UNITED
      STATES




SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      D.C. 20549


_________________________________________





Form
      10-Q





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





For
      the
      quarterly period ended June 30, 2008





oTRANSITION
      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.
                Employer Identification No.)incorporation
                or organization)





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. x Yes o
      No





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a smaller reporting company. (Check One):





Large
                accelerated filer o
            
            Accelerated
                filer oNon-accelerated
                filer o
            
            Smaller
                reporting company x(Do
                not check if a smaller reporting company)





APPLICABLE
      ONLY TO CORPORATE ISSUERS




The
      number of shares outstanding the issuer's common stock, $.001 par value, was
      64,802,781 as of August 1, 2008.









Table
      of
      Contents





PART
                I
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements
            
            1Item
                2.
            Management's
                Discussion and Analysis or Plan of Operation
            
            11Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            16Item
                4T.
            Controls
                and Procedures
            
            16PART
                IIItem
                1.
            Legal
                Proceedings
            
            17Item
                6.
            Exhibits
            
            17EXHIBIT
                INDEX
            
            18




ii





**Item
      1. Financial Statements**





Chancellor
      Group, Inc.


(A
      Development Stage Company)





I
      N D
      E X


Page
                No.Balance
                Sheets as at June 30, 2008 (Unaudited) and December 31, 2007
                (Audited)
            2Statements
                of OperationsFor
                the Three and Six Months Ended June 30, 2008 and 2007
                (Unaudited)
            3Statements
                of Cash FlowsFor
                the Six Months Ended June 30, 2008 and 2007 (Unaudited)
            4Notes
                to Financial Statements (Unaudited)
            5-10





1


Chancellor
      Group, Inc.


CONSOLIDATED
      BALANCE SHEETS





June 30, 2008
            
            December 31, 2007(Unaudited)
            
            (Audited)ASSETSCurrent
                AssetsCash
                in Bank
            
            $
            305,075
            
            $
            218,118Revenue
                Receivable
            
            
            331,492
            
            
            248,680Prepaid
                Insurance
            
            
            60,447
            
            
            0Total
                Current Assets
            
            
            697,014
            
            
            466,797Fixed
                AssetsLeasehold
                Costs - Developed
            
            
            5,000,678
            
            
            4,938,564Office
                Building & Equipment
            
            
            127,463
            
            
            126,073Fleet
                - Road
            
            
            66,052
            
            
            62,263Heavy
                Field Equipment & Tools
            
            
            430,375
            
            
            405,593Accumulated
                Depreciation
            
            
            (
                688,679
            )
            
            (411,495
            )Total
                Fixed Assets
            
            
            4,935,889
            
            
            5,120,999Other
                AssetsUnamortized
                Debt Expense
            
            
            45,842
            
            
            55,500Prepaid
                Long Term Hedge
            
            
            33,300
            
            
            70,848Deposits
            
            
            250
            
            
            250Total
                Other Assets
            
            
            79,392
            
            
            126,598Total
                Assets
            
            $
            5,712,295
            
            $
            5,714,394LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                LiabilitiesAccounts
                Payable — Chancellor
            
            $
            109,828
            
            $
            109,828Accounts
                Payable - Gryphon Production
            
            
            393,349
            
            
            264,800Accrued
                Interest Payable
            
            
            410,910
            
            
            113,028Miscellaneous
                Accounts Payable & Suspense
            
            
            41,576
            
            
            10,044Stock
                Subscription Payable
            
            
            1,602
            
            
            1,602Total
                Current Liabilities
            
            
            957,265
            
            
            499,302Long
                Term LiabilitiesNote
                Payable — Senior Debt
            
            
            1,962,557
            
            
            2,108,332Note
                Payable - Subordinated Debt
            
            
            3,797,345
            
            
            3,797,345Installment
                Loan - Equipment
            
            
            56,750
            
            
            63,576Note
                Payable - Investors
            
            
            5,160
            
            
            5,160Total
                Long Term Liabilities
            
            
            5,821,812
            
            
            5,974,413Stockholders’
                EquityCommon
                Stock: $.001 par value, 250,000,000 shares authorized, 64,802,781
                shares
                issued and outstanding at December 31, 2007 and June 30,
                2008
            
