UNITED
      STATES




SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      D.C. 20549









Form
      10-QSB





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





For
      the
      quarterly period ended March 31, 2007





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





For
      the
      transition period from___________  to___________




Commission
      file number 000-30219




Chancellor
      Group, Inc.




(Name
      of small business issuer in its charter)





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




216
      South Price Road, Pampa, TX 79065


(Address
      of principal executive offices)





(806-688-9697)


(Issuer's
      telephone number)





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





APPLICABLE
      ONLY TO CORPORATE ISSUERS




The
      number of shares outstanding the issuer's common stock, $.001 par value, was
      64,502,781 as of May 7, 2007.




Transitional
      Small Business Disclosure Format (Check one): Yes o No x









Table
      of
      Contents


PART
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements
              1Item
                  2.
              Management's
                  Discussion and Analysis or Plan of Operation
              13Item
                  4.
              Controls
                  and Procedures
              15PART
                  IIItem
                  2.
              Unregistered Sales of Equity Securities and Use of
                  Proceeds
              16Item
                  6.
              Exhibits
              16Signatures
              17EXHIBIT
                  INDEX
              
              18










Item
      1.
      Financial Statements





Chancellor
      Group, Inc.


(A
      Development Stage Company)





I
      N D
      E X


Page
                  No.Balance
                  Sheet as at March 31, 2007 (Unaudited
              2Statements
                  of OperationsFor
                  the Three Months Ended March 31, 2007 and 2006 (Unaudited)
              3Statements
                  of Cash FlowsFor
                  the Three Months Ended March 31, 2007 and 2006 (Unaudited)
              4Notes
                  to Financial Statements (Unaudited)
              5





1




ITEM
      1.




CHANCELLOR
      GROUP, INC.


CONSOLIDATED
      BALANCE SHEET


MARCH
      31,
      2007


(UNAUDITED)


ASSETSCurrent
                  AssetsCash
                  in Bank
              
              $
              16,314Total
                  Assets
              
              $
              16,314LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilitiesAccounts
                  payable
              
              $
              109,828Stock
                  subscription payable
              
              
              1,602Total
                  current liabilities
              
              
              111,430Long
                  Term LiabilitiesNote
                  Payable
              
              
              5,000Total
                  Liabilities
              
              
              116,430Stockholders'
                  equityCommon
                  stock: $.001 parvalue,
                  250,000,000 sharesauthorized,
                  62,005,030shares
                  issued&
                  outstanding
              
              
              62,005Preferred
                  Series B stock:$1,000
                  par value,250,000
                  shares authorized,-0-
                  issued and outstandingPaid
                  in capital
              
              
              3,173,333Accumulated
                  deficit
              
              
              (3,335,454
              )Total
                  Stockholders' Equity
              
              
              (100,116
              )Total
                    Liabilities AndStockholders'
                    Equity
              
              $
              16,314
  See
                  Notes to Consolidated Financial
                  Statements
  2




CHANCELLOR
      GROUP, INC.


CONSOLIDATED
      STATEMENT OF OPERATIONS


(UNAUDITED)


Three
                  Months EndedMarch
                  31,2007
              
              2006Sales
              
              $
              -
              
              $
              -Operating
                  expenses
              
              
              12,015
              
              
              16,033Income
                  (loss) fromoperations
              
              
              (
                  12,015
              )
              
              (
                  16,033
              )Other
                  income (expenses)
              
              
              -
              
              
              -Income
                  (loss) before provisionfor
                  income taxes
              
              
              (
                  12,015
              )
              
              (
                  16,033
              )Provision
                  for income tax
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              (
                  12,015
              )
              $
              (
                  16,033
              )Net
                  income (loss) per share(Basic
                  and fully diluted)
              
              $
              (
                  *
              )
              $
              (
                  *
              )Weighted
                  average number ofcommon
                  shares outstanding
              
              
              59,580,030
              
              
              56,281,184*less
                  than $.01 per share
  See
                  Notes to Consolidated Financial
                  Statements
  3
  CHANCELLOR
        GROUP, INC.
 CONSOLIDATED
        STATEMENT OF CASH
        FLOWS
 (UNAUDITED)


Three
                  Months EndedMarch
                  31,2007
              
              2006Cash
                  Flows From Operating Activities:Net
                  income (loss)
              
