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 March 31, 2009





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.


(Exact
Name of Registrant as Specified 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
              
              79065(Address
      of Principal Executive Offices)
              
              (Zip
      Code)




(806-688-9697)


(Registrant's
Telephone Number, Including Area Code)





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. Yes xNo o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes oNo o





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 o





Non-accelerated
filer o                                                                                               
   Smaller reporting company x


(Do not
check if a smaller reporting company)




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


Yes oNo x





APPLICABLE
ONLY TO CORPORATE ISSUERS




The
number of shares outstanding the issuer's common stock, $.001 par value, was
66,382,781 as of May 19, 2009.










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
              
              
              16Item
      6. Exhibits
              
              
              16EXHIBIT
      INDEX
              
              
              17




ii





Item
1.  Financial Statements




Chancellor
Group, Inc.




I N D E
X




Page
      No.Balance
      Sheets as at March 31, 2009 and December 31, 2008
    (Unaudited)
              
              
              2Statements
      of OperationsFor
      the Three Months Ended March 31, 2009 and 2008 (Unaudited)
              
              
              3Statements
      of Cash FlowsFor
      the Three Months Ended March 31, 2009 and 2008 (Unaudited)
              
              
              4Notes
      to Unaudited Financial Statements
              
              
              5-10




1




CHANCELLOR
GROUP, INC.


Consolidated
Balance Sheets


(Unaudited)





March
      31,
              2009
            
            
            December
      31,
              2008ASSETSCurrent
      AssetsCash
      in Bank
            
            $
            1,855,764
            
            
            $
            2,531,525Revenue
      Receivable
            
            
            65,919
            
            
            
            201,455Prepaid
      Insurance
            
            
            8,909
            
            
            
            23,665Federal
      Income Tax Refund Receivable
            
            
            43,603
            
            
            
            0Total
      Current Assets
            
            
            1,974,195
            
            
            
            2,756,645Fixed
      AssetsLeasehold
      Costs – Developed
            
            
            1,566,926
            
            
            
            1,396,252Office
      Building & Equipment
            
            
            132,065
            
            
            
            132,065Fleet
      – Road
            
            
            241,844
            
            
            
            218,661Heavy
      Field Equipment & Tools
            
            
            452,679
            
            
            
            442,746Accumulated
      Depreciation
            
            
            (329,493
            )
            
            
            (262,478
            )Total
      Fixed Assets
            
            
            2,064,021
            
            
            
            1,927,246Other
      AssetsUnamortized
      Letter of Credit
            
            
            0
            
            
            
            833Prepaid
      Long Term Hedge
            
            
            0
            
            
            
            11,100Deposits
            
            
            250
            
            
            
            4,975Deferred
      Tax Assets
            
            
            49,502
            
            
            
            0Total
      Other Assets
            
            
            49,752
            
            
            
            16,908Total
      Assets
            
            $
            4,087,968
            
            
            $
            4,700,799LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesDue
      to Related Party
            
            $
            36,500
            
            
            $
            36,500Accounts
      Payable – Gryphon Production
            
            
            53,628
            
            
            
            224,598Accrued
      Interest Payable
            
            
            0
            
            
            
            0Miscellaneous
      Accounts Payable & Suspense
            
            
            8,144
            
            
            
            5,949Federal
      Income Tax Payable
            
            
            0
            
            
            
            52,229State
      Income Tax Payable
            
            
            64,674
            
            
            
            64,674Stock
      Subscription Payable
            
            
            1,602
            
            
            
            1,602Total
      Current Liabilities
            
            
            164,548
            
            
            
            385,552Long
      Term LiabilitiesDeferred
      Tax Liability
            
            
            138,817
            
            
            
            126,802Total
      Long Term Liabilities
            
            
            138,817
            
            
            
            126,802Stockholders’
      EquityCommon
      Stock:  $.001 par value, 250,000,000shares
      authorized, 65,232,781 sharesissued
      and outstanding including 1,000,000shares
      held as treasury stock
            
            
            65,233
            
            
            
            65,233Paid
      in Capital
            
            
            3,229,905
            
            
            
            3,229,905Retained
      Earnings
            
            
            929,807
            
            
            
            (4,045,659
            )Treasury
      Stock
            
            
            (36,500
            )
            
            
            (36,500
            )Net
      Income (Loss)
            
            
            (403,842
            )
            
            
            4,975,466Total
      Stockholders’ Equity
            
            
            3,784,603
            
            
            
            4,188,445Total
      Liabilities and Stockholders’ Equity
            
            $
            4,087,968
            
            
            $
            4,700,799




See Notes
to Unaudited Consolidated Financial Statements




2





Chancellor
Group, Inc.