            
            64,803
            
            
            62,605Paid
                in Capital
            
            
            3,221,735
            
            
            3,223,733Accumulated
                Deficit
            
            
            (
                4,353,320
            )
            
            (
                4,045,659
            )Total
                Stockholders’ Equity
            
            
            (
                1,066,782
            )
            
            (
                759,321
            )Total
                Liabilities and Stockholders’ Equity
            
            $
            5,712,295
            
            $
            5,714,394





See
      Notes
      to Unaudited Consolidated Financial Statements




2





Chancellor
      Group, Inc.


CONSOLIDATED
      STATEMENT OF OPERATIONS


FOR
      THE
      THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND JUNE 30, 2007


(Unaudited)





For the three months
              ended June 30,
            
            For the six months
              ended June 30,2008
            
            2007
            
            2008
            
            2007Sales
                - Net of Royalties PaidOil
            
            $
            930,480
            
            $
            268,473
            
            $
            1,718,096
            
            $
            268,473Natural
                Gas
            
            
            230,240
            
            
            21,912
            
            
            379,950
            
            
            21,912Other
                Income
            
            
            600
            
            
            0
            
            
            1,750
            
            
            0Gross
                Revenue
            
            
            1,161,320
            
            
            290,385
            
            
            2,099,796
            
            
            290,385Severance
                Taxes
            
            
            58,692
            
            
            13,881
            
            
            105,245
            
            
            13,881Marketing
                Fees
            
            
            9,023
            
            
            1,474
            
            
            16,755
            
            
            1,474Royalties
                Paid
            
            
            0
            
            
            0
            
            
            13
            
            
            0Net
                Revenue
            
            
            1,093,605
            
            
            275,030
            
            
            1,977,783
            
            
            275,030Operating
                ExpensesLease
                Operating Expense
            
            
            419,050
            
            
            88,157
            
            
            736,715
            
            
            88,157Other
                Operating Expense
            
            
            331,454
            
            
            329,426
            
            
            659,573
            
            
            325,658General
                & Administrative Expense
            
            
            93,392
            
            
            112,970
            
            
            126,476
            
            
            104,743Depreciation,
                Depletion & Amortization
            
            
            138,897
            
            
            136,813
            
            
            277,184
            
            
            136,813Total
                Operating Expense
            
            
            982,793
            
            
            667,366
            
            
            1,799,948
            
            
            655,371Income
                (loss) From Operations
            
            
            110,812
            
            
            (
                392,336
            )
            
            177,835
            
            
            (
                380,341
            )Other
                Income (Expenses)Organization
                Costs
            
            
            
            
            
            (
                49,299
            )
            
            
            
            
            (
                49,299
            )Hedge
                Costs Amortization
            
            
            (
                11,100
            )
            
            (
                11,100
            )
            
            (
                22,200
            )
            
            (
                11,100
            )Total
                Other Income (Expense)
            
            
            (
                11,100
            )
            
            (
                60,399
            )
            
            (
                22,200
            )
            
            (
                60,399
            )Financing
                ChargesInterest
            
            
            283,388
            
            
            39,313
            
            
            433,290
            
            
            39,292Bank
                Fees Amortization
            
            
            15,419
            
            
            14,170
            
            
            30,006
            
            
            14,170Total
                Financing Charges
            
            
            298,807
            
            
            53,483
            
            
            463,296
            
            
            56,462Income
                (Loss) before provision forIncome
                Taxes
            
            
            (
                109,095
            )
            
            (
                506,218
            )
            
            (
                307,661
            )
            
            (
                494,202
            )Provision
                for Income Taxes
            
            
            0
            
            
            0
            
            
            0
            
            
            0Net
                Income (Loss)
            
            $
            (
                199,095
            )
            $
            (
                506,218
            )
            $
            (
                307,661
            )
            $
            (
                494,202
            )Net
                Income (Loss) per Share (Basic and Fully Diluted)
            
            $
            (
                *
            )
            $
            (
                *
            )
            $
            (
                *
            )
            $
            (
                *
            )Weighted
                Average Number of Common Shares Outstanding
            
            
            64,802,781
            
            
            60,828,906
            
            
            64,802,781
            
            
            63,253,906





*
      Less
      than $.01 per Share





See
      Notes
      to Unaudited Consolidated Financial Statements




3


Chancellor
      Group, Inc.


