8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 27, 2007

CHANCELLOR GROUP, INC.

(Exact Name of Registrant as Specified in Charter)

Nevada	000-30219	87-0438647
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	( I.R.S. Employer Identification No.)

216 South Price Road, Pampa, TX	79065
(Address of Principal Executive Offices)	(Zip Code)
Registrant's telephone number, including area code:	(806) 688-9697

Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17

CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a -12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the

Exchange Act (17 CFR 240.14d -2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e -4(c))

ITEM 1.01. Entry into a Material Definitive Agreement.

Amendments to CapWest Resources Loan Documents

On April 13, 2007, we entered into a Loan Agreement with CapWest Resources, Inc. (“CapWest”), Midland, Texas, for an advancing line of credit/term loan facility (the “CapWest Loan Agreement”). At the closing of the purchase of the Caldwell Assets, we drew down under this facility $2,700,000 for the balance of the purchase price of the Caldwell Leases, $291,500 for the Caldwell equipment, $111,000 for bank fees, legal expenses and associated costs, and $130,000 for initial working capital. We issued to CapWest Resources, Inc. our Advancing Line of Credit/Term Note at such closing to cover the above advances. The interest rate under the CapWest Loan Agreement is a variable rate equal to the prime rate as defined in this Agreement plus 4%, but not higher than the highest lawful rate as defined in this Agreement.

Effective July 12, 2007, we executed an agreement (“Modification”), amending the Capwest Multiple Advance Term Note issued pursuant to the CapWest Loan Agreement. The Modification changes the monthly payment date from the 15^th to the 25^th of each month and extended the maturity date of the loan to April 25, 2010.

Effective August 9, 2007, we entered into a First Amendment to the CapWest Loan Agreement (the “Amendment”), that increases our borrowing base from $3,700,000 to $3,950,000. Of the additional borrowing base, $170,000 is reserved for the purpose of restoring existing oil and gas wells. We have agreed to reduce our consolidated general and administrative expenses paid to members of our management team to a maximum of $20,000, beginning with those payments to be tendered to such management team members for their services during the month of August 2007, and to maintain such general and administrative expenses at this level until such time as we have raised $250,000 in equity capital and have demonstrated to the satisfaction of CapWest that we have met, and are continuing to meet, our forecasted production levels and expenses. In the Amendment, we have also agreed that we will reach the budgeted oil and gas sales figures per month of 5,300 barrels of oil (“BO”) (with net production to us of 4,134 BO) and 10 million cubic feet of natural gas production (producing net production to us of 8,750,000 cubic feet), and attain a producing well count of 245 wells on or before December 31, 2007. Should we fail to fulfill this covenant, we have agree to reduce the general and administrative expenses allocable to management team members to $10,000 monthly, beginning with general and administrative expenses paid to management for the month of January 2008.

Under the CapWest Loan Agreement, CapWest has a 2% overriding royalty interest in our leases. After the payout of CapWest’s loan, or in the event that the Company is sold, this overriding royalty interest will convert to a 15% net revenue interest in the leases. This interest may be purchased by us under a formula specified in this Agreement. As of August 9, 2007, we entered into a new Bill of Sale and Assignment of Contractual Rights with CapWest that provides for an additional 5% interest for CapWest in the gross oil and gas proceeds from our leases after payout of CapWest’s loan.

As of August 9, 2007, we also entered into a First Modification and Amendment to Advancing Line of Credit/Term Note with CapWest, which provides, inter alia, for payment of accrued unpaid interest by August 20, 2007, which we have done, and for payment of the regularly scheduled interest payment due August 30, 2007, which will be paid in the next few days upon receipt of revenue check for the purchase of oil from a major purchaser. In addition, under the First Modification and Amendment, for the balance of 2007, we are required to pay interest only on the CapWest loan, payments of principal to resume on January 31, 2008

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FOR THE FULL TERMS OF THE AMENDMENTS TO THE LOAN AGREEMENT WITH CAPWEST, PLEASE REFER TO THE COPY OF THESE AGREEMENTS FILED AS EXHIBITS 10.13 THROUGH 10.16 TO THIS REPORT.

ITEM 5.02.Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

Resignation of Chief Financial Officer

Effective August 24, 2007, Alan M. Wright resigned as our Chief Financial Officer in order to resume his retirement, his motorsports, and his non-profit responsibilities. In connection with his resignation, we entered into a Separation and Release Agreement, pursuant to which we will issue Mr. Wright 300,000 shares of our common stock in full settlement of all matters between the parties.

ITEM 9.01.Financial Statements and Exhibits

(d) Exhibits.

Exhibit No.	Description
10.13	Modification dated as of July 27, 2007, to Form of Multiple Advance Term Promissory Note issued by the Company pursuant to the CapWest Resources, Inc. Loan Agreement.
10.14	First Amendment, dated as of August 9, 2007, to Loan Agreement, dated April 13, 2007, by and among the Company, Gryphon Production Company, LLC, and Gryphon Field Services, LLC, as borrowers, and CapWest Resources, Inc., as lender.
10.15	Bill of Sale and Assignment of Contractual Rights, dated as of August 9, 2007, by and among the Company, Gryphon Production