UNITED
      STATES




SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      D.C. 20549





Form
      10-Q





x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the quarterly period ended September 30, 2008 ̈
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the transition period fromto




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(Address
                of principal executive offices)
            
            (Zip
                Code)




(806-688-9697)





(Issuer'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. 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 ̈
            
            Accelerated
                filer ̈Non-accelerated
                filer ̈
            
            Smaller
                reporting companyx(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
      63,802,781 as of November 14, 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
            
            14Item
                4T.
            
            Controls
                and Procedures
            
            15PART
                IIItem
                5.
            
            Other
                Information
            
            15Item
                6.
            
            Exhibits
            
            15EXHIBIT
                INDEX
            
            16




ii




**Item
      1. Financial Statements**





Chancellor
      Group, Inc.





I
      N D
      E X





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




1


Chancellor
      Group, Inc.


CONSOLIDATED
      BALANCE SHEETS


(Unaudited)





September 30, 2008
            
            December 31, 2007ASSETSCurrent
                AssetsCash
                in Bank
            
            $
            3,744,096
            
            $
            218,118Revenue
                Receivable
            
            
            115,080
            
            
            248,680Prepaid
                Insurance
            
            
            63,793
            
            
            0Total
                Current Assets
            
            
            3,922,969
            
            
            466,798Fixed
                AssetsLeasehold
                Costs - Developed
            
            
            1,182,198
            
            
            4,938,564Office
                Building & Equipment
            
            
            132,065
            
            
            126,073Fleet
                - Road
            
            
            134,402
            
            
            62,263Heavy
                Field Equipment & Tools
            
            
            182,535
            
            
            405,593Accumulated
                Depreciation
            
            
            (
                226,354
            )
            
            (411,495
            )Total
                Fixed Assets
            
            
            1,404,846
            
            
            5,120,998Other
                AssetsUnamortized
                Debt Expense
            
            
            0
            
            
            55,500Unamortized
                Letter of Credit
            
            
            2,084
            
            
            0Prepaid
                Long Term Hedge
            
            
            22,200
            
            
            70,848Deposits
            
            
            250
            
            
            250Total
                Other Assets
            
            
            24,534
            
            
            126,598Total
                Assets
            
            $
            5,352,349
            
            $
            5,714,394LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                LiabilitiesAccounts
                Payable — Chancellor
            
            $
            0
            
            $
            109,828Accounts
                Payable – Gryphon Production
            
            
            216,219
            
            
            264,800Accrued
                Interest Payable
            
            
            0
            
            
            113,028Miscellaneous
                Accounts Payable & Suspense
            
            
            11,697
            
            
            10,044Estimated
                Income Tax
            
            
            465,000
            
            
            0Stock
                Subscription Payable
            
            
            1,602
            
            
            1,602Total
                Current Liabilities
            
            
            694,518
            
            
            499,302Long
                Term LiabilitiesNote
                Payable — Senior Debt
            
            
            0
            
            
            2,108,332Note
                Payable – Subordinated Debt
            
            
            0
            
            
            3,797,345Installment
                Loan – Equipment
            
            
            0
            
            
            63,576Note
                Payable - Investors
            
            
            0
            
            
            5,160Total
                Long Term Liabilities
            
            
            0
            
            
            5,974,413Stockholders’
                EquityCommon
                      Stock: $.001 par value, 250,000,000 shares authorized, 64,802,781
                      shares
                      issued and outstanding
            
            
            64,803
            
            
            62,605Paid
                in Capital
            
            
            3,221,735
            
            
            3,223,733Retained
                Earnings
            
            
            (
                4,045,659
            )
            
            (
                3,323,438
            )Net
                Income (Loss)
            
            
            5,416,952
            
            
            (
                722,221
            )Total
                Stockholders’ Equity
            
            
            4,657,831
            
            
            (
                759,321
            )Total
                Liabilities and Stockholders’ Equity
            
            $
            5,352,349
            
            $
            5,714,394





See
      Notes
      to Unaudited Consolidated Financial Statements


2




Chancellor
      Group, Inc.