CONSOLIDATED
      STATEMENT OF CASH FLOWS


FOR
      THE
      SIX MONTHS ENDED JUNE 30, 2008 AND JUNE 30, 2007


(Unaudited)





June 30, 2008
            
            June 30, 2007Cash
                Flows From Operating Activities:Net
                Income (loss)
            
            $
            (
                307,661
            )
            $
            (
                506,218
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used for)
                operating activities:Depreciation
                & Amortization
            
            
            277,184
            
            
            136,813(Increase)
                Decrease in Operating Assets
            
            
            (
                96,054
            )
            
            (
                176,887
            )Increase
                (Decrease) in Operating Liabilities
            
            
            457,963
            
            
            44,907Net
                Cash Provided by (used for) Operating Activities
            
            
            331,432
            
            
            (
                501,385
            )Cash
                Flows From Investing Activities Capital Expenditures
            
            
            (
                92,074
            )
            
            (
                5,489,303
            )Net
                Cash Provided by (used for) Investing Activities
            
            
            (
                92,074
            )
            
            (
                5,489,303
            )Cash
                Flows From Financing ActivitiesNotes
                Payable
            
            
            (
                152,601
            )
            
            6,072,000Paid
                in Capital
            
            
            
            
            
            37,500Sales
                of Common Stock
            
            
            200
            
            
            0Net
                Cash Provided by (used for) Financing Activities
            
            
            (
                152,401
            )
            
            6,109,500Net
                Increase (Decrease) in Cash
            
            
            86,957
            
            
            118,812Cash
                at the Beginning of the Period
            
            
            218,118
            
            
            829Cash
                at the End of the Period
            
            $
            305,075
            
            $
            119,641





See
      Notes
      to Unaudited Consolidated Financial Statements




4


Chancellor
      Group, Inc.


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





June
      30,
      2008




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 14,000 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.




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.




Productive
      capacity at December 31, 2007, was estimated to be 96 bopd and 233 mcfd gas.
      As
      of June 30, 2008, 218 wells are producing - an increase of 15 wells since the
      end of the year. Productive capacity at June 30, 2008 is estimated to be 116
      bopd and 236 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 4 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 those of its 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.





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.




5





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.





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 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.




6





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.





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.




7





NOTE
      2.
      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, 2007, the Company had approximately $4.3 million in unused federal
      net operating loss carry-forwards, which begin to expire principally in the
      year
      2011. A deferred tax asset of approximately $1,462,000 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 the end of 2007 was approximately
      $334,900. The net operating loss carry-forwards may be limited under the Change
      of Control provisions of the Internal Revenue Code section 382.





At
      June
      30, 2008, the Company had approximately $4.6 million in unused federal net
      operating loss carry-forwards, which begin to expire in the year 2011. A
      deferred tax asset of approximately $1,564,000 resulting from the loss
      carry-forward has been offset by a 100% valuation allowance. The increase in
      the
      valuation allowance from year end 2007 to the end of June 30, 2008 was
      approximately $102,000. The net operating loss carry-forwards may be limited
      under the Change of Control provisions of the Internal Revenue Code section
      382.





NOTE
      3.
      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 June 30, 2008 which was unchanged
      from the year end.





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 at into 166.667 shares of the Company's
      common stock upon election by the shareholder, with dates and terms set by
      the
      Board. No shares of Series B preferred stock are outstanding.





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,
      2006
      and 2007, no options were issued, exercised or cancelled. There were no stock
      options issued in the first quarter of 2008.





The
      Company currently has stock options outstanding 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, with CapWest Resources,
      Inc.
      (“CapWest”), we also issued CapWest a warrant (“CapWest Warrants”) 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 during the period beginning on the first to occur of the following dates
      (a) the second anniversary of our Loan Agreement with CapWest; 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.
      These
      amounts are unchanged between December 31, 2007 and June 30, 2008.