              $
              (
                  12,016
              )
              $
              (
                  16,033
              )Adjustments
                  to reconcile netincome
                  (loss) to net cashprovided
                  by (used for)operating
                  activities:Accounts
                  pay. and accrued expenses
              
              
              
              
              
              6,000Stock
                  subscriptions payableCompensatory
                  stock issuances
              
              
              
              
              
              4,558Other
              
              
              
              
              
              (25
              )Net
                  cash providedby
                  (used for)operating
                  activities
              
              
              (12,016
              )
              
              (
                  5,500
              )Cash
                  Flows From Financing Activities:Notes
                  Payable
              
              
              5,000Sales
                  of common stock
              
              
              22,500
              
              
              5,500Net
                  cash providedby
                  (used for)financing
                  activities
              
              
              27,500
              
              
              5,500Net
                  Increase (Decrease) In Cash
              
              
              15,484
              
              
              0Cash
                  At The Beginning Of The Period
              
              
              830
              
              
              0Cash
                  At The End Of The Period
              
              $
              16,314
              
              $
              0
  See
                  Notes to Consolidated Financial
                  Statements





4


Chancellor
      Group, Inc.




NOTES
      TO
      FINANCIAL STATEMENTS





MARCH
      31,
      2007


(Unaudited)







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





Chancellor
      Group, Inc. (the "Company") was incorporated in the state of Utah on May 2,
      1986, 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.





Principles
      of Consolidation





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





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.
      Depletion and depreciation of the capitalized costs for producing oil and gas
      properties are provided by the unit-of-production method based on proved oil
      and
      gas reserves. Undeveloped properties are periodically assessed for possible
      impairment due to unrecoverability of costs invested. Cash received for partial
      conveyances of property interests are 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 carryforwards
      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




CHANCELLOR
      GROUP, INC.


Notes
      to
      Consolidated Financial Statements - Continued





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





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 each item's estimated useful life.





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 acquire and develop domestic oil and gas
      properties.





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




CHANCELLOR
        GROUP, INC.
 Notes
        to
        Consolidated Financial Statements - Continued




Employee
      Stock-Based Compensation





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





Recent
      Accounting Pronouncements





In
      March
      2006, the Financial Accounting Standards Board ("FASB") issued Statement of
      Financial Accounting Standard ("SFAS") No. 155, "Accounting for Certain Hybrid
      Financial Instruments."




SFAS
      155
      resolves certain accounting issues related to various hybrid financial
      instruments. The Company has adopted the provisions of SFAS No. 155 which are
      effective for fiscal years beginning after September 15, 2006. The adoption
      did
      not have a material effect on the results of operations of the
      Company.





In
      March
      2006, the FASB issued SFAS No. 156 "Accounting for Servicing of Financial
      Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities". This
      statement requires all separately recognized servicing assets and servicing
      liabilities be initially measured at fair value, if practicable, and permits
      for
      subsequent measurement using either fair value measurement with changes in
      fair
      value reflected in earnings or the amortization and impairment requirements
      of
      Statement No. 140.




The
      Company has adopted the provisions of SFAS No. 156, which are effective in
      general for an entity's fiscal year beginning after September 15, 2006. The
      adoption did not have a material effect on the results of operations of the
      Company.





In
      December 2006, the FASB issued SFAS No. 157 "Fair Value Measurements", to
      improve consistency and comparability in fair value measurements, and to expand
      related disclosures.




The
      Company has adopted the provisions of SFAS No. 157, which are effective for
      financial statements for fiscal years beginning after November 15, 2007. The
      adoption did not have a material effect on the results of operations of the
      Company.





NOTE
      2.
      RELATED PARTY TRANSACTIONS





In
      the
      first quarter of 2007, ending March 31, 2007, a related party advanced the
      Company $5,000 for working capital, which resulted in a $5,000 loan payable.
      Also in the first quarter of 2007, we paid $3,000 in consulting fees to a
      related party.




NOTE
      3.  INCOME
      TAXES





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





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




7




CHANCELLOR
        GROUP, INC.
 Notes
        to
        Consolidated Financial Statements - Continued


At
      March
      31, 2007 the Company had approximately $3,327,000 in unused federal net
      operating loss carryforwards, which begin to expire principally in the year
      2011. A deferred tax asset of approximately $662,000 resulting from the loss
      carryforward has been offset by a 100% valuation allowance.
      The increase in the valuation allowance from year end 2006 to first quarter
      2007
      was approximately $2,000.