CONSOLIDATED
STATEMENT OF OPERATIONS


FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008


(Unaudited)





March
      31, 2009
            
            
            March
      31, 2008Sales
      – Net of Royalties Paid to OthersOil
            
            $
            99,148
            
            
            $
            786,495Natural
      Gas
            
            
            18,986
            
            
            
            149,709Other
      Income
            
            
            18,975
            
            
            
            1,150Gross
      Revenue
            
            
            137,109
            
            
            
            937,354Severance
      Taxes
            
            
            5,944
            
            
            
            46,501Marketing
      Fees
            
            
            0
            
            
            
            7,733Royalties
      Paid
            
            
            0
            
            
            
            12Net
      Revenue
            
            
            131,165
            
            
            
            883,108Operating
      ExpensesLease
      Operating Expense
            
            
            139,190
            
            
            
            317,665Other
      Operating Expense
            
            
            343,361
            
            
            
            344,469General
      & Administrative Expense
            
            
            85,441
            
            
            
            16,735Depreciation,
      Depletion & Amortization
            
            
            67,014
            
            
            
            138,287Total
      Operating Expense
            
            
            635,006
            
            
            
            817,156Income
      (loss) From Operations
            
            
            (503,841
            )
            
            
            65,952Other
      Income (Expenses)Interest
      Income
            
            
            3,270
            
            
            
            0Hedge
      Income
            
            
            71,660
            
            
            
            0Hedge
      Costs Amortization
            
            
            (11,100
            )
            
            
            (11,100
            )Total
      Other Income (Expense)
            
            
            63,830
            
            
            
            (11,100
            )Financing
      ChargesInterest
            
            
            24
            
            
            
            150,319Bank
      Fees Amortization
            
            
            1,294
            
            
            
            14,170Total
      Financing Charges
            
            
            1,318
            
            
            
            164,489Income (Loss) before
      provision for Income Taxes
            
            
            (441,329
            )
            
            
            (109,637
            )Provision
      for Income Taxes
            
            
            (37,487
            )
            
            
            0Net
      Income (Loss)
            
            
            (403,842
            )
            
            $
            (109,637
            )Net
      Income (Loss) per Share(Basic
      and Fully Diluted)
            
            
            (*
            )
            
            $
            (*
            )Weighted Average
      Number of Common Shares Outstanding
            
            
            65,232,781
            
            
            
            64,802,781




* Less
than $.01 per Share




See Notes
to Unaudited Consolidated Financial Statements




3




Chancellor
Group, Inc.


CONSOLIDATED
STATEMENT OF CASH FLOWS


FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008


(Unaudited)





March
      31, 2009
            
            
            March
      31, 2008Cash
      Flows From Operating Activities:Net
      Income (loss)
            
            $
            (403,842
            )
            
            $
            (109,637
            )Adjustments
      to reconcile net income(loss)
      to net cash provided by(used
      for) operating activities:Depreciation
      & Amortization
            
            
            78,114
            
            
            
            149,387Deferred
      Income Taxes
            
            
            (37,487
            )
            
            
            0(Increase)
      Decrease in Operating Assets
            
            
            109,249
            
            
            
            (110,322
            )Increase
      (Decrease) in OperatingLiabilities
            
            
            (221,005
            )
            
            
            110,185Net
      Cash Provided by (used for)Operating
      Activities
            
            
            (474,971
            )
            
            
            39,613Cash
      Flows From Investing ActivitiesCapital
      Expenditures
            
            
            (200,790
            )
            
            
            ( 41,599
            )Net
      Cash Provided by (used for)Investing
      Activities
            
            
            (200,790
            )
            
            
            ( 41,599
            )Cash
      Flows From Financing ActivitiesNotes
      Payable
            
