nine
                  Months EndedSeptember
                  30,2007
              
              2006Cash
                  Flows from OperatingActivities:Net
                  Income (Loss)
              
              
              ($510,056
              )
              
              (35,145
              )Adjustments
                  to Reconcile Net
                  Income (Loss) to Net Cash
                  Flow from Operating Activities:Depreciation
                  and Amortization
              
              
              273,922Decrease(Increase)
                  in Operating
                  Assets
              
              
              (398,293
              )Increase(Decrease)
                  in Operating
                  Liabilities
              
              
              137,217Accounts
                  Payable & Other
              
              
              
              
              
              29,083Total
                  Adjustments
              
              
              12,846
              
              
              29,083Net
                      Cash Provided by (Used  in) Operating
                      Activities
              
              
              (497,210
              )
              
              (6,062
              )Cash
                  Flows for Investing Activities
                  Capital
                  Expenditures
              
              
              (5,507,821
              )Net
                  Cash Provided(Used) by Investing
                  Activities
              
              
              (5,507,821
              )
              
              -Cash
                    Flows from FinancingNotes Payable Borrowings
              
              
              6,023,212
              
              
              -Paid
                  in Capital
              
              
              47,500
              
              
              27,450Net
                    Cash Provided byFinancing
              
              
              6,070,712
              
              
              27,450Net
                    Increase (Decrease) inCash
              
              
              65,680
              
              
              21,388Cash
                  Beginning
              
              
              829Cash
                  Ending
              
              $
              66,510
              
              
              21,388





See
      Notes
      to Consolidated Financial Statements




5


Chancellor
      Group, Inc.





NOTES
      TO
      FINANCIAL STATEMENTS





SEPTEMBER
      30, 2007


(Unaudited)




NOTE
      1.
      ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES:





Chancellor
      Group, Inc. (the "Company") was incorporated in the state of Utah on May 2,
      1986, and then, on December 31, dissolved as a Utah corporation and
      reincorporated as a Nevada corporation. The Company's primary business purpose
      is to engage in the exploration and production of oil and gas. In 1996 the
      Company's corporate name was changed from Nighthawk Capital, Inc. to Chancellor
      Group, Inc.





On
      April
      16, 2007, the Company closed the acquisition of assets from Caldwell Production
      Company, Inc., consisting of 48 mineral leases with 631 wells, of which
      approximately 100 were believed to be producing wells and 531 inactive well
      bores equipped with necessary production equipment, and related operating
      facilities and equipment including an office warehouse facility, ten pickup
      trucks, two pulling rigs, a backhoe, a winch truck and a water truck. The
      purchase price for such oil field equipment was $291,500. The purchase price
      for
      the mineral leases and an existing office building, including an attached
      warehouse/shop building valued at $81,630, was $5,000,000. The oil and natural
      gas leases purchased are on approximately 8,000 acres in Gray and Carson
      Counties, Texas, with a well spacing of 10 acres, and are in the Panhandle
      Field, discovered in 1920. After closing the acquisition, the Company has opened
      corporate offices for our production and oil field service subsidiaries at
      the
      purchased facilities in Pampa, Texas. After the initial acquisition, the Gryphon
      Production Company subsidiary has acquired additional trucks, including an
      electrical repair “bucket” truck, which is needed to restore electric power to
      several previously non-producing wells. The cost of this additional equipment
      was $34,000, and associated tools and equipment was $6,422. The Company has
      also
      acquired a replacement backhoe machine for $67,000. Subsequently, additional
      field equipment and tools were purchased for $31,184.




The
      plan
      is to operate our properties and to restore 10-20 wells per month to production.
      A typical well restoration is estimated to cost $2,500 to $5,000.




Soon
      after April 16, 2007, the number of producing wells was determined to be 84.
      As
      of September 30, 2007, 166 wells are producing - an increase of 82 wells.
      Productive capacity on April 16 was estimated to be 70 bopd and 90 mcfd.
      Productive capacity at September 30 is estimated to be 101 bopd and 263 mcfd
      gas.” The oil is light sweet crude and the natural gas has very high heat
      content, 1600 to 2600 btu/scf.





As
      set
      forth in Note 8 below, on October 30, 2007, we filed for reorganization under
      Chapter 11 of the United States Bankruptcy Code with the United States
      Bankruptcy Court, District of Northern District of Texas.





Principles
      of Consolidation





The
      accompanying consolidated financial statements include the accounts of
      Chancellor Group, Inc., and will include its newly formed, wholly owned
      subsidiaries: Gryphon Production Company, LLC, and Gryphon Field Services,
      LLC.
      These entities are collectively hereinafter referred to as "the Company". Any inter-company
      accounts and transactions have been eliminated. Former subsidiaries, Radly
      Petroleum, Inc., Lichfield Petroleum America, Inc. , and Getty Petroleum, Inc.,
      no longer exist.