NOTE
      4.
      STOCKHOLDERS' EQUITY





Common
      Stock





The
      Company has 250,000,000 authorized shares of common stock, par value $.001,
      with
      62,005,030 shares issued and outstanding as of March 31, 2007.





Preferred
      Stock





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





Stock
      Options





Non-employee
      Stock Options





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





The
      Company currently has stock options outstanding to various individuals in the
      following amounts:





2,000,000
      options exercisable for one share of common stock at an exercise price of $0.025
      per share, currently exercisable, expiring December 31, 2009, and 4,000,000
      options exercisable for one share of common stock at an exercise price of $0.02
      per share, currently exercisable, expiring December 31, 2009.





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 quarter ending 3/31/2007.




NOTE
      5.
      GOING CONCERN UNCERTAINTY





These
      financial statements are presented assuming the Company will continue as a
      going
      concern. The Company has no established source of revenue, recurring losses
      from
      operations, negative working capital, and stockholders' equity deficiency.
      This
      raises substantial doubt about its ability to continue as a going concern.
      Management's plan in regard to these matters includes raising working capital
      to
      assure the Company's viability, through private or public equity offerings
      and/or debt financing; and acquiring and developing profitable oil and gas
      properties.




8




CHANCELLOR
        GROUP, INC.
 Notes
        to
        Consolidated Financial Statements - Continued


NOTE
      6.
      SUBSEQUENT EVENTS





Subsequent
      to the end of the first quarter of 2007, 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 are 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 was $5,000,000, and
      for
      the equipment $291,000. The oil and natural gas leases purchased are on
      approximately 8,000 acres in Gray and Carson Counties, Texas, with a well
      spacing of 10 acres, and are in the Panhandle Field, discovered in 1920. After
      closing the acquisition, we have opened corporate offices for our production
      and
      oil field service subsidiaries at the purchased facilities in Pampa, Texas.
      After the initial equipment acquisition, 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.




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




Since
      April 16, 2007 and as of April 30, 2007 we have restored approximately 40 wells
      to production bringing the total number of producing wells to 140, at a cost
      of
      $45,000, including allocated internal costs.




9





CHANCELLOR
      GROUP, INC.


Supplemental
      Information (Unaudited)





Year
      Ended December 31, 2006





Capitalized
      Costs Relating to Oil and Gas


Producing
      Activities at December 31, 2006


Unproved
                  oil and gas properties
              
              $
              0Proved
                  oil and gas properties
              
              $
              0Support
                  equipment and facilities
              
              $
              0Less
                  accumulated depreciation,depletion,
                  amortization, andimpairment
              
              
              ($0
              )Net
                  capitalized costs
              
              $
              0




Costs
      Incurred in Oil and Gas Producing


Activities
      for the Year


Ended
      December 31, 2006


Property
                  acquisition costsProved
              
              $
              0Unproved
              
              $
              0Exploration
                  costs
              
              $
              0Development
                  costs
              
              $
              0




Results
      of Operations for Oil and Gas Producing


Activities
      for the Year Ended December 31, 2006




Oil
                  and gas sales
              
              $
              0Gain
                  on sale of oil and gas properties
              
              $
              0Gain
                  on sale of oil and gas leases
              
              $
              0Production
                  costs
              
              $
              0Exploration
                  expenses
              
              $
              0Depreciation,
                  depletion,and amortization
              
              $
              0Income
                  tax expense
              
              $
              0Results
                  of operations for oil and gas
                producing
                  activities (excluding
                corporate
                  overhead and financing costs)
              
              $
              0
  10




Reserve
      Information





The
      following estimates of proved developed reserve quantities and related
      standardized measure of discounted net cash flow are estimates only, and do
      not
      purport to reflect realizable values or fair market values of the Company's
      reserves. The Company emphasizes that reserve estimates are inherently imprecise
      and that estimates of new discoveries are more imprecise than those of producing
      oil and gas properties. Accordingly, these estimates are expected to change
      as
      future information becomes available. All of the Company's reserves are located
      in the United States.




Proved
      reserves are estimated reserves of crude oil (including condensate and natural
      gas liquids) and natural gas that geological and engineering data demonstrate
      with reasonable certainty to be recoverable in future years from known
      reservoirs under existing economic and operating conditions.
      Proved developed reserves are those expected to be recovered through existing
      wells, equipment, and operating methods.