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 year ending December 31,
      2007. There were no stock options issued in the first and second quarters of
      2008.




8




NOTE
      4.
      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.





The
      Company filed a bankruptcy petition on October 30, 2007 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 was 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.





NOTE
      5.
      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
      6.
      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 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.





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, we agreed in principle, subject to definitive documentation, with
      CapWest to amend the CapWest 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 attempt 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%.




9





On
      October 30, 2008 the Company 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. The current loan balances due to WNB are $1,962,557 and $56,750.
      WNB has elected under the subordination terms of the loan agreements to take
      interest and principal payments against its debt. Consequently, the loans to
      WNB
      are current as to interest and principal. The interest to CapWest is accruing
      and is only reduced by the amount that is not applied to the WNB debt according
      to its regular amortization. The Company has the right to offset those interest
      and principal payments but has not elected to do so in that neither cash flow
      or
      net income is effected. The current loan balance due to CapWest is $3,797,345
      and the applicable accrued interest is $410,910.





Note
      7.
      ACCUMULATED COMPENSATED ABSENCES





It
      is the
      Company’s policy to permit employees to accumulate a limited amount of earned by
      unused vacation, 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 and not
      accrued.





Note
      8.
      SUBSEQUENT EVENT





On
      July
      22, 2008 the Company signed an agreement to sell a substantial portion of the
      oil and gas leases that it currently operates. The agreement was signed in
      anticipation of being dismissed from the bankruptcy proceedings. The closing
      for
      the sale is expected to be in late August and effective back June 1, 2008.
      The
      sales price is for $13.25 million which, at closing, will allow the Company
      to
      retire all its debts and retain approximately $2.5 million in cash for working
      capital.




10





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




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





We
      are in
      the business of acquisition, exploration, and development of natural gas and
      oil
      properties, 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 August 1, 2008, there were 64,802,781 shares of our common
      stock issued and outstanding.





Six
      Months Ended June 30, 2008




We
      had no
      production operations in the first quarter of calendar year 2007. Our oil
      production operations began April 16 th ,
      2007
      with an effective date of April 1 st ,
      2007.
      During the period ending December 31, 2007 we produced 23,120 barrels of oil
      and
      produced 55,831 mcf gas. We had 84 wells actually producing oil and gas on
      April
      16, 2007 and restored an additional 119 wells by December 31, 2007. In the
      six
      month period ended June 30, 2008, we produced 20,575 barrels of oil and produced
      47,318 mcf gas, while generating revenues of $2,092,046. During this period,
      we
      restored an additional 15 wells, so that at June 30, we had 218 wells actually
      producing.




11





PLAN
      OF
      OPERATION





On
      April
      16, 2007, we closed the acquisition of assets from Caldwell Production Company,
      Inc., consisting of 48 mineral leases with 631 wells, of which approximately
      100
      were thought 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 14,000 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.





We
      commenced operations on April 16, 2007 with what were 84 actually producing
      wells. As of June 30, 2008, 218 wells are producing. Productive capacity on
      June
      30, 2008 was estimated to be 116 bopd and 236 mcfd. The oil is light sweet
      crude
      and the natural gas has very high heat content, 1600 to 2600 btu/scf.





The
      following table is for the three months ended:




June
                30,
              2008
            
            June
                30,
              2007Oil
                and Gas SalesOil
                Sales(Bbl)
            
            
            7,773
            
            
            9,727Natural
                Gas Sales (Mcf)
            
            
            22,919
            
            
            13,070Average
                Sales Price:Oil,
                per Bbl:
            
            $
            119.70
            
            $
            62.76Gas,
                per MMCF:
            
            $
            10.05
            
            $
            8.15




Our
      current production levels for the first six months of 2008 have increased over
      the the last six months of 2007. The second quarter production has increased
      by
      approximately 14 bopd and 59 mcfd gas. We produced 10,077 and 10,498 barrels
      of
      oil in the first and second quarters of 2008, respectively. There is no
      assurance that management will be able to continue to increase production,
      or to
      maintain current production levels.