            
            0
            
            
            
            ( 33,749
            )Sales
      of Common Stock
            
            
            0
            
            
            
            200Net
      Cash Provided by (used for)Financing
      Activities
            
            
            0
            
            
            
            ( 33,549
            )Net
      Increase (Decrease) in Cash
            
            
            (675,761
            )
            
            
            ( 35,535
            )Cash
      at the Beginning of the Period
            
            
            2,531,525
            
            
            
            218,118Cash
      at the End of the Period
            
            $
            1,855,764
            
            
            $
            182,583


Supplemental
      Disclosures of Cash Flows InformationInterest
      Paid
              
              $
              1,317
              
              
              $
              150,319Income
      Taxes Paid
              
              $
              95,382
              
              
              $
              0




See Notes
to Unaudited Consolidated Financial Statements




4





CHANCELLOR
GROUP, INC.




NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




March 31,
2009




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




Organization




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.




Operations




The
Company is licensed by the Texas Railroad Commission as oil and gas producers
and operators. The Company, and its wholly-owned subsidiaries, Gryphon
Production Company, LLC and Gryphon Field Services, LLC, own 127 wells, of which
84 are actively producing (two of which are natural gas wells).  We
also own and operate our 15.9 acre property, with its shop, yard and office
complex. Company equipment includes two work-over rigs as well as other oil
field related equipment.




In
addition, we own approximately 4,200 acres of production rights on six leases
which includes 500 acres of undrilled acreage, approximately 300 acres of which
was previously owned by Mobil and the balance approximating 200 or so acres on
the Worley Combs lease.  The six leases have the production rights for
oil, casing-head gas and natural gas.




As of
March31,
2009, 84 wells are producing.Total productive capacity at
March 31, 2009is
estimated to beapproximately 55bopd and63mcfd gas. The oil is light sweet
crude and the natural gas has very high heat content, 1600 to 2600
btu/scf.




Significant
Accounting Policies




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.




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.





5




Cash and Cash
Equivalents





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





Included
in cash in bank at March 31, 2009 are deposits totaling $500,000 which are
assigned and held as collateral for two letters of credit issued to the Railroad
Commission of Texas as required for its oil and gas activities.




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. The estimated useful
life of leasehold costs, equipment and tools ranges from five to seven
years.  The useful life of the office building and warehouse is
estimated to be twenty 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, which primarily all oil and gas
production is sold to, are Plains Marketing and DCP Midstream.





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 June,
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No.48, “Accounting for Uncertainty in Income Taxes , an Interpretation of SFAS
No.109” (“FIN 48”). The interpretation creates a single model to address
accounting for uncertainty in tax positions.  Specifically, the
pronouncement prescribes a recognition threshold and a measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance
on de-recognition, classification, interest


and
penalties, accounting in interim periods, disclosure and transition of certain
tax positions.  The Company adopted the provisions of FIN 48 effective
January 1, 2007. The adoption of this accounting principle did not have an
effect on the Company’s consolidated financial statements at, and for the years
ended December 31, 2007 and 2008.





In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, as amended in February
2008 by FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement
No.157. SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. FSP FAS 157-2
defers the effective date of SFAS 157 for all nonfinancial assets and
liabilities, except those items recognized or disclosed at fair value on an
annual or more frequently recurring basis, until January 1, 2009. As such,
management partially adopted the provisions of SFAS 157 effective January 1,
2008. The partial adoption of this statement did not have a material impact on
the financial statements. Management expects to adopt the remaining provisions
of SFAS 157 beginning in 2009.  The adoption did not have a material
impact on the consolidated 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 adoption did not have a material effect on the results of
operations of the Company, and the Company did not make any options to record
its financial assets or liabilities at fair value.





In
December 2007, the FASB issued SFAS 141R, Business Combinations. SFAS 141R
continues to
require the purchase method of accounting to be applied to all business
combinations, but it significantly changes the accounting for certain aspects of
business combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific acquisition related items
including: (1) expensing acquisition related costs as incurred; (2) valuing
non-controlling interests at fair value at the acquisition date; and (3)
expensing restructuring costs associated with an acquired business. SFAS 141R
also includes a substantial number of new disclosure requirements.




