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 1934
 
 For the
quarterly period ended June 30, 2009
 
  ̈
                  TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                    EXCHANGE
      ACT OF 1934
 For the
transition period from  to
 
 Commission
file number 000-30219
 
 Chancellor
Group, Inc.
  (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. x Yes
 ̈
No
  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  ̈    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 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 x
No
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
  The
number of shares outstanding the issuer's common stock, $.001 par value, was
66,125,030 as of July 31, 2009.
  
  Table of
Contents
 
 PART
      I
                  FINANCIAL
      INFORMATIONItem
      1.
                  Financial
      Statements
                  1Item
      2.
                  Management's
      Discussion and Analysis or Plan of Operation
                  12Item
      3.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  14Item
      4T.
                  Controls
      and Procedures
                  15PART
      IIItem
      2.
                  Unregistered
      Sales of Securities and Use of Proceeds
                  15Item
      6.
                  Exhibits
                  16EXHIBIT
      INDEX
                  16
  i
  Item
1.  Financial Statements
 
 Chancellor
Group, Inc.
 
 INDEX
 
 Page No.Balance
      Sheets as at June 30, 2009 and December 31, 2008
    (Unaudited)
                  
                  2Statements
      of OperationsFor
      the Six and Three Months Ended June 30, 2009 and 2008
      (Unaudited)
                  
                  3Statements
      of Cash FlowsFor
      the Six Months Ended June 30, 2009 and 2008 (Unaudited)
                  
                  4Notes
      to Unaudited Financial Statements
                  
                  5-11
  1
  Chancellor
Group, Inc.
 CONSOLIDATED
BALANCE SHEETS
 
 June
      30, 2009
                        
                        
                        December
      31, 2008ASSETSCurrent
      AssetsCash
      in Bank
                        
                        $
                        1,592,333
                        
                        
                        $
                        2,531,525Revenue
      Receivable
                        
                        
                        71,675
                        
                        
                        
                        201,455Prepaid
      Insurance
                        
                        
                        50,846
                        
                        
                        
                        23,665Deferred
      Tax Asset
                        
                        
                        49,502
                        
                        
                        
                        0Federal
      Income Tax Refund Receivable
                        
                        
                        43,603
                        
                        
                        
                        0Total
      Current Assets
                        
                        
                        1 ,807,959
                        
                        
                        
                        2,756,645Fixed
      AssetsLeasehold
      Costs – Developed
                        
                        
                        1,566,926
                        
                        
                        
                        1,396,252Office
      Building & Equipment
                        
                        
                        134,630
                        
                        
                        
                        132,065Fleet
      – Road
                        
                        
                        202,723
                        
                        
                        
                        218,661Heavy
      Field Equipment & Tools
                        
                        
                        450,179
                        
                        
                        
                        442,746Accumulated
      Depreciation
                        
                        
                        (390,765
                        )
                        
                        
                        ( 262,478
                        )Total
      Fixed Assets
                        
                        
                        1,963,693
                        
                        
                        
                        1,927,246Other
      AssetsUnamortized
      Letter of Credit
                        
                        
                        0
                        
                        
                        
                        833Prepaid
      Long Term Hedge
                        
                        
                        0
                        
                        
                        
                        11,100Deposits
                        
                        
                        250
                        
                        
                        
                        4,975Total
      Other Assets
                        
                        
                        250
                        
                        
                        
                        16,908Total
      Assets
                        
                        $
                        3,771,902
                        
                        
                        $
                        4,700,799LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesDue
      to Related Party
                        
                        $
                        0
                        
                        
                        $
                        36,500Accounts
      Payable – Gryphon Production
                        
                        
                        59,193
                        
                        
                        
                        224,598Accrued
      Interest Payable
                        
                        
                        0
                        
                        
                        
                        0Miscellaneous
      Accounts Payable & Suspense
                        
                        
                        1,670
                        
                        
                        
                        5,949Federal
      Income Tax Payable
                        
                        
                        0
                        
                        
                        
                        52,229State
      Income Tax Payable
                        
                        
                        0
                        
                        
                        
                        64,674Stock
      Subscription Payable
                        
                        
                        1,602
                        
                        
                        
                        1,602Total
      Current Liabilities
                        
                        
                        62,465
                        
                        
                        
                        385,552Long
      Term LiabilitiesDeferred
      Tax Liability
                        
                        
                        77,339
                        
                        
                        
                        126,802Total
      Long Term Liabilities
                        
                        
                        77,339
                        
                        
                        