6




NOTE
        1.
        ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued):




Oil
      and
      Gas Properties





The
      Company follows the successful efforts method of accounting for its oil and
      gas
      activities. Under this accounting method, costs associated with the acquisition,
      drilling and equipping of successful exploratory and development wells are
      capitalized. Geological and geophysical costs, delay rentals and drilling costs
      of unsuccessful exploratory wells are charged to expense as incurred. The
      carrying value of mineral leases is depleted over the minimum estimated
      productive life of the leases, or ten years. Undeveloped properties are
      periodically assessed for possible impairment due to un-recoverability of costs
      invested. Cash received for partial conveyances of property interests is treated
      as a recovery of cost and no gain or loss is recognized.





Income
      Tax





Deferred
      taxes are provided on a liability method whereby deferred tax assets are
      recognized for deductible temporary differences and operating loss
      carry-forwards and deferred tax liabilities are recognized for taxable temporary
      differences. Temporary differences are the differences between the reported
      amounts of assets and liabilities and their tax bases. 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. Deferred tax assets and liabilities are adjusted for the effects
      of
      changes in tax laws and rates on the date of enactment.





Cash
      and
      Cash Equivalents





The
      Company considers all highly liquid investments with an original maturity of
      three months or less as cash equivalents.





Accounting
      Year





The
      Company employs a calendar accounting year. The Company recognizes income and
      expenses based on the accrual method of accounting.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect 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.





Net
      Income (loss) per share





The
      net
      income (loss) per share is computed by dividing the net income (loss) by the
      weighted average number of shares of common outstanding. Warrants, stock
      options, and common stock issuable upon the conversion of the Company's
      preferred stock (if any), are not included in the computation if the effect
      would be anti-dilutive and would increase the earnings or decrease loss per
      share.




7





NOTE
      1.
      ORGANIZATION, OPERATIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued):





Property
      and Equipment





Property
      and equipment are recorded at cost and depreciated under the straight line
      method over the estimated useful life of the equipment. This life is estimated
      to be five years. The useful life of the office building and warehouse is
      estimated to be 20 years.





Depletion





The
      carrying value of the mineral leases is depleted over the minimum estimated
      productive life of the leases, or ten years.





Accounts
      Receivable





The
      Company reviews accounts receivable periodically for collectibles and
      establishes an allowance for doubtful accounts and records bad debt expense
      when
      deemed necessary.





Products
      and Services, Geographic Areas and Major Customers





The
      Company plans to develop its domestic oil and gas properties, located in Gray
      and Carson counties, Texas, and possibly to acquire additional producing oil
      and
      gas properties. The Company’s major customers are Shell Trading Company, Valero
      Marketing, DCP Midstream, and Eagle Rock Energy.





Revenue
      Recognition





The
      Company recognizes revenue when a product is sold to a customer, either for
      cash
      or as evidenced by an obligation on the part of the customer to pay.





Financial
      Instruments





The
      carrying value of the Company's financial instruments, including cash and cash
      equivalents, accounts receivable, accounts payable, and long term debt, as
      reported in the accompanying balance sheet, approximates fair
      value.





Employee
      Stock-Based Compensation





The
      Company uses the intrinsic value method of accounting for employee stock-based
      compensation.





Recent
      Accounting Pronouncements





In
      March
      2006, the Financial Accounting Standards Board ("FASB") issued Statement of
      Financial Accounting Standard ("SFAS") No. 155, "Accounting for Certain Hybrid
      Financial Instruments." SFAS 155 resolves certain accounting issues related
      to
      various hybrid financial instruments. The Company has adopted the provisions
      of
      SFAS No. 155 which are effective for fiscal years beginning


after
      September 15, 2006. The adoption did not have a material effect on the results
      of operations of the Company.





In
      March
      2006, the FASB issued SFAS No. 156 "Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities". This
      statement requires all separately recognized servicing  assets
      and servicing liabilities be initially measured at fair value, if practicable,
      and permits for subsequent measurement using either fair value measurement
      with
      changes in fair value reflected in earnings or the amortization and impairment
      requirements of Statement No. 140. The Company has adopted the provisions of
      SFAS No. 156, which are effective in general for an entity's fiscal year
      beginning after September 15, 2006. The adoption did not have a material effect
      on the results of operations of the Company.




8




NOTE
      1.
      ORGANIZATION, OPERATIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (Continued):





In
      December 2006, the FASB issued SFAS No. 157 "Fair Value Measurements", to
      improve consistency and comparability in fair value measurements, and to expand
      related disclosures. The Company has adopted the provisions of SFAS No. 157,
      which are effective for financial statements for fiscal years beginning after
      November 15, 2007. The adoption did not have a material effect on the results
      of
      operations of the Company.





In
      September 2006 the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Post Retirement Plans”. SFAS No. 158 requires the
      Company to recognize the funded status of its post retirement plans on the
      balance sheet and recognize as a component of accumulated other comprehensive
      income the gains and losses, prior service costs or credits that occur during
      the financial year but are not recognized as components of the Company’s pension
      costs This Statement is effective as of the beginning of its first
      fiscal year that begins after December 15, 2008. The Company does not expect
      application of SFAS No. 156 to have a material affect on its financial
      statements.