7





SFAS 141R
is to be applied prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. Management expects SFAS 141R
will have an impact on the accounting for future business combinations once
adopted but the effect is dependent upon the acquisitions that are made in the
future.





In
December 2007, the FASB issued SFAS 160, Non-controlling Interests in
Consolidated Financial Statements. SFAS 160 establishes new accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in
a subsidiary (minority interest) is an ownership interest in the consolidated
entity that should be reported as equity in the Consolidated Financial Statement
and separate from the parent company’s equity. Among other requirements, this
statement requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling
interest. It also requires disclosure, on the face of the Consolidated Statement
of Operations, of the amounts of consolidated net income attributable to the
parent and to the non-controlling interest. This statement is effective for us
on January 1, 2009. The adoption did not have a material impact on the
consolidated financial statements.





In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 161, Disclosures about Derivative
Instruments and Hedging Activities –an amendment of SFAS 133. SFAS 161 seeks to
improve financial reporting for derivative instruments and hedging activities by
requiring enhanced disclosures regarding the impact on financial position,
financial performance, and cash flows. To achieve this increased transparency,
SFAS 161 requires: (1) the disclosure of the fair value of derivative
instruments and gains and losses in a tabular format; (2) the disclosure of
derivative features that are credit risk related; and (3) cross-referencing
within the footnotes. SFAS 161 is effective for us on January 1, 2009. The
adoption did not have a material impact on the consolidated financial
statements.





NOTE 2.
INCOME TAXES





Deferred
income taxes arise from temporary differences in recognition of certain revenues
and expenses between financial statement and income tax basis of accounting, and
also net operating loss carry-forwards and other tax credit
carry-forwards.  Under IRC Section 382, net operating loss carryovers
may be limited should a significant change in ownership occur. The Company
accounts for income taxes pursuant to SFAS 109.





At March
31, 2009, the Company has a federal net operating loss of approximately
$440,000.  A deferred tax asset of approximately $100,000 has been
partially offset by a valuation allowance of approximately $50,000 due to
federal NOL carry-back and carry-forward limitations.





At March
31, 2009, the Company has approximately $138,800 in deferred income tax
liability attributable to timing differences between federal income tax
depreciation, depletion and book depreciation.





NOTE 3.
STOCKHOLDERS' EQUITY





Preferred
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.





Common
Stock





The
Company has 250,000,000 authorized shares of common stock, par value $.001, with
65,232,781 shares issued and outstanding (which includes 1,000,000 shares of
Treasury Stock not held for retirement) as of March 31, 2009 (see footnotes
regarding Treasury Stock, Sale of Assets and Related Party Transactions for
additional information).




8





Treasury
Stock





In early
2008 in the context of our prior bankruptcy proceeding, Koala Pictures
Proprietary Ltd. ("Koala"), controlled by our Chairman and Chief Executive
Officer Maxwell Grant, had transferred 1,000,000 shares of our common stock to
New Concept Energy, Inc. (“NCE”), which had entered into discussions with
us.  Following dismissal of the bankruptcy proceeding in August 2008, we
settled all matters with NCE for $110,000 pursuant to a Settlement Agreement and
Release of All Claims, dated September 4, 2008, and repurchased the 1,000,000
shares of common stock.  In May 2009, our Board of Directors authorized
retransfer of the 1,000,000 shares of common stock back to Koala, since Koala
had originally transferred these shares to NCE for the benefit of the Company in
the context of the Company's discussions with NCE.




Stock Options and
Warrants





Non-employee Stock Options
and Warrants





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 all quarters for the years ended
December 31, 2007 and 2008, no options were issued, exercised or
cancelled.  For quarter ending March 31, 2009 no options were issued,
exercised or cancelled





The
Company currently has outstanding warrants to purchase an aggregate of 6,000,000
shares of common stock expiring December 31, 2009, of which warrants to purchase
2,000,000 shares are at an exercise price of $.025 per share, and 4,000,000 of
which are at an exercise price of $0.02 per share.