CONSOLIDATED
      STATEMENT OF OPERATIONS


FOR
      THE
      THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30,
      2007


(Unaudited)





For the three months
              ended September 30,
            
            For the nine months
              ended September 30,2008
            
            2007
            
            2008
            
            2007Sales
                - Net of Royalties PaidOil
            
            $
            331,665
            
            $
            887,892
            
            $
            1,852,948
            
            $
            1,156,335Natural
                Gas
            
            
            43,552
            
            
            170,624
            
            
            335,648
            
            
            192,536Other
                Income
            
            
            38,960
            
            
            2,165
            
            
            38,960
            
            
            2,165Gross
                Revenue
            
            
            414,177
            
            
            1,060,681
            
            
            2,227,556
            
            
            1,351,036Severance
                Taxes
            
            
            9,620
            
            
            52,881
            
            
            99,764
            
            
            66,762Marketing
                Fees
            
            
            0
            
            
            7,194
            
            
            13,213
            
            
            8,669Royalties
                Paid
            
            
            0
            
            
            10,454
            
            
            14
            
            
            10,454Net
                Revenue
            
            
            404,557
            
            
            990,152
            
            
            2,114,565
            
            
            1,265,151Operating
                ExpensesLease
                Operating Expense
            
            
            245,539
            
            
            180,646
            
            
            893,692
            
            
            268,803Other
                Operating Expense
            
            
            30,216
            
            
            299,365
            
            
            617,797
            
            
            653,762General
                & Administrative Expense
            
            
            149,458
            
            
            77,213
            
            
            214,256
            
            
            165,298Depreciation,
                    Depletion & Amortization
            
            
            71,989
            
            
            137,109
            
            
            302,664
            
            
            273,922Total
                Operating Expense
            
            
            497,202
            
            
            694,333
            
            
            2,028,409
            
            
            1,361,785Income
                (loss) From Operations
            
            
            (
                92,645
            )
            
            295,819
            
            
            86,156
            
            
            (
                96,634
            )Other
                Income (Expenses)Interest
            
            
            1,836
            
            
            0
            
            
            1,836
            
            
            0Sales
                of Assets (Net of Cost)
            
            
            6,409,927
            
            
            
            
            
            6,489,545Organization
                Costs
            
            
            (
                0
            )
            
            (
                0
            )
            
            (
                0
            )
            
            (
                49,299
            )Hedge
                Costs Amortization
            
            
            (
                14,800
            )
            
            (
                11,100
            )
            
            (
                33,300
            )
            
            (
                22,200
            )Total
                Other Income (Expense)
            
            
            6,396,963
            
            
            (
                11,100
            )
            
            6,458,081
            
            
            (
                71,499
            )Financing
                ChargesInterest
            
            
            (
                340,574
            )
            
            (
                274,271
            )
            
            (
                588,521
            )
            
            (
                313,584
            )Bank
                Fees Amortization
            
            
            (
                48,899
            )
            
            (
                14,170
            )
            
            (
                73,764
            )
            
            (
                28,339
            )Total
                Financing Charges
            
            
            (
                389,473
            )
            
            (
                288,441
            )
            
            (
                662,285
            )
            
            (
                341,923
            )Income
                    (Loss) before provision for Income Taxes
            
            
            5,914,845
            
            
            (
                3,722
            )
            
            5,881,952
            
            
            (
                510,056
            )Provision
                for Income Taxes
            
            
            465,000
            
            
            0
            
            
            465,000
            
            
            0Net
                Income (Loss)
            
            $
            5,449,845
            
            $
            (
                3,722
            )
            $
            5,416,952
            
            $
            (
                510,056
            )Net
                    Income (Loss) per Share (Basic and Fully
                    Diluted)
            
            $
            0.0841
            
            $
            (
                *
            )
            $
            0.0836
            
            $
            (
                *
            )Weighted
                Average Number of Common SharesOutstanding
            
            
            64,802,781
            
            
            64,577,781
            
            
            64,802,781
            
            
            63,016,406




*
                Less than $.01 per Share





See
      Notes
      to Unaudited Consolidated Financial Statements


3


Chancellor
      Group, Inc.


CONSOLIDATED
      STATEMENT OF CASH FLOWS


FOR
      THE
      NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007


(Unaudited)




2008
            
            2007Cash
                Flows From Operating Activities:Net
                Income (loss)
            
            $
            86,156
            
            $
            (
                96,634
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used for)
                operating activities:Depreciation
                & Amortization
            
            
            (
                185,142
            )
            
            273,922(Increase)
                Decrease in Operating Assets
            
            
            171,871
            
            
            (
                398,293
            )Increase
                    (Decrease) in Operating Liabilities
            
            
            195,217
            
            
            (
                276,205
            )Net
                  Cash Provided by (used for) Operating Activities
            
            
            268,102
            
            
            (
                497,210
            )Cash
                Flows From Investing ActivitiesSale
                of Assets
            