In
      February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities - Including an amendment of FASB Statement
      No.
      115”. SFAS No. 159 permits entities to choose to measure many financial
      instruments and certain other items at fair value. The amendment to SFAS No.
      115
      applies to all entities with investments in available-for-sale or trading
      securities. The statement is effective for fiscal years beginning after November
      15, 2007. The Company does not expect application of SFAS No. 159 to have a
      material affect on its financial statements.





NOTE
      2.
      RELATED PARTY TRANSACTIONS





In
      the
      second quarter of 2007, ending June 30, 2007, a Director purchased 300,000
      shares of Chancellor common stock for $15,000. Also in the second quarter of
      2007, we paid $40,000 in consulting fees to a Director. In addition during
      the
      second quarter of 2007, US Consultancy and Services, LLC, owned by the
      son-in-law of the President and CEO, was paid $6,000 for consulting
      services.





In
      the
      third quarter of 2007, ending September 30, a Director was paid $6,000 in
      consulting fees. Also in the third quarter of 2007, US Consultancy and Services,
      LLC, owned by the son-in-law of the President and CEO, was paid $29,018.57
      for
      consulting services.




9




NOTE
      3.
      INCOME TAXES





Deferred
      income taxes arise from the temporary differences between financial statement
      and income tax recognition of net operating losses. These loss carryovers are
      limited under the Internal Revenue Code should a significant change in ownership
      occur. The Company accounts for income taxes pursuant to SFAS 109.





At
      December 31, 2006 the Company had approximately $3,315,000 in unused federal
      net
      operating loss carry-forwards, which begin to expire principally in the year
      2011. A deferred tax asset of approximately $660,000 resulting from the loss
      carry-forward has been offset by a 100% valuation allowance. The increase in
      the
      valuation allowance from 2005 to 2006 was approximately $12,000.





At
      September 30, 2007, the Company had approximately $3,833,000 in unused federal
      net operating loss carry-forwards, which begin to expire principally in the
      year
      2011. A deferred tax asset of approximately $875,000 resulting from the loss
      carry-forward has been offset by a 100% valuation allowance. The increase in
      the
      valuation allowance from year end 2006 to third quarter 2007 was approximately
      $215,000. The net operating loss carry-forwards may be limited under the Change
      of Control provisions of the Internal Revenue Code section 382.





NOTE
      4.
      STOCKHOLDERS' EQUITY





Common
      Stock





The
      Company has 250,000,000 authorized shares of common stock, par value $.001,
      with
      64,802,781 shares issued and outstanding as of September 30, 2007.





Preferred
      Stock





Preferred
      Series B Stock - The Company has provided for the issuance of 250,000 shares,
      par value $1,000 per share, of convertible Preferred Series B stock ("Series
      B"). Each Series B share is convertible into 166.667 shares of the Company's
      common stock upon election by the shareholder, with dates and terms set by
      the
      Board. 48,000 Series B shares have been issued and converted in prior
      years.





Stock
      Options





Non-employee
      Stock Options





The
      Company accounts for non-employee stock options under SFAS 123 (as amended
      by
      SFAS 148), whereby options costs are recorded based on the fair value of the
      consideration received or the fair value of the equity instruments issued,
      whichever is more reliably measurable. During the years ended December 31,
      2005
      and 2006, no options were issued, exercised or cancelled.





The
      Company currently has stock options outstanding to various individuals in the
      following amounts: 2,000,000
      options exercisable for one share of common stock at an exercise price of $0.025
      per share, currently exercisable, expiring December 31, 2009, and 4,000,000
      options exercisable for one share of common stock at an exercise price of $0.02
      per share, currently exercisable, expiring December 31, 2009. In addition,
      At
      the closing of the purchase of the Caldwell Assets, pursuant to an Agreement
      to
      Issue Warrants, dated April 13, 2007 (the “CapWest Warrant Agreement”), we also
      issued CapWest a warrant to purchase 2,000,000 shares of our common stock,
      at a
      purchase price of $0.001 per share, which warrant is exercisable at any time
      up
      to April 13, 2012. CapWest has a put option (the “Put Option”) during the period
      beginning on the first to occur of the following dates (a) the second
      anniversary of the CapWest Loan Agreement; or (b) the date when the Company
      shall have paid CapWest’s loan in full to put the CapWest Warrants to the
      Company for repurchase at an exercise price of $1,000,000.




10





NOTE
      4.
      STOCKHOLDERS' EQUITY (Continued):





Employee
      Stock Options





The
      Company accounts for non-employee stock options under SFAS 123 (as Amended
      by
      SFAS 148). The Company issued no employee stock options and had none outstanding
      at the end of 2005, 2006 or as of the close of the quarter ending June 30,
      2007.