                        126,802Stockholders’
      EquityCommon
      Stock:  $.001 par value, 250,000,000 shares authorized,
      63,345,030 shares issued and outstanding
                        
                        
                        63,345
                        
                        
                        
                        65,233Paid
      in Capital
                        
                        
                        3,239,293
                        
                        
                        
                        3,229,905Retained
      Earnings
                        
                        
                        929,807
                        
                        
                        
                        (4,045,659
                        )Treasury
      Stock
                        
                        
                        0
                        
                        
                        
                        (36,500
                        )Net
      Income (Loss)
                        
                        
                        (600,347
                        )
                        
                        
                        4,975,466Total
      Stockholders’ Equity
                        
                        
                        3,632,098
                        
                        
                        
                        4,188,445Total
      Liabilities and Stockholders’ Equity
                        
                        $
                        3,771,902
                        
                        
                        $
                        4,700,799
 
 See Notes
to Unaudited Consolidated Financial Statements
  2
  Chancellor
Group, Inc.
 CONSOLIDATED
STATEMENT OF OPERATIONS
 FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
 (Unaudited)
 
 For the three months
                    ended June 30,
                  
                  
                  For the six months
                    ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Sales
      - Net of Royalties PaidOil
                  
                  $
                  155,692
                  
                  
                  $
                  930,480
                  
                  
                  $
                  254,841
                  
                  
                  $
                  1,718,096Natural
      Gas
                  
                  
                  18,629
                  
                  
                  
                  230,240
                  
                  
                  
                  37,614
                  
                  
                  
                  379,950Other
      Income
                  
                  
                  13,512
                  
                  
                  
                  600
                  
                  
                  
                  96,318
                  
                  
                  
                  1,750Gross
      Revenue
                  
                  
                  187,833
                  
                  
                  
                  1,161,320
                  
                  
                  
                  388,773
                  
                  
                  
                  2,099,796Severance
      Taxes
                  
                  
                  9,418
                  
                  
                  
                  58,692
                  
                  
                  
                  15,362
                  
                  
                  
                  105,245Marketing
      Fees
                  
                  
                  0
                  
                  
                  
                  9,023
                  
                  
                  
                  0
                  
                  
                  
                  16,755Royalties
      Paid
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  13Net
      Revenue
                  
                  
                  178,415
                  
                  
                  
                  1,093,605
                  
                  
                  
                  373,411
                  
                  
                  
                  1,977,783Operating
      ExpensesLease
      Operating Expense
                  
                  
                  44,826
                  
                  
                  
                  419,050
                  
                  
                  
                  184,016
                  
                  
                  
                  736,715Other
      Operating Expense
                  
                  
                  184,809
                  
                  
                  
                  331,454
                  
                  
                  
                  528,171
                  
                  
                  
                  659,573General
      & Administrative Expense
                  
                  
                  140,576
                  
                  
                  
                  93,392
                  
                  
                  
                  226,017
                  
                  
                  
                  126,476Depreciation,
      Depletion & Amortization
                  
                  
                  65,836
                  
                  
                  
                  138,897
                  
                  
                  
                  121,750
                  
                  
                  
                  277,184Total
      Operating Expense
                  
                  
                  436,047
                  
                  
                  
                  982,793
                  
                  
                  
                  1,059,954
                  
                  
                  
                  1,799,948Income
      (loss) From Operations
                  
                  
                  (257,632
                  )
                  
                  
                  110,812
                  
                  
                  
                  (686,543
                  )
                  
                  
                  177,835Other
      Income (Expenses)Organization
      Costs
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Hedge
      Costs Amortization
                  
                  
                  0
                  
                  
                  
                  ( 11,100
                  )
                  
                  
                  ( 11,100
                  )
                  
                  
                  ( 22,200
                  )Total
      Other Income (Expense)
                  
                  
                  0
                  
                  
                  
                  (
      11,100
                  )
                  
                  
                  (
      11,100
                  )
                  
                  
                  (
      22,200
                  )Financing
      ChargesInterest
                  
                  
                  351
                  
                  
                  
                  283,388
                  
                  
                  
                  375
                  
                  
                  
                  433,290Bank
      Fees Amortization
                  
                  
                  0
                  
                  
                  
                  15,419
                  
                  
                  
                  1,294
                  
                  
                  
                  30,006Total
      Financing Charges
                  
                  
                  351
                  
                  
                  
                  298,807
                  
                  
                  
                  1,669
                  
                  
                  