            
            9,824,890Interest
                Income
            
            
            1,836Other
                Capital Expenditure
            
            
            (
                594,636
            )
            
            (
                5,507,821
            )Net
                Cash Provided by (used for)Investing
                Activities
            
            
            9,232,090
            
            
            (
                5,507,821
            )Cash
                Flows From Financing ActivitiesNotes
                Payable
            
            
            (
                5,974,414
            )
            
            6,023,212Paid
                in Capital
            
            
            (
                1,998
            )
            
            47,500Sales
                of Common Stock
            
            
            2,198
            
            
            0Net
                Cash Provided by (used for)Financing
                Activities
            
            
            (
                5,974,214
            )
            
            6,070,712Net
                Increase (Decrease) in Cash
            
            
            3,525,978
            
            
            65,681Cash
                at the Beginning of the Period
            
            
            218,118
            
            
            829Cash
                at the End of the Period
            
            $
            3,744,096
            
            $
            66,510





See
      Notes
      to Unaudited Consolidated Financial Statements


4


Chancellor
      Group, Inc.


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





September
      30, 2008




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 131 wells, of
      which
      62 are actively producing (two of which are natural gas wells). We also own
      and
      operate from our 15.9 acre property, with its shop, yard and office complex.
      The
      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
      September 30, 2008, 62 wells are producing. Productive capacity at September
      30,
      2008 is estimated to be 42 bopd and 24 mcfd 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.





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.





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.




6




Employee
      Stock-Based Compensation





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





New
      Financial Accounting Standards





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of
      accounting principles and the framework for selecting the principles to be
      used
      in the preparation of financial statements of nongovernmental entities that
      are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States. This Statement is effective sixty days following the SEC’s
      approval of the Public Company Accounting Oversight Board amendments to AU
      Section 411, “The Meaning of Present Fairly in Conformity With Generally
      Accepted Accounting Principles.” The Company is currently evaluating the
      potential impact, if any, of the adoption of SFAS No. 162 on its financial
      statements.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities”, an amendment of FASB Statement No. 133 (“SFAS No.
      161”). The new standard is intended to improve financial reporting about
      derivative instruments and hedging activities by requiring enhanced disclosures
      to enable investors to better understand their effects on an entity’s financial
      position, financial performance and cash flows. It is effective for financial
      statements issued for fiscal years and interim periods beginning after November
      15, 2008. The Company does not believe that SFAS No. 161 will have a material
      impact on its financial statements.





In
      February 2008, the FASB issued FASB Staff Position SFAS 157-1, “Application
      of SFAS No. 157 to SFAS No. 13 and Its Related Interpretative Accounting
      Pronouncements that Address Leasing Transactions” (“FSP SFAS 157-1”) and FASB
      Staff Position SFAS 157-2, “Effective Date of SFAS No. 157” (“FSP SFAS
      157-2”). FSP SFAS 157-1 excludes SFAS No. 13 and its related interpretive
      accounting pronouncements that address leasing transactions from the
      requirements of SFAS No. 157, with the exception of fair value measurements
      of
      assets and liabilities recorded as a result of a lease transaction but measured
      pursuant to other pronouncements within the scope of SFAS No. 157. FSP SFAS
      157-2 delays the effective date of SFAS No. 157 for all nonfinancial assets
      and
      nonfinancial liabilities, except those that are recognized or disclosed at
      fair
      value in the financial statements on a recurring basis (at least annually).
      FSP
      SFAS 157-1 and FSP SFAS 157-2 became effective for the Company upon adoption
      of
      SFAS No. 157 on January 1, 2008. The Company will provide the additional
      disclosures required relating to the fair value measurement of nonfinancial
      assets and nonfinancial liabilities when it fully implements SFAS No. 157 on
      January 1, 2009, as required, and does not believe they will have a significant
      impact on its financial statements.





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 $4.6 million in unused federal
      net operating loss carry-forwards (NOL), which begin to expire principally
      in
      the year 2011. It is estimated that the entire NOL will be used this tax year.
      The resulting estimated income tax liability will be $465,000. The net operating
      loss carry-forward is not expected to be limited under the Change of Control
      provisions of the Internal Revenue Code section 382.





At
      September 30, 2008, the Company has approximately $43,000 in deferred income
      tax
      liability attributable to timing differences between federal income tax
      depreciation and book depreciation.




7




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 September 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.





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 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 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.




NOTE
      6.
      CONTINGENT LIABILITY





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





NOTE
      7.
      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 (“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%.