NOTE
      5.
      GOING CONCERN UNCERTAINTY





These
      financial statements are presented assuming the Company will continue as a
      going
      concern. The Company has had recurring losses from operations, negative working
      capital, and stockholders' equity deficiency. This raises substantial doubt
      about its ability to continue as a going concern. Management's plan in regard
      to
      these matters includes restoring sufficient production capacity from the
      recently acquired properties so as to achieve positive cash flow, as well as
      raising working capital to assure the Company's viability, through private
      or
      public equity offerings and/or debt financing; and acquiring and developing
      profitable oil and gas properties. There can be no assurance that either
      operating or capital market transactions will be successful.





NOTE
      6.
      CONTINGENT LIABILITY





On
      August
      4, 2007, the Company received a letter from David L. Kagel, a former attorney
      for the Company, indicating his intention to initiate an arbitration proceeding
      or to file a lawsuit for recovery of $50,489 (including interest) for services
      rendered over several years under prior management. The Company believes the
      claim is without merit and that it has a number of counterclaims against Mr.
      Kagel. No further action has occurred regarding this issue.





NOTE
      7.
      DEBT





To
      finance the acquisition of the assets purchased from Caldwell Production
      Company, Inc., on April 13, 2007, we closed on a Loan Agreement with Western
      National Bank (“WNB”), Midland, Texas, for a senior loan facility (the “WNB Loan
      Agreement”). At the closing of the purchase of the Caldwell Assets, we drew down
      $2.3 million under the WNB Loan Agreement The interest rate under the WNB Loan
      Agreement is a variable rate equal to the prime rate as defined in this
      Agreement plus 2%, but in no event to be less than 9.25%.





April
      13,
      2007, we also entered into a Loan On Agreement with CapWest Resources, Inc.,
      Midland, Texas, for an advancing line of credit/term loan facility, under which
      we drew down at closing $2,700,000 for the balance of the purchase price of
      the
      leases, $291,500 for the equipment, $111,000 for bank fees, legal expenses
      and
      associated costs, and $130,000 for initial working capital. The interest rate
      under the CapWest Loan Agreement is a variable rate equal to the prime rate
      as
      defined in this Agreement plus 4%. Under the CapWest loan agreement, CapWest
      has
      a 2% overriding royalty interest in the Leases.




11





NOTE
      7.
      DEBT (Continued):





After
      the
      payout of CapWest’s loan, or in the event that the Company is sold, this
      overriding royalty interest will convert to a 15% net revenue interest in the
      Leases. This interest may be purchased by us under a formula specified in this
      Agreement. The CapWest Loan Agreement has now been fully drawn to the initially
      agreed amount of $3,700,000.





On
      August
      2, 2007, that Company and CapWest Resources, Inc., our subordinated debt lender,
      agreed in principle, subject to definitive documentation, to amend the
      Subordinated Loan Agreement in order to increase the loan by $250,000. The
      terms
      of the agreement in principle were: a) The Company must pay accrued interest
      thru July 30, by August 20, 2007. The Company has paid $42,000 in August, and
      must pay an additional $85,000 by that date; b) CapWest agreed to require
      monthly interest only thereafter, until December 31, 2007; c) The Company agreed
      to raise $250,000 in common equity by October 31,2007; d) The Company agreed
      to
      reduce administrative salaries by $25,000 per month; e) The net revenue interest
      after payout provided in the CapWest loan was increased from 15% to 20%.





NOTE
      8.
      SUBSEQUENT EVENTS





On
      October 15, 2007 Mr. Bradley W. Fischer resigned as the Chief Executive Officer
      and as a director. Under the separation agreement with the Company, Mr. Fischer
      has released the Company for any claims of unpaid salary and unreimbursed
      expenses, and is returning the 3,037,751 shares of common stock issued to him
      for cancellation.





Effective
      October 16, 2007, Thomas H. Grantham was appointed as the President and Chief
      Financial Officer of the Company.





Due
      to
      the resignation of Mr. Bradley W. Fischer as Chief Executive Officer of the
      Company the primary lenders (Western National Bank of Midland, Texas and CapWest
      Resources, Inc.) have taken the position the Company is in default with regard
      certain loan covenants that related to changes in management and borrowers.
      An
      extension of time to correct these technical defaults was provided to the
      Company until October 31, 2007. Additionally, another loan covenant regarding
      a
      debt ratio was deemed to have been in default and the Company was given until
      November 15, 2007 to remedy that problem.





On
      October 25, 2007, the lenders presented to the Company three agreements, that
      upon their execution, the lenders would extend the default provisions until
      December 15, 2007 at which date the lenders expected the debt to be paid in
      its
      entirety. One of the agreements was that a fully executed deed in trust would
      be
      placed into an escrow account that would allow the lenders to immediately
      proceed to foreclosure if the Company was unable to retire its debt by the
      December 15, 2007 deadline.