At the
closing of the purchase of the Caldwell Assets, pursuant to an Agreement to
Issue Warrants, dated April 13, 2007, with CapWest, we had 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. At the August 29, 2008 closing under
the Agreement with Legacy, for a total additional consideration of $1,550,000,
Capwest assigned the CapWest Warrants back to the Company for cancellation and
conveyed to the Company the twenty (20%) percent production payment and two (2%)
percent overriding royalty held by Capwest.





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 2006, 2007 or as of the close of the year ending December 31,
2008. There were no stock options issued in the first quarter of
2009.





9




NOTE 4.
FIXED ASSETS




A summary
of fixed assets at March 31, 2009, follows:






BalanceDecember
      31,
            
            
            
            
            
            
            
            
            Balance2008
            
            
            Additions
            
            
            Deletions
            
            
            March
      31, 2009Auto/Transportation
      Equipment
            
            $
            218,661
            
            
            $
            23,183
            
            
            $
            0
            
            
            $
            241,844Buildings
      & Improvements
            
            
            125,280
            
            
            
            
            
            
            
            
            
            
            
            125,280Leases
      & Lease Equipment
            
            
            1,396,252
            
            
            
            170,674
            
            
            
            0
            
            
            
            1,566,926Furniture,
      Fixtures & Office Equipment
            
            
            6,785
            
            
            
            
            
            
            
            
            
            
            
            6,785Machinery
      & Equipment
            
            
            442,747
            
            
            
            9,933
            
            
            
            0
            
            
            
            452,679$
            2189725
            
            
            $
            203,790
            
            
            $
            0
            
            
            $
            2,393,514Less:
      Accum. Depr.
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            329,493$
            2,064,021





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.
LONG-TERM 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, Midland, Texas (“WNB”) 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 was 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 had also entered into a Loan Agreement with CapWest Resources, Inc.
of 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 was a variable rate
equal to the prime rate as defined in this Agreement plus 4%. Under the CapWest
loan agreement, CapWest had a 2% overriding royalty interest in the
Leases.





At the
August 29, 2008 closing under the Agreement, the notes held by our lenders, WNB
and Capwest, plus interest thereon to the date of closing, were paid in full
with payments of $2,063,549.53 and $4,220,617.47, respectively.





The
Company had no long-term debt at March 31, 2009.





At March
31, 2009, the Company has two irrevocable blanket letters of credit totaling
$500,000 issued to the Railroad Commission of Texas as required for its oil and
gas activities, which are secured by deposits totaling $500,000 included in cash
in bank.





10




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.
SALE OF ASSETS





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 were 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 opened corporate offices for our production
and oil field service subsidiaries at the purchased facilities in Pampa,
Texas.





To
finance the acquisition of the assets purchased from Caldwell Production
Company, Inc., on April 13, 2007, we closed on a Loan Agreement with WNB for a
senior loan facility.  At the closing of the purchase of the Caldwell
Assets, we drew down $2.3 million under the WNB Loan Agreement. On April 13,
2007, we also entered into a Loan Agreement with 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.





On
October 30, 2007, we filed for reorganization under Chapter 11 of the United
States Bankruptcy Code with the United States Bankruptcy Court, Northern
District of Texas.  We operated the Company in the bankruptcy
proceeding until August 15, 2008, when the Court issued an order dismissing the
bankruptcy cases of the Company and of its two operating subsidiaries, Gryphon
Production Company, LLC and Gryphon Field Services, LLC.





On July
22, 2008, we had entered into a Purchase and Sale Agreement, effective as of
June 1, 2008 (the “Agreement”), by and among the Company, Gryphon Production
Company, LLC and Gryphon Field Services, LLC, collectively acting as sellers,
and Legacy Reserves Operating LP, acting as buyer (“Legacy”), and WNB and
CapWest, collectively acting as sellers’ lenders.  The Agreement
provided for the sale of oil and gas wells accounting for approximately 80% of
the Company’s oil and gas production (the “Oil and Gas Assets”) to Legacy for a
purchase price of $13,250,000. At the August 29, 2008 closing under the
Agreement, the notes held by our lenders, WNB and CapWest, plus interest thereon
to the date of closing, were paid in full.





The
financial statements reflect the sale of the Oil and Gas Assets, effective
retroactively to June 1, 2008.  The following is the details of the
sale and closing costs.