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.




12





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 was 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.





We
      have
      filed a Plan of Reorganization on March 1, 2008, and an amendment thereto on
      April 21, 2008. CapWest Resources, Inc. filed a plan of reorganization on April
      2, 2008, and we have filed on May 2, 2008, an objection to that plan. On June
      20, 2008, we announced that we were in discussions with a mid-size
      Texas oil and gas company for the purchase by this company of a part of our
      oil
      and gas producing properties, thus permitting payment of the
      Company's and its subsidiaries’ obligations to their secured and unsecured
      creditors and, subject to Court approval, an early exit from the Chapter 11
      bankruptcy proceeding.





The
      transaction being discussed would leave the Company debt-free, and
      with some working capital.  The Company, and its wholly-owned subsidiaries,
      Gryphon Production Company LLC and Gryphon Field Services LLC, would retain
      approximately 116 wells, of which 48 are actively producing, out of a total
      of
      approximately 625 wells. The Company and Gryphon Production Company
      would continue as licensed Texas Railroad Commission operators. Also retained
      would be all operating equipment, including two rigs, and our 15.9 acre
      property, with its shop, yard and office complex.  On June 21, 2008, we and
      our two operating subsidiaries filed a motion with the Bankruptcy Court for
      dismissal of the bankruptcy case, which is scheduled to be decided by the
      Court in mid-August 2008.




Liquidity
      & Capital Resources




As
      of
      June 30, 2008 the Company had $305,075 of cash on hand. We have an accumulated
      deficit of $4,353,320 and have a stockholders' deficiency of $1,066,782 at
      June
      30, 2008.





*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.




13





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.





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.




14





*Reorganization
      Plans*





We
      filed
      a Plan of Reorganization dated June 1, 2008 (the “Plan”), providing for
      repayment of the WNB and CapWest loans over 42- to 60-month periods, the terms
      of the repayment being dependent on whether the particular lender accepts the
      Plan. Under the Plan as filed, the holders of common stock of the Company would
      retain all of their ownership interest. The Company’s oil and gas leases would
      be assumed under the Plan, and certain executory contracts would be assumed
      and
      certain others rejected.





On
      April
      2, 2008, CapWest Resources, Inc. filed its own plan of reorganization and
      disclosure statement to which we filed an objection on May 2, 2008.





On
      April
      21, 2008, we filed an amended Plan, in which we set forth a preliminary
      financing commitment we had received that would enable us to pay off our lenders
      and emerge from the Chapter 11 reorganization proceeding.





On
      May 2,
      2008, we filed our objections to CapWest Resouces, Inc.’s plan of reorganization
      and disclosure statement. In this filing we included professional evaluations
      of
      the value of our oil and gas reserves that show the value of our reserves
      substantially to exceed the sum of our obligations to Western National Bank
      and
      CapWest Resources, Inc.





On
      June
      20, 2008, we announced that we were in discussions with a mid-size
      Texas oil and gas company for the purchase by this company of a part of our
      oil
      and gas producing properties, thus permitting payment of the
      Company's and its subsidiaries’ obligations to their secured and unsecured
      creditors and, subject to Court approval, an early exit from the Chapter 11
      bankruptcy proceeding.





The
      transaction being discussed would leave the Company debt-free, and
      with some working capital.  The Company, and its wholly-owned subsidiaries,
      Gryphon Production Company LLC and Gryphon Field Services LLC, would retain
      approximately 130 wells, of which 35 are actively producing, out of a total
      of
      approximately 625 wells. The Company and Gryphon Production Company
      would continue as licensed Texas Railroad Commission operators. Also retained
      would be all operating equipment, including two rigs, and our 15.9 acre
      property, with its shop, yard and office complex.  On June 21, 2008, we and
      our two operating subsidiaries filed a motion with the Bankruptcy Court for
      dismissal of the bankruptcy case, which is scheduled to be decided by the
      Court in mid-August 2008.





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.