                  463,296Income
      (Loss) before provision forIncome
      Taxes
                  
                  
                  (
      257,983
                  )
                  
                  
                  (
      199,095
                  )
                  
                  
                  (
      699,312
                  )
                  
                  
                  (
      307,661
                  )Provision
      for Income Taxes
                  
                  
                  (61,478
                  )
                  
                  
                  0
                  
                  
                  
                  (98,965
                  )
                  
                  
                  0Net
      Income (Loss)
                  
                  $
                  (
      196,505
                  )
                  
                  $
                  (
      199,095
                  )
                  
                  $
                  (
      600,347
                  )
                  
                  $
                  (
      307,661
                  )Net
      Income (Loss) per Share (Basic and
                    Fully
      Diluted)
                  
                  $
                  (*
                  )
                  
                  $
                  (*
                  )
                  
                  $
                  (*
                  )
                  
                  $
                  (*
                  )Weighted
      Average Number of Common Shares  Outstanding
                  
                  
                  65,335,663
                  
                  
                  
                  65,232,781
                  
                  
                  
                  65,284,506
                  
                  
                  
                  65,232,781
 * Less
than $.01 per Share
  See Notes
to Unaudited Consolidated Financial Statements
  3
  Chancellor
Group, Inc.
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
 (Unaudited)
 
 June
      30, 2009
                  
                  
                  June
      30, 2008Cash
      Flows From Operating Activities:Net
      Income (loss)
                  
                  $
                  (600,347
                  )
                  
                  $
                  (307,661
                  )Adjustments
      to reconcile net income (loss) to net cash provided by (used for)
      operating activities:Depreciation
      & Amortization
                  
                  
                  132,850
                  
                  
                  
                  277,184Deferred
      Income Taxes
                  
                  
                  ( 98,965
                  )
                  
                  
                  0(Increase)
      Decrease in Operating Assets
                  
                  
                  63,721
                  
                  
                  
                  (
      96,054
                  )Increase
      (Decrease) in OperatingLiabilities
                  
                  
                  (286,587
                  )
                  
                  
                  457,963Net
      Cash Provided by (used for)Operating
      Activities
                  
                  
                  (789,328
                  )
                  
                  
                  331,432Cash
      Flows From Investing ActivitiesCapital
      Expenditures
                  
                  
                  (157,364
                  )
                  
                  
                  ( 92,074
                  )Net
      Cash Provided by (used for)Investing
      Activities
                  
                  
                  (157,364
                  )
                  
                  
                  ( 92,074
                  )Cash
      Flows From Financing ActivitiesNotes
      Payable
                  
                  
                  0
                  
                  
                  
                  (152,601
                  )Issuance
      of Common Stock
                  
                  
                  7,500
                  
                  
                  
                  200Net
      Cash Provided by (used for)Financing
      Activities
                  
                  
                  7,500
                  
                  
                  
                  (152,401
                  )Net
      Increase (Decrease) in Cash
                  
                  
                  (939,192
                  )
                  
                  
                  86,957Cash
      at the Beginning of the Period
                  
                  
                  2,531,525
                  
                  
                  
                  218,118Cash
      at the End of the Period
                  
                  $
                  1,592,333
                  
                  
                  $
                  305,075Supplemental
      Disclosures of Cash Flows InformationInterest
      Paid
                  
                  $
                  375
                  
                  
                  $
                  433,290Income
      Taxes Paid
                  
                  $
                  0
                  
                  
                  $
                  0
 
 See Notes
to Unaudited Consolidated Financial Statements
  4
  CHANCELLOR
GROUP, INC.
 
 NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 June 30,
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
19 are water disposal wells and 2 are gas wells, although “associated” gas is
also produced from some oil wells.  As of June 30, 2009 approximately
60 oil wells are actively producing.  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.
 
 We
produced a total of 6,472 barrels of oil and 7,370 mcf of gas in the six months
ended June 30, 2009. 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 June 30, 2009 are deposits totaling $250,000 which are
assigned and held as collateral for a letter 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.
 
 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.
  6
 
 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.
 
 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.
  7
  In June
2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
("SFAS 168"). SFAS 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles ("GAAP"),
superseding existing FASB, American Institute of Certified Public Accountants
("AICPA"), Emerging Issues Task Force ("EITF"), and related accounting
literature. SFAS 168 reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a consistent structure.
Also included is relevant Securities and Exchange Commission guidance organized
using the same topical structure in separate sections. SFAS 168 will be
effective for financial statements issued for reporting periods that end after
September 15, 2009. This will have an impact on the Company's financial
statements since all future references to authoritative accounting literature
will be references in accordance with SFAS 168.
 