The
      standardized measure of discounted future net cash flows is computed by applying
      year end prices of oil and gas (with consideration of price changes only to
      the
      extent provided by contractual arrangements) to the estimated future production
      of proved oil and gas reserves, less estimated future expenditures (based on
      year end costs) to be incurred in developing and producing the proved reserves,
      less estimated future income tax expenses (based on year end statutory tax
      rates, with consideration of future tax rates already legislated) to be incurred
      on pretax net cash flows less tax basis of the properties and available credit,
      and assuming continuation of existing economic conditions. The estimated future
      net cash flows are then discounted using a rate of 10 percent a year to reflect
      the estimated timing of the future cash flows.




11




CHANCELLOR
      GROUP, INC.


Supplemental
      Information (Unaudited) - Continued


Year
      Ended December 31, 2006





Reserve
      Information





Oil
              
              Gas(Bbls)
              
              (Bcf)Proved
                  developed and undeveloped reservesBeginning
                  of year
              
              
              0
              
              
              0Revisions
                  of previous estimates
              
              
              -
              
              
              -Improved
                  recovery
              
              
              -
              
              
              -Purchases
                  of minerals in place
              
              
              -
              
              
              -Extensions
                  and discoveries
              
              
              -
              
              
              -Production
              
              
              -
              
              
              -Sales
                  of minerals in place
              
              
              -
              
              
              -End
                  of year
              
              
              0
              
              
              0Proved
                  developed reservesBeginning
                  of year
              
              
              0
              
              
              0End
                  of year
              
              
              0
              
              
              0Standardized
                  Measure of Discounted FutureNet
                  Cash Flows at December 31, 2006


Future
                cash inflows
            
            $
            0Future
                production costs
            
            
            0Future
                development costs
            
            
            0Future
                income tax expenses
            
            
            0Future
                net cash flows (10% annual discount forestimated
                timing of cash flows)
            
            $
            0Standardized
                measures of discounted future net cashflows
                relating to proved oil and gas reserves
            
            $
            0




The
        following reconciles the change in the standardized measure of discounted
        future net cash flow during the year ended
        December 31, 2006.


Beginning
                  of year
              
              $
              0Sales
                  of oil and gas produced, net of production costs
              
              
              0Net
                  changes in prices and production costs
              
              
              0Extensions,
                  discoveries, and improved recovery,less
                  related costs
              
              $
              0Development
                  costs incurred during the year whichwere
                  previously estimated
              
              $
              0Net
                  change in estimated future development costs
              
              $
              0Revisions
                  of previous quantity estimates
              
              $
              0Net
                  change from purchases and sales ofminerals
                  in place
              
              $
              0Accretion
                  of discount
              
              $
              0Net
                  change in income taxes
              
              $
              0Other
              
              $
              0End
                  of year
              
              $
              0





12




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




DISCLOSURE
      REGARDING FORWARD-LOOKING STATEMENTS




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





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





BACKGROUND





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





Since
      that time, we have been actively seeking the acquisition of petroleum producing
      assets, and have completed an initial acquisition of oil and gas leases and
      related facilities and equipment as described below under “Plan of
      Operation.”





Our
      common stock is quoted on the Over-The-Counter Bulletin Board and trades under
      the symbol CHAG.OB. As of May 7, 2007, there were 64,502,781 shares
      of our common stock issued and outstanding.





Three
      Months Ended March 31, 2007 Compared to Three Months Ended March 31,
      2006




During
      the three months ended March 31, 2007, we incurred a net loss of $12,016,
      because we had no revenue to offset against operating expenses. The loss
      in
      the first quarter was primarily attributable to general and administrative
      expenses in preparation for an acquisition. Total operating expenses decreased
      from approximately $11,195 for the three months ended March 31, 2006 to
      approximately $12,016 for the three months ended March 31, 2007. From inception
      to March 31, 2007, we had a net loss of $3,335,454.




13





We
      have a
      stockholders' deficiency in the amount of $100,116 at March 31, 2007.