15





ITEM
      3.  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Interest
      Rate Risk - Interest rate risk refers to fluctuations in the value of a security
      resulting from changes in the general level of interest rates. Investments
      that
      are classified as cash and cash equivalents have original maturities of three
      months or less. Our interest income is sensitive to changes in the general
      level
      of U.S. interest rates. We do not have significant short-term investments,
      and
      due to the short-term nature of our investments, we believe that there is not
      a
      material risk exposure.





We
      are
      exposed to interest rate risk with borrowing under our loans with Western
      National Bank (“WNB”) and CapWest Resources (“CapWest”). 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%. The interest rate under the CapWest Loan Agreement is a variable rate
      equal to the prime rate as defined in this Agreement plus 4%. Increases or decreases in the prime rate will cause our interest obligations
      under these Agreements to increase or decrease correspondingly, subject to
      the
      floor in the WNB Agreement.





Credit
      Risk - Our accounts receivables are subject, in the normal course of business,
      to collection risks. We regularly assess these risks and have established
      policies and business practices to protect against the adverse effects of
      collection risks. As a result we do not anticipate any material losses in this
      area.





Commodity
      Price Risk - We are exposed to market risks related to price volatility of
      crude
      oil and natural gas. The prices of crude oil and natural gas affect our
      revenues, since sales of crude oil and natural gas comprise all of the
      components of our revenues. A decline in crude oil and natural gas prices will
      likely reduce our revenues, unless we implement offsetting production increases.
      We do not use derivative commodity instruments for trading
      purposes.





ITEM
      4T.
      CONTROLS AND PROCEDURES





The
      Company's Chief Executive Officer and its Chief Financial Officer are primarily
      responsible for the accuracy of the financial information that is presented
      in
      this Quarterly Report. These officers have 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 them during the period covered by this Quarterly
      Report. In their evaluation, no changes were made to the Company's internal
      controls in this period that have materially affected, or are reasonably likely
      materially to affect, the Company’s internal control over financial
      reporting.




16





PART
      II—OTHER INFORMATION




ITEM
      1.
      Legal Proceedings.





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. On March 1, 2008, we filed
      a
      Plan of Reorganization with the Court, and on April 21, 2008 filed an amendment
      to that plan. On April 2, 2008, CapWest Resources, Inc. filed its own plan
      of
      reorganization and disclosure statement to which we filed a formal objection
      on
      May 2, 2008. On June 20, 2008, we announced that we were in
      discussions with a mid-size Texas oil and gas company for the purchase by this
      company of a part of our oil and gas producing properties, thus permitting
      payment of the Company's and its subsidiaries’ obligations to their
      secured and unsecured creditors and, subject to Court approval, an early exit
      from the Chapter 11 bankruptcy proceeding.





The
      transaction being discussed would leave the Company debt-free, and
      with some working capital.  The Company, and its wholly-owned subsidiaries,
      Gryphon Production Company LLC and Gryphon Field Services LLC, would retain
      approximately 130 wells, of which 35 are actively producing, out of a total
      of
      approximately 625 wells. The Company and Gryphon Production Company
      would continue as licensed Texas Railroad Commission operators. Also retained
      would be all operating equipment, including two rigs, and our 15.9 acre
      property, with its shop, yard and office complex.  On June 21, 2008, we and
      our two operating subsidiaries filed a motion with the Bankruptcy Court for
      dismissal of the bankruptcy case. At the August 7, 2008 docket call
      for our motion to dismiss the bankruptcy case, which is scheduled to be decided
      by the Court in mid-August 2008.





ITEM
      6.
      Exhibits.





31
            Certification
                of Principal Executive Officer and Chief Financial Officer Pursuant
                to
                Section 302 of The Sarbanes Oxley Act of 2002.32
            Certification
                of Principal Executive Officer and Chief Financial Officer Pursuant
                to 18
                U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-
                Oxley Act of 2002.




17




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 GranthamPresident
                andChief
                Financial Officer




Dated:
      August 14, 2008





EXHIBIT
      INDEX





Exhibit Number
            
            Description31
            
            Certification
                of Principal Executive Officer and Chief Financial Officer Pursuant
                to
                Section 302 of the Sarbanes Oxley Act of 2002.32
            
            Certification
                of Principal Executive Officer 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.




18