Sales
      Price
            
            
            
            
            $
            13,250,000Adjustments
      to Sales PriceEstimated
      Liability for Well Plugging Expense
            
            
            
            
            
            ( 160,000
            )Retention
      of HH Merten Lease
            
            
            
            
            
            ( 9,642
            )$
            13,130,358Closing
      Costs and Other Related ExpendituresAcquisition
      of Warrants
            
            $
            850,000Acquisition
      of 2% ORRI
            
            
            700,000Acquisition
      of 6.25% ORRI
            
            
            232,500Acquisition
      of NCE Stock
            
            
            110,000Commissions
            
            
            232,500Legal
            
            
            350,494Other
            
            
            1,599Notes
      payable (including accrued interest)
            
            
            6,284,167
            
            
            
            (8,761,260
            )Net
      Received from Sale
            
            
            
            
            
            $
            4,319,098




11




NOTE 9.
RELATED PARTY TRANSACTIONS





The
Company has used the services of a local accounting firm in Pampa, Texas to
provide the disbursing of the payroll with related expense and accounts payable
while maintaining the general ledger.  The Company’s President, at
that time, has a one-half interest in that firm.  The Company has paid
$10,161 for those accounting services this year.  Effective in late
April 2009, The Company disengaged the Pampa related firm and has engaged an
unrelated accounting firm in Amarillo, Texas to provide these
services.





Axis
Network Pty. Ltd.(Axis), a company controlled by the Chairman of the Board,
through a prior arrangement had the rights to receive a 6.25% Overriding Royalty
Interest (ORRI) in the leases owned by the Company.  That ORRI was to
begin paying at the time the acquisition debt of the Company was
retired.  The purchaser of the leases would not accept the sale with
the burden of a 6.25% ORRI being implemented at the time of its taking control
of the subject leases.  In lieu of receiving a 6.25% ORRI, Axis agreed
to accept $232,500 and the 2% ORRI that was purchased from CapWest Resources,
Inc.





The
Company has used the services of a consulting company owned by the Chairman of
the Board.  The Company has paid $24,000 for those services this
year.





In early
2008 in the context of our prior bankruptcy proceeding, Koala Pictures
Proprietary Ltd. ("Koala"), controlled by our Chairman and Chief Executive
Officer Maxwell Grant, had transferred 1,000,000 shares of our common stock to
New Concept Energy, Inc. (“NCE”), which had entered into discussions with
us.  Following dismissal of the bankruptcy proceeding in August 2008, we
settled all matters with NCE for $110,000 pursuant to a Settlement Agreement and
Release of All Claims, dated September 4, 2008, and repurchased the 1,000,000
shares of common stock.  In May 2009, our Board of Directors authorized
retransfer of the 1,000,000 shares of common stock back to Koala, since Koala
had originally transferred these shares to NCE for the benefit of the Company in
the context of the Company's discussions with NCE.




12




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





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.”
This acquisition was financed with debt provided by two Texas financial
institutions and. On October 30, 2007, we had filed for reorganization under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court, Northern District of Texas. We operated the Company in the
bankruptcy proceeding until August 15, 2008, when the Court issued an order
dismissing the bankruptcy cases of the Company and of its two operating
subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services,
LLC.





13




On July
22, 2008, we had entered into an Agreement, effective as of June 1, 2008 with
Legacy Reserves Operating LP (“Legacy”) for the sale of oil and gas wells
accounting for approximately 84% of our oil and gas production to Legacy for a
purchase price of $13,250,000. At the August 29, 2008 closing under this
Agreement with Legacy, the notes held by the lenders that provided the financing
for our initial acquisition of oil and gas leases, plus interest thereon to the
date of closing, were paid in full.





Our
common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB.  As of May 19, 2009, there were 66,382,781 shares of
our common stock issued and outstanding.