Due
      to
      the unreasonable time frame that was placed upon the Company by the lenders
      to
      restructure its liabilities to the lenders and the impending default date of
      October 31, 2007, the management of the Company made the decision to seek the
      protection of the United States Bankruptcy Court, District of Northern District
      of Texas. The applicable filings were made for Gryphon Operating Co., LLC on
      October 29, 2007. Subsequent filings were made for Chancellor Group, Inc. and
      Gryphon Field Services Co., LLC on October 30, 2007. The Company is currently
      operating as a debtor in possession under those court filings.




12




Note
      9.
      ACCUMULATED COMPENSATED ABSENCES





It
      is the
      Company’s policy to permit employees to accumulate a limited amount of earned by
      unused vacation and sick leave, which will be paid to employees upon separation
      from the Company’s service. The cost of vacation and sick leave is recognized
      when payments are made to employees. These amounts are immaterial at this time
      and no amounts have been recorded in the financial statements.




13




ITEM
      2.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN of OPERATION




DISCLOSURE
      REGARDING FORWARD-LOOKING STATEMENTS




Throughout
      this report, we make statements that may be deemed "forward-looking" statements
      within the meaning of Section 27A of the Securities Act of 1933, as
      amended, and Section 21E of the Securities Exchange Act of 1934, as
      amended. All statements, other than statements of historical facts, that address
      activities, events, outcomes and other matters that Chancellor plans, expects,
      intends, assumes, believes, budgets, predicts, forecasts, projects, estimates
      or
      anticipates (and other similar expressions) will, should or may occur in the
      future are forward-looking statements. These forward-looking statements are
      based on management's current belief, based on currently available information,
      as to the outcome and timing of future events. When considering forward-looking
      statements, you should keep in mind the risk factors and other cautionary
      statements in this report.





We
      caution you that these forward-looking statements are subject to all of the
      risks and uncertainties, many of which are beyond our control, incident to
      the
      exploration for and development, production and sale of oil and gas. These
      risks
      include, but are not limited to, commodity price volatility, inflation, lack
      of
      availability of goods and services, environmental risks, operating risks,
      regulatory changes, the uncertainty inherent in estimating proved oil and
      natural gas reserves and in projecting future rates of production and timing
      of
      development expenditures and other risks described herein.




BACKGROUND





Chancellor
      Group, Inc., a Nevada corporation (“we”, “us”, “Chancellor” or the “Company”),
      is in the business of acquisition, exploration, and development of natural
      gas
      and oil properties. In 1997, we had purchased oil, gas and mineral leases in
      Pecos County, Texas. All such leases have since lapsed. Following the
      appointment in 2002 of a new Board by the Court in a derivative action brought
      against us in 2001, the Company has applied itself to reorganizing management,
      providing up to date accounting information and seeking new business
      opportunities. Funds provided by several investor-shareholders enabled the
      process to proceed and the Company's audits and filings with the Securities
      and
      Exchange Commission to be brought up to date.





Since
      that time, we actively sought an acquisition of petroleum producing assets,
      and
      have completed an initial acquisition of oil and gas leases and related
      facilities and equipment as described below under “Plan of Operation.” As set
      forth in detail below, on October 30, 2007, we filed for reorganization under
      Chapter 11 of the United States Bankruptcy Code with the United States
      Bankruptcy Court, District of Northern District of Texas.





Our
      common stock is quoted on the Over-The-Counter market and trades under the
      symbol CHAG.PK. As of November 1, 2007, there were 64,802,781 shares
      of our common stock issued and outstanding.




14





Three
      Months Ended September 30, 2007 Compared to Three Months Ended September 30,
      2006




We
      had no
      production operations in calendar year 2006. Our oil production operations
      began
      April 16 th ,
      2007
      with an effective date of April 1 st ,
      2007.
      During the three month period ending September 30 th ,
      2007 we
      produced and sold 9,131 barrels of oil and produced and sold 23,689 mcf gas,
      generating $1,048,032 revenues after royalties, with a one month lag in receipt
      of revenues for the prior months sales. Start up expenditures, included debt
      origination expenditures, and the required prepaid hedge were $251,456. We
      had
      84 wells actually producing oil and gas on April 16 th and
      restored an additional 82 wells by September 30 th .





Nine
      Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
      2006




We
      had no
      production operations in calendar year 2006. Our oil production operations
      began
      April 16 th ,
      2007
      with an effective date of April 1 st ,
      2007.
      During the period ending September 30 th ,
      2007 we
      produced and sold 17,099 barrels of oil and produced and sold 33,630 mcf gas,
      generating $1,348,871 revenues after royalties, with a one month lag in receipt
      of revenues for the prior months sales. Start up expenditures, included debt
      origination expenditures, and the required prepaid hedge were $251,456. We
      had
      84 wells actually producing oil and gas on April 16 th and
      restored an additional 82 wells by September 30 th .
      The
      terms of our loan agreement required us to hedge initial oil production; we
      purchased two 1000 barrel hedge contracts covering the first 24 months
      production at a cost of $88,900. We also experienced non-recurring expenses
      related to start-up. In aggregate, the delays in revenue, hedge expense, and
      non-recurring expenses amounted to approximately $490,000 of reduced income
      and
      $666,000 of reduced cash flow.