 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 June
30, 2009, the Company has a federal net operating loss of approximately
$786,000.  A deferred tax asset of approximately $157,000 has been
partially offset by a valuation allowance of approximately $41,000 due to
federal NOL carry-back and carry-forward limitations.
 
 At June
30, 2009, the Company has approximately $144,000 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
63,345,030 shares issued and outstanding as of June 30, 2009 (see footnotes
regarding Treasury Stock, Sale of Assets and Related Party Transactions for
additional information).
 
 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 June 30, 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, 2014, 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.
  8
 
 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 second quarter of
2009.
 
 
 NOTE 4.
FIXED ASSETS
  A summary
of fixed assets at June 30, 2009, follows:
 
 BalanceDecember 31,
                        2008
                      
                      
                      Additions
                      
                      
                      Deletions
                      
                      
                      Balance
                        June 30, 2009Auto/Transportation
      Equipment
                      
                      $
                      218,661
                      
                      
                      $
                      23,183
                      
                      
                      $
                      39,121
                      
                      
                      $
                      202,723Buildings
      & Improvements
                      
                      
                      125,280
                      
                      
                      
                      2,565
                      
                      
                      
                      0
                      
                      
                      
                      127,845Leases
      & Lease Equipment
                      
                      
                      1,396,252
                      
                      
                      
                      170,675
                      
                      
                      
                      0
                      
                      
                      
                      1,566,927Furniture,
      Fixtures & Office Equipment
                      
                      
                      6,785
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      6,785Machinery
      & Equipment
                      
                      
                      442,747
                      
                      
                      
                      9,932
                      
                      
                      
                      2,500
                      
                      
                      
                      450,179$
                      2,189,725
                      
                      
                      $
                      206,355
                      
                      
                      $
                      41,621
                      
                      
                      $
                      2,354,459Less:
      Accum. Depr.
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      390,765$
                      1,963,694
 
 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.
  9
 
 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 June 30, 2009.
 
 At June
30, 2009, the Company has an irrevocable blanket letter of credit totaling
$250,000 issued to the Railroad Commission of Texas as required for its oil and
gas activities, which is secured by deposits totaling $250,000 included in cash
in bank.
 
 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
 
 10
  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
$11,512 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 $48,000 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
issuance of 1,000,000 shares of common stock to Koala, which shares were issued
on July 13, 2009, since Koala had originally transferred 1,000,000 shares to NCE
for the benefit of the Company in the context of the Company's discussions with
NCE.  On July 17, 2009, the 1,000,000 share certificate representing
the shares repurchased from NCE and held as treasury stock was
cancelled.
 
 On July
13, 2009, the Company issued 150,000 shares to common stock to Koala Pictures on
behalf of Maxwell Grant, our Chairman and Chief Executive Officer, 300,000
shares of Common Stock to Robert Gordon and 300,000 shares of common stock to
Dudley Muth, both also members of our Board of Directors.  Such shares
were issued to our directors for services rendered as directors over a long
period, dating back in some cases to March 2006.
 
 On August
10, 2009, the Company issued to Koala a Warrant expiring December 31, 2014 to
purchase 2,500,000 shares of common stock, at a purchase price of $.02 per
share, issued in replacement of a warrant held by Koala to purchase the same
number of shares at the same per share exercise price, expiring December 31,
2009, which was originally issued for services rendered in a shareholder
derivative action in Nevada some years ago..
 
 On August
10, 2009, the Company issued to Dudley Muth, a member of our Board of Directors,
a Warrant expiring December 31, 2014 to purchase 1,000,000 shares of common
stock, at a purchase price of $.025 per share, issued in replacement of a
warrant held by Mr. Muth to purchase the same number of shares at the same per
share exercise price, expiring December 31, 2009, which was originally issued
for services rendered in a shareholder derivative action in Nevada some years
ago.
  11
  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.
 
 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 July 31, 2009, there were 66,125,030 shares of
our common stock issued and outstanding.
  12
 
 Six Months Ended June 30,
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 six month period
ended June 30, 2009, we produced and sold 6,472 net barrels of oil and 7,3708
mcf of gas, attributable to our net revenue interest in our producing
properties, while generating revenues of $292,455, as compared with 7,773 net
barrels of oil and 22,919 net mcf of gas, generating revenues of $2,092,046 in
the comparable period of 2008. At June 30, 2009, we had approximately 60 oil
wells and 2 gas wells producing with additional “associated” gas coming from
some oil 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
produced a total of 6,472 barrels of oil and  7,370 mcf of gas in the
six months ended June 30, 2009. The oil is light sweet crude and the natural gas
has very high heat content, 1600 to 2600 btu/scf.
 