PLAN
      OF
      OPERATION





On
      April
      16, 2007, we closed the acquisition of assets from Caldwell Production Company,
      Inc., consisting of 48 mineral leases with 631 wells, of which approximately
      100
      were 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 was
      $5,000,000, and for the equipment $291,000. The oil and natural gas leases
      purchased are on approximately 8,000 acres in Gray and Carson Counties, Texas,
      with a well spacing of 10 acres, and are in the Panhandle Field, discovered
      in
      1920. After closing the acquisition, we have opened corporate offices for our
      production and oil field service subsidiaries at the purchased facilities in
      Pampa, Texas. After the initial equipment acquisition, 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.




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




As
      of
      April 30, 2007 we have restored approximately 40 wells to production bringing
      the total number of producing wells to 140, at a cost of $45,000, including
      allocated internal costs.




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.




Implementation
      of our business approach relies on our ability to fund ongoing development
      projects with cash flow provided by operating activities and external sources
      of
      capital. There is no assurance that we will be able to arrange any further
      capital if required by our operations.




14




LIQUIDITY
      AND CAPITAL RESOURCES





As
      of
      March 31, 2007 the Company had $16,314 of cash on hand and a working capital
      deficit of $95,116. Through March 31, 2007, the Company was in the development
      stage and had not carried on any significant operations and had not generated
      significant revenues. The Company has incurred losses since inception
      aggregating $3,335,454 and has working capital and stockholders' deficiencies
      of
      $95,116 and $100,116, respectively, at March 31, 2007.





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, for a $5,000,000 senior loan facility, under
      which we drew down $2.3 million at the April 16, 2007 closing. On April 13,
      2007, we also entered into a Loan Agreement with CapWest Resources, Inc.,
      Midland, Texas, for an advancing line of credit/term loan facility, under which
      we drew down at closing $2,700,000 for the balance of the purchase price of
      the
      leases, $291,500 for the equipment, $111,000 for bank fees, legal expenses
      and
      associated costs, and $130,000 for initial working capital. On April 26, 2007
      we
      drew $75,000 for additional working capital and start-up expenses. On May 6,
      2007 we drew $88,800 to purchase a hedge floor for a portion of our oil
      production, as required by the loan agreements. On May 7, 2007 we drew $203,000
      to fund lease operating expenses and well restorations. A portion of this draw
      was necessitated because we do not expect that the receipt of cash revenue
      from
      our production until the latter part of May due to transition delays. However,
      under the Purchase and Sale Agreement with Caldwell, we expect that such revenue
      will ultimately be paid for production from the effective date of April 1,
      2007.





CRITICAL
      ACCOUNTING POLICIES





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





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





ITEM
      4.
      CONTROLS AND PROCEDURES





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




15




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 Amount1)
            
            
            Purchaser
            
            
            Underwriter
            
            
            Underwriting
              DiscountsJanuary
                1 - March 31, 2007
            
            
            1,250,000
                shares of common stock purchased by private investors
            
            
            5
                private investors.
            
            
            NA
            
            $
            22,500/NA




(1)
      These
      shares were issued pursuant to private offering exemptions provided by Section
      4(2) of the Securities Act of 1933, as amended (Securities Act), and Rule 506
      promulgated thereunder, to a limited number of investors and are restricted
      shares as defined in the rules and regulations under the Securities Act.




ITEM
      6.
      Exhibits.





31.1
            Certification
                of Chief Executive Officer Pursuant to Section 302 of TheSarbanes
                Oxley Act of 2002.




31.2
            Certification
                of Chief Financial Officer Pursuant to Section 302 of TheSarbanes
                Oxley Act of 2002.





32.1
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. Section1350
                as adopted pursuant to Section 906 of the Sarbanes-Oxley Oxley Actof
                2002.





32.2
            Certification
                of Chief Financial Officer Pursuant to 18 U.S.C. Section1350
                as adopted pursuant to Section 906 of the Sarbanes-Oxley Oxley Act
                of
                2002.





16




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/
              Bradley W. FischerBradley
                W. Fischer, President and
              Chief
                Executive Officer




Dated:
      May 15, 2007




17




EXHIBIT
      INDEX





Exhibit
              Number
            
            Description31.1
            
            Certification of Chief Executive Officer
              Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.31.2
            
            Certification of Chief Financial Officer
              Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.32.1
            
            Certification of Chief Executive Officer
              Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
              of
              the Sarbanes-Oxley Oxley Act of 2002.32.2
            
            Certification of Chief Financial Officer
              Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
              of
              the Sarbanes-Oxley Oxley Act of 2002.





18