We
      have a
      stockholders' deficiency in the amount of $628,911 at September 30, 2007.




PLAN
      OF
      OPERATION





On
      April
      16, 2007, we closed the acquisition of assets from Caldwell Production Company,
      Inc., consisting of 48 mineral leases with 621 wells, of which approximately
      100
      were considered to be producing wells and 531 inactive well bores equipped
      with
      necessary production equipment, and related operating facilities and equipment
      including an office warehouse facility, ten pickup trucks, two pulling rigs,
      a
      backhoe, a winch truck and a water truck. The purchase price for the mineral
      leases and an existing office building including an attached warehouse/shop
      building valued at $81,630, was $5,000,000, and for the equipment $291,500.
      The
      oil and natural gas leases purchased are on approximately 8,000 acres in Gray
      and Carson Counties, Texas, with a well spacing of 10 acres, and are in the
      Panhandle Field, discovered in 1920. After closing the acquisition, we has
      opened corporate offices for our production and oil field service subsidiaries
      at the purchased facilities in Pampa, Texas. After the initial acquisition,
      the
      Gryphon Production Company subsidiary we have acquired additional trucks,
      including an electrical repair “bucket” truck, which is needed to restore
      electric power to several previously non-producing wells. The cost of this
      additional equipment was $34,000 and associated tools and equipment was $6,422.
      We have also acquired a replacement backhoe machine for $67,000. Subsequently,
      additional Field equipment and tools were purchased for $31,184. We were also
      required to invest $38,949 in the rehabilitation and restoration of the office
      building.




15





We
      commenced operations on April 16 with what were 84 actually producing wells.
      As
      of September 30, 2007, 166 wells are producing. Productive capacity on April
      16
      was estimated to be 70 bopd and 90 mcfd. Productive capacity at September 30
      is
      estimated to be 101 bopd and 163 mcfd gas. The oil is light sweet crude and
      the
      natural gas has very high heat content, 1600 to 2600 btu/scf.





On
      October 30, 2007, as discussed in more detail under “Liquidity and Capital
      Resources” below, due to notices of default received from Western National Bank
      and CapWest Resources, Inc., we filed a bankruptcy petition under Chapter 11
      of
      the United States Bankruptcy Code, and our operating subsidiaries, Gryphon
      Production Company, LLC and Gryphon Field Services, LLC, filed bankruptcy
      petitions under Chapter 11 of the Code on October 29 and October 30, 2007,
      respectively. At this time, the Company is managing its operations and those
      of
      its two subsidiaries as a debtor in possession. Our intention making in the
      Chapter 11 filings is to continue operations of the Company through the Chapter
      11 bankruptcy process and to emerge from the Chapter 11 reorganization as an
      operating company, with our financial structure reorganized, and where all
      of
      our creditors would receive the full amounts owed. However, there is no
      assurance that we will be able successfully to reorganize our company in this
      bankruptcy proceeding.




The
      following table is for the three months ended:


September
                  30, 2007
              
              
              
              September
                  30, 2006Oil
                  and Gas SalesOil
                  Sales(Bbl)
              
              
              9131
              
              
              
              
              
              0Natural
                  Gas (Mcf)
              
              
              23689
              
              
              
              
              
              0Average
                  Sales Price:Oil,
                  per Bbl:
              
              $
              76.59
              
              
              
              
              
              0Gas,
                  per MMCF:
              
              $
              6.80
              
              
              
              
              
              0




16




The
      following table is for the Nine months ended:


September
                  30, 2007
              
              
              
              September
                  30, 2006Oil
                  and Gas SalesOil
                  Sales(Bbl)
              
              
              17098
              
              
              
              
              
              0Natural
                  Gas Sales (Mcf)
              
              
              38041
              
              
              
              
              
              0Average
                  Sales Price:Oil,
                  per Bbl:
              
              $
              70.15
              
              
              
              
              
              0Gas,
                  per MMCF:
              
              $
              7.31
              
              
              
              
              
              0




Generally,
      in managing our business we must deal with many factors inherent in our
      industry. First and foremost is wide fluctuation of oil and gas prices. Oil
      and
      gas markets are cyclical and volatile, with future price movements difficult
      to
      predict. While our revenues are a function of both production and prices, wide
      swings in prices often have the greatest impact on our results of operations.




Our
      operations entail significant complexities. Advanced technologies requiring
      highly trained personnel are utilized in restoration of wells and production.
      The oil and gas industry is highly competitive. We compete with major and
      diversified energy companies, independent oil and gas companies, and individual
      operators. In addition, the industry as a whole competes with other businesses
      that supply energy to industrial, commercial, and residential end users. Our
      ability to recruit and retain experienced personnel is vital to the success
      of
      our endeavors.