 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 shows the approximate volumes and average sales prices for oil
and gas we produced in the six months ended June 30, 2009, as compared with
sales and price information for the comparable period in 2008:
  Six Months EndedJune 30, 2009
                    
                    
                    June 30, 2008Oil
      and Gas Sales(1)Oil
      Sales(Bbl)
                    
                    
                    6,472
                    
                    
                    
                    20,575Natural
      Gas Sales (Mcf)
                    
                    
                    7,370
                    
                    
                    
                    47,318Average
      Sales Price:Oil,
      per Bbl:
                    
                    $
                    46.18
                    
                    
                    $
                    107.01Gas,
      per MMCF:
                    
                    $
                    5.41
                    
                    
                    $
                    9.15
 
 (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.
 
 13
  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
June 30, 2009 the Company had $1,592,333 of cash on hand.   We
have retained earnings of $329,460 and have a stockholders' equity of $3,632,098
at June 30, 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.
 
 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 six 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.
  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 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
 The
following table sets forth the sales of unregistered securities since the
Company’s last report filed under this item.
 Principal   Total
Offering Price/
  Date
                                
                                Title
      and Amount (1)
                                
                                Purchaser
                                
                                Underwriter
                                
                                Underwriting DiscountsApril 15, 2009
                                
                                150,000 shares of common stock.
                                
                                Private investor.
                                
                                NA
                                
                                $7,500/NAAugust   10,
      2009
                                
                                Warrant
      expiring December 31, 2014 to purchase 2,500,000 shares of common stock,
      at a purchase price of $.02 per share, issued in replacement of a warrant
      to purchase the same number of shares at the same per share exercise
      price, expiring December 31, 2009.
                                
                                Koala
      Pictures Proprietary Ltd.(2)
                                
                                NA
                                
                                $0/NAAugust   10,
      2009
                                
                                Warrants
      expiring December 31, 2014 to purchase 1,000,000 shares and 1,500,000
      shares of common stock, respectively, at the respective purchase prices of
      $.025 and $.02 per share, issued in replacement of two warrants to
      purchase the same numbers of shares at the same per share exercise prices,
      expiring December 31, 2009.
                                
                                Private
      investor.
                                
                                NA
                                
                                $0/NAAugust   10,
      2009
                                
                                Warrant
      expiring December 31, 2014 to purchase 1,000,000 shares of common stock,
      at a purchase price of $.025 per share, issued in replacement of a warrant
      to purchase the same number of shares at the same per share exercise
      price, expiring December 31, 2009.
                                
                                Director.
                                
                                NA
                                
                                $0/NA
 (1)
              The
      issuances to a private investor and to two directors, one of which is an
      officer, are viewed by the Company as exempt from registration under the
      Securities Act of 1933, as amended (“Securities Act”), alternatively, as
      transactions either not involving any public offering, or as exempt under
      the provisions of Regulation D promulgated by the SEC under the Securities
      Act. (2)
                Koala
      Pictures Proprietary Ltd is controlled by our Chairman and Chief Executive
      Officer, Maxwell Grant.
  15
  ITEM
6.  Exhibits.
 
 10.23
              Warrant
      issued August 10, 2009 to Koala Pictures Proprietary Ltd. to purchase an
      aggregate of 2,500,000 shares of common stock on or before December 31,
      2014.
 
 10.24
              Warrant
      issued August 10, 2009, to Dudley Muth to purchase an aggregate of
      1,000,000 shares of common stock on or before December 31,
      2014.
 
 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.
 
 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/  Maxwell
GrantChief
      Executive Officer andPrincipal
      Financial Officer
 
 Dated:
August 10, 2009
 
 EXHIBIT
INDEX
 
 Exhibit Number
                    
                    Description10.23
                    
                    Warrant
      issued August 10, 2009 to Koala Pictures Proprietary Ltd. to purchase an
      aggregate of 2,500,000 shares of common stock on or before December 31,
      2014.10.24
                    
                    Warrant
      issued August 10, 2009, to Dudley Muth to purchase an aggregate of
      1,000,000 shares of common stock on or before December 31,
      2014.31
                    
                    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 Oxley Act of
2002.
  16