8





On
      April
      13, 2007, we had also entered into a Loan Agreement with CapWest for an
      advancing line of credit/term loan facility (the “CapWest Loan Agreement”),
      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 of the sale of a portion of our oil and gas properties
      under the Agreement with Legacy described in Note 9, 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 September 30, 2008.





Note
      8.
      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
      9.
      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 drew down $2.3 million under the WNB Loan
      Agreement. On April 13, 2007, we also drew down at closing under the CapWest
      Loan Agreement $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.




9





The
      financial statements for the three- and nine-month periods ended September
      30,
      2008, 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
            
            
            
            
            
            (
                110,000
            )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% ORRI
            
            
            232,500Acquisition
                of Treasury Stock
            
            
            110,000Commissions
            
            
            232,500Legal
            
            
            350,494Other
            
            
            1,599Notes
                payable (including accrued interest)
            
            
            6,284,167
            
            
            (8,761,260
            )Net
                Received from Sale
            
            
            
            
            $
            4,369,098




Note
      10.
      RELATED PARTY TRANSACTIONS





The
      Company uses the services of a local accounting firm to provide the disbursing
      of the payroll with related expense and accounts payable while maintaining
      the
      general ledger. The Company’s President has a one-half interest in that firm.
      The Company has paid $19,299 for those accounting services this
      year.





Axis
      Network Pty. Ltd.(Axis), a company controlled by the Chairman of our Board
      of
      Directors, 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 $84,000 for those services this
      year.





During
      the proceeding of the Bankruptcy the Company entered into a relationship with
      New Concepts Energy, Inc. (NCE). In the process of negotiations the Company
      arranged for NCE to receive 1 million shares of Common Stock from Koala Pictures
      Proprietary, Ltd. (a company controlled by the Chairman of our Board of
      Directors) and obligated itself to pay an additional $10,000 at the closing
      of
      the bankruptcy proceedings. At the conclusion of the bankruptcy proceeding
      when
      NCE was no longer involved in the Company’s financial plans, the Company agreed
      to acquire the 1 million shares of Common Stock from NCE for $110,000. The
      Company has acquired the 1 million shares from NCE for a purchase price of
      $110,000, and the Company plans to reissue the stock to Koala Pictures
      Proprietary, Ltd.


10




ITEM
              2.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
                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.”
This acquisition was financed with debt provided by Western National Bank
      (“WNB”) and CapWest Resources, Inc. (“CapWest”). As set forth in detail below,
      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.





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 70% 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 our lenders, WNB and CapWest, 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.PK. As of November 1, 2008, there were 63,802,781 shares of our
      common stock issued and outstanding.





Nine
      Months Ended September 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
      nine
      month period ended September 30, 2008, giving effect retroactively to June
      1,
      2008, of the sale of 492 producing oil and gas wells to Legacy Reserves
      Operating LP, we produced from 18,565 barrels of oil and 43,058 mcf gas, while
      generating revenues of $2,188,597. At September 30, 2008, we had 62 wells
      actually producing.




11




Three
      Months Ended September 30, 2008





In
      the
      three month period ended September 30, 2008, giving effect retroactively to
      the
      sale of 492 producing oil and gas wells to Legacy Reserves Operating LP, we
      produced 2,521 barrels of oil and produced 1,539 mcf gas, while generating
      revenues of $375,217. During this period, we restored an additional 15 wells,
      so
      that at September 30, 2008, we had 62 wells actually producing.





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
      September 30, 2008, following the sale of producing oil and gas wells accounting
      for approximately 80% of our oil and gas production to Legacy, 62 wells are
      producing. Productive capacity on September 30, 2008 was estimated to be 42
      bopd
      and 24 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:




September
              30, 2008
            
            September
              30, 2007Oil and Gas SalesOil
                Sales(Bbl)
            
            
            2,521
            
            
            9,131Natural
                Gas Sales (Mcf)
            
            
            1,539
            
            
            23,689Average
                Sales Price:Oil,
                per Bbl:
            
            
            131.57
            
            
            76.59Gas,
                per MMCF:
            
            
            15.87
            
            
            6.8




Our
      current production levels for continuing operations for the three months ended
      September 30, 2008 have increased over the comparable period in 2007. We
      produced 2,521 and 2,068 barrels of oil in the third quarters of 2008 and 2007
      (giving effect to the sale of oil and gas assets to Legacy), respectively.
      There
      is no assurance that management will be able to continue to increase production,
      or to maintain current production levels.




12




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.