Liquidity
      & Capital Resources





As
      of
      September 30, 2007 the Company had $66,510 of cash on hand. We have an
      accumulated deficit of $3,833,494 and have a stockholders' deficiency of
      $628,911 at September 30, 2007.





*Loan
      Agreements with Western National Bank and CapWest Resources,
      Inc.*





To
      finance the acquisition of the assets purchased from Caldwell Production
      Company, Inc., on April 13, 2007, we closed on a Loan Agreement with Western
      National Bank (“WNB”), Midland, Texas, for a senior loan facility (the “WNB Loan
      Agreement”). At the closing of the purchase of the Caldwell Assets, we drew down
      $2.3 million under the WNB Loan Agreement The interest rate under the WNB Loan
      Agreement is a variable rate equal to the prime rate as defined in this
      Agreement plus 2%, but in no event to be less than 9.25%.





On
      April
      13, 2007, we also entered into a Loan Agreement with CapWest Resources, Inc.,
      Midland, Texas (“CapWest”), for an advancing line of credit/term loan facility,
      under which we drew down at closing $2,700,000 for the balance of the purchase
      price of the leases, $291,500 for the equipment, $111,000 for bank fees, legal
      expenses and associated costs, and $130,000 for initial working capital. The
      interest rate under the CapWest Loan Agreement is a variable rate equal to
      the
      prime rate as defined in this Agreement plus 4%. Under the CapWest loan
      agreement, CapWest has a 2% overriding royalty interest in the Leases. After
      the
      payout of CapWest’s loan, or in the event that the Company is sold, this
      overriding royalty interest will convert to a 15% net revenue interest in the
      Leases. This interest may be purchased by us under a formula specified in this
      Agreement.




17





On
      April
      26, 2007 we drew $75,000 for additional working capital and start-up expenses.
      On May 6, 2007 we drew $88,800 to purchase a hedge floor for a portion of our
      oil production, as required by the loan agreements. On May 7, 2007 we drew
      $203,000 to fund lease operating expenses and well restorations. On June 14,
      2007 we drew $98,000 for the same purposes. The CapWest Loan Agreement has
      now
      been fully drawn to the initially agreed amount of $3,700,000.





Effective
      July 12, 2007, we executed an agreement ("Modification'), amending the WNB
      Term
      Note issued pursuant to the WNB Loan Agreement. The Modification changes the
      monthly payment date from the 15 th to the
      25 th of each
      month and extended the maturity date of the loan to April 25, 2010.





Pursuant
      to the terms of the CapWest Loan Agreement, we have previously executed an
      assignment of overriding royalty interest under which we conveyed to CapWest
      a
      2% overriding royalty interest ("ORRI") in our leases, proportionately reduced
      to our net revenue interest. In addition to the aforementioned 2% ORRI, after
      payout of Cap West's loan (as defined in the CapWest Loan Agreement), CapWest
      will "back-in" for 15% of our gross oil and gas proceeds, conveyed in a Bill
      of
      Sale and Assignment of Contractual Rights dated April 13, 2007. We may
      repurchase this interest based upon a formula specified in the Cap West Loan
      Agreement. As of August 2, 2007, we entered into a new Bill of Sale and
      Assignment of Contractual Rights with CapWest that provides for an additional
      5%
      interest for Cap West in the gross oil and gas proceeds from our leases after
      payout of Cap West's loan, effectively resulting in an increase of the back-in
      from 15% to 20% of our gross oil and gas proceeds.





We
      received a notice of defaults dated September 7, 2007 from counsel for WNB
      and
      CapWest stating that we were in default of two financial covenants relating
      to
      our consolidated debt service coverage ratio under the WNB and CapWest loan
      documents. We subsequently received letters from WNB and CapWest, both dated
      September 12, 2007, waiving the previously stated events of default until
      October 15, 2007. Following the resignation of Bradley W. Fischer as our Chief
      Executive Officer effective October 16, 2007, we received notices dated that
      date from WNB and CapWest as to the existence of an event of default regarding
      our consolidated debt service coverage ratio, which had been waived by both
      financial institutions through October 15, 2007, and an event of default
      relating to the departure of Mr. Fischer as our Chief Executive Officer. As
      to
      the noticed default regarding our consolidated debt service coverage ratio,
      the
      October 16 notices from the lenders provided us until November 15, 2007 to
      take
      appropriate curative action. With regard to the management change, both lenders
      expressed a willingness to meet with Thomas Grantham, Mr. Fischer’s successor as
      our President and did, in fact, meet with Mr. Grantham. On October 22, 2007,
      we
      received an oral communication from a representative of one the lenders to
      the
      effect that the lenders would not waive this event of default and that they
      would not extend the November 15, 2007 compliance deadline for the debt service
      coverage ratio covenants. In continuing negotiations, on October 25, 2007,
      the
      lenders further advised that the banks would not foreclose on the Company’s
      assets if the Company agreed to pay the lenders in full by December 15, 2007,
      execute a release of the banks from liability, and deliver into escrow a deed
      in
      trust on all our properties and assets that would be released from escrow and
      delivered to the banks on December 15, 2007 if all loans were not paid in
      full.