Three
Months Ended March 31, 2009




Our oil
production operations began April 16th,
2007 with an effective date of April 1st,
2007.  During the period ending December 31, 2007 we produced and sold
23,120 barrels of oil and produced and sold 55,831 mcf gas, generating
$2,075,956 revenues after royalties, with a one month lag in receipt of revenues
for the prior months sales, as compared with 24,114 barrels of oil and 48,759
mcf of gas, generating $2,351,433 in gross revenues in
2008.  Effective June 1, 2008, we sold producing properties with 173
producing wells to Legacy Reserves Operating LP.  We had 84 wells
actually producing oil and gas on December 31, 2008. In the three month period
ended March 31, 2009, we produced and sold 2,623 barrels of oil and 3,570 mcf of
gas, attributable to our net revenue interest in our producing properties, while
generating revenues of $118,134, as compared with 8,268 net barrels of oil and
18,599 net mcf of gas, generating revenues of $936,204 in the comparable period
of 2008. At March 31, 2009, we had 86 wells actually producing. During this
period, we restored an additional 11 wells.




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.





We
commenced operations on April 16, 2007 with what were 84 actually producing
wells. As of December 31, 2007, 203 wells are producing.  Productive
capacity on April 16, 2007 was estimated to be 70 bopd and 90 mcfd. Total
productive capacity at March 31, 2009 is estimated to be approximately 60 bopd
and 63 mcfd gas.  The oil is light sweet crude and the natural gas has
very high heat content, 1600 to 2600 btu/scf.




14




Our
near-term plans include continued maintenance of existing wells, our primary
focus being to operate our properties and to restore 5-10 wells per month to
production. In some circumstances enhanced production is expected to be achieved
by an ongoing treatment plan to reduce paraffin down-hole, in flow lines,
treatment equipment, and salt water disposal wells.  Additionally,
production is expected to increase by remedial repairs that improve and prolong
the production life of existing wells.  The Company also has plans to
reenter certain abandoned wells, which were taken out of production due to
extremely low oil and gas prices, bringing that oil and gas into the
market.  Several of the leases need to studied and reviewed for the
possibility of drilling the wells deeper to reach additional producing
strata.  Feasibility studies are planned to consider drilling
replacement wells in the locations of wells that were previously plugged and
abandoned due to either low prices or integrity issues with the well bore
casing.  There is approximately 500 acres of undeveloped leased
property that needs to be reviewed and studied for the possibility of drilling
for new production.




The
following table is for the three months ended:




Three
      Months EndedMarch
      31, 2009
            
            
            March
      31, 2008Oil
      and Gas Sales(1)Oil
      Sales(Bbl)
            
            
            2,623
            
            
            
            8,268Natural
      Gas Sales (Mcf)
            
            
            3,570
            
            
            
            18,599Average
      Sales Price:Oil,
      per Bbl:
            
            $
            38.08
            
            
            $
            95.07Gas,
      per MMCF:
            
            $
            5.32
            
            
            $
            8.05







(1)
            Sales
      oil and gas are those attributable to our respective net revenue interests
      in our producing properties, and do not take account of severance taxes or
      other operating expenses.





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.





Liquidity
& Capital Resources




As of
March 31, 2009 the Company had $1,855,765 of cash on hand.   We
have a retained earnings of $526,799 and have a stockholders' equity of
$3,785,437 at March 31, 2009.





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.




15




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.





The
process of estimating quantities of oil and gas reserves is complex, requiring
significant decisions in the evaluation of all available geological,
geophysical, engineering and economic data. The data for a given field may also
change substantially over time as a result of numerous factors including, but
not limited to, additional development activity, evolving production history and
continual reassessment of the viability of production under varying economic
conditions. As a result, material revisions to existing reserve estimates may
occur from time to time. Although every reasonable effort is made to ensure that
reserve estimates reported represent the most accurate assessments possible, the
subjective decisions and variances in available data for various fields make
these estimates generally less precise than other estimates included in the
financial statement disclosures.





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.





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 Principal Financial Officer is primarily
responsible for the accuracy of the financial information that is presented in
this quarterly Report.  This officer 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.  In his 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
6.  Exhibits.





31
            Certification
      of Chief Executive Officer and Principal Financial Officer Pursuant to
      Section 302 of The Sarbanes Oxley Act of
2002.





32
            Certification
      of Chief Executive Officer and Principal 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)Dated: May 20, 2009
              By:
              /s/ Maxwell
      GrantChief
      Executive Officer andPrincipal
      Financial Officer




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