Chapter
      11 Bankruptcy Filing by the Company and its Operating Subsidiaries and
      Dismissalof
      Bankruptcy Cases





On
      October 30, 2007, due to notices of default received from WNB and CapWest,
      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. We filed a Plan of
      Reorganization on March 1, 2008, and an amendment thereto on April 21, 2008.
      We
      operated the Company in the bankruptcy proceeding until August 15, 2008, when
      the Bankruptcy Court issued an order dismissing the bankruptcy cases of the
      Company and of its two operating subsidiaries.





Sale
      of Oil and Gas Assets to Legacy Reserves Operating LP





On
      July
      22, 2008, we had entered into an Agreement, effective as of June 1, 2008, with
      Legacy for the sale of oil and gas wells accounting for approximately 80% 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, the notes held by our lenders,
      WNB
      and Capwest, plus interest thereon to the date of closing, were paid in
      full.




LIQUIDITY
      AND CAPITAL RESOURCES





As
      of
      September 30, 2008 the Company had $3,744,096 of cash on hand. We have retained
      earnings of $1,481,294 and a stockholders' equity of $4,657,831 at September
      30,
      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.




13




New
      Financial Accounting Standards





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of
      accounting principles and the framework for selecting the principles to be
      used
      in the preparation of financial statements of nongovernmental entities that
      are
      presented in conformity with generally accepted accounting principles (GAAP)
      in
      the United States. This Statement is effective sixty days following the SEC’s
      approval of the Public Company Accounting Oversight Board amendments to AU
      Section 411, “The Meaning of Present Fairly in Conformity With Generally
      Accepted Accounting Principles.” The Company is currently evaluating the
      potential impact, if any, of the adoption of SFAS No. 162 on its financial
      statements.




In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities”, an amendment of FASB Statement No. 133 (“SFAS No.
      161”). The new standard is intended to improve financial reporting about
      derivative instruments and hedging activities by requiring enhanced disclosures
      to enable investors to better understand their effects on an entity’s financial
      position, financial performance and cash flows. It is effective for financial
      statements issued for fiscal years and interim periods beginning after November
      15, 2008. The Company does not believe that SFAS No. 161 will have a material
      impact on its financial statements.





In
      February 2008, the FASB issued FASB Staff Position SFAS 157-1, “Application
      of SFAS No. 157 to SFAS No. 13 and Its Related Interpretative Accounting
      Pronouncements that Address Leasing Transactions” (“FSP SFAS 157-1”) and FASB
      Staff Position SFAS 157-2, “Effective Date of SFAS No. 157” (“FSP SFAS
      157-2”). FSP SFAS 157-1 excludes SFAS No. 13 and its related interpretive
      accounting pronouncements that address leasing transactions from the
      requirements of SFAS No. 157, with the exception of fair value measurements
      of
      assets and liabilities recorded as a result of a lease transaction but measured
      pursuant to other pronouncements within the scope of SFAS No. 157. FSP SFAS
      157-2 delays the effective date of SFAS No. 157 for all nonfinancial assets
      and
      nonfinancial liabilities, except those that are recognized or disclosed at
      fair
      value in the financial statements on a recurring basis (at least annually).
      FSP
      SFAS 157-1 and FSP SFAS 157-2 became effective for the Company upon adoption
      of
      SFAS No. 157 on January 1, 2008. The Company will provide the additional
      disclosures required relating to the fair value measurement of nonfinancial
      assets and nonfinancial liabilities when it fully implements SFAS No. 157 on
      January 1, 2009, as required, and does not believe they will have a significant
      impact on its financial statements.




ITEM
      3.  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





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.




14





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.




PART
      II—OTHER INFORMATION




ITEM
      5.
      OTHER INFORMATION.





On
      November 6, 2008,  Mr. Dudley Muth, who has been a member of our Board
      of Directors, informed the Company as follows: that in connection
      with the preparation of our Annual Report on Form 10-K for our fiscal year
      ended December 31, 2007, filed on April 7, 2008, he had inadvertently
      neglected to  advise the Company as to a Financial Industry
      Regulatory Authority (FINRA) 
regulatory  disciplinary action  within the past
      several years in which he was fined $2,500 by reason of a
      temporary net capital violation of a broker dealer for which he was the
      regulatory operative contact with FINRA, such fine  having been
      paid by the company with which he was then associated.  Mr. Muth
      advised the Company on November 7, 2008 that he was resigning from our
      Board for personal reasons effective that date.





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.




15


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
                (Principal Executive Officer) andChief
                Financial Officer


Dated:
      November 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.


16