*Bankruptcy
      Filing under Chapter 11 of the Bankruptcy Code*





Due
      to
      the potential for an immediate event of default under the WNB and CapWest loan
      agreements, unless we signed additional documents with the banks with the
      required payoff of their loans by December 15, 2007, on October 30, 2007, we
      filed a bankruptcy petition under Chapter 11 of the United States Bankruptcy
      Code (the “Code”) with the United States Bankruptcy Court, Northern District of
      Texas. Our operating subsidiaries, Gryphon Production Company, LLC and Gryphon
      Field Services, LLC filed bankruptcy petitions under Chapter 11 of the Code
      on
      October 29 and October 30, 2007, respectively, with the same Court. At this
      time, the Company is managing its operations and those of its two subsidiaries
      as a debtor in possession.




18





Our
      intention making in the Chapter 11 filings is to continue operations of the
      Company through the Chapter 11 bankruptcy process and to emerge from the Chapter
      11 reorganization as an operating company, with our financial structure
      reorganized, and where all of our creditors would receive the full amounts
      owed.
      In the context of our reorganization under Chapter 11 of the Code, we may be
      required to raise equity capital to fully rework wells that are currently not
      in
      production in the next 12 months and to finance our planned business operations.
      There are no assurances that we will be able to raise additional equity capital.
      In the event we are unable to obtain additional capital or funding we may be
      unable to reorganize successfully under Chapter 11 of the Code.





CRITICAL
      ACCOUNTING POLICIES





The
      Securities and Exchange Commission recently issued "Financial Reporting Release
      No. 60 Cautionary Advice Regarding Disclosure About Critical Accounting
      Policies" ("FRR 60"), suggesting companies provide additional disclosures,
      discussion and commentary on those accounting policies considered most critical
      to its business and financial reporting requirements. FRR 60 considers an
      accounting policy to be critical if it is important to the Company's financial
      condition and results of operations, and requires significant judgment and
      estimates on the part of management in the application of the policy. For a
      summary of the Company's significant accounting policies, including the critical
      accounting policies discussed below, please refer to the accompanying notes
      to
      the financial statements.




The
      Company assesses potential impairment of its long-lived assets, which include
      its property and equipment and its identifiable intangibles such as deferred
      charges under the guidance of SFAS 144 "Accounting for the Impairment or
      Disposal of Long-Lived Assets". The Company must continually determine if a
      permanent impairment of its long-lived assets has occurred and write down the
      assets to their fair values and charge current operations for the measured
      impairment.




ITEM
      3.
      CONTROLS AND PROCEDURES





The
      Company's President and Chief Financial Officer is primarily responsible for
      the
      accuracy of the financial information that is presented in this quarterly
      Report. This officers has as of the close of the period covered by this
      Quarterly Report, evaluated the Company's disclosure controls and procedures
      (as
      defined in Rules 13a-4c and 15d-14c promulgated under the Securities Exchange
      Act of 1934 and determined that such controls and procedures were effective
      in
      ensuring that material information relating to the Company was made known to
      him
      during the period covered by this Quarterly Report. Since his evaluation, no
      changes were made to the Company's internal controls or in other factors that
      could significantly affect these controls.




19




PART
      II—OTHER INFORMATION





ITEM
      1.
      Legal Proceedings





On
      August
      4, 2007, the Company received a letter from David L. Kagel, a former attorney
      for the Company, indicating his intention to initiate an arbitration proceeding
      or to file a lawsuit for recovery of $50,489 (including interest) for services
      rendered over several years under prior management. The Company believes the
      claim is without merit and that it has a number of counterclaims against Mr.
      Kagel.




ITEM
      6.
      Exhibits.





No.
            
            Description31
            
            Certification of President and Chief
              Financial Officer Pursuant toSection
              302 of The Sarbanes Oxley Act of 2002.32
            
            Certification of President and Chief
              Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant
              to Section 906 of the Sarbanes-Oxley Oxley Act of
              2002.




20




SIGNATURES





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.


Chancellor
                Group,
                Inc.
              (Registrant)By:
            /s/
              Thomas H. GranthamThomas
                H. Grantham, President and
              Chief
                Financial OfficerDated:
                November 15, 2007




21




EXHIBIT
      INDEX


Exhibit
                Number
              
              Description31
              
              Certification
                  of President and Chief Financial Officer Pursuant to Section
                  302 of The Sarbanes Oxley Act of 2002.32
              
              Certification
                  of President and Chief Financial Officer Pursuant to 18 U.S.C.Section
                  1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley
                  Oxley Act of
                  2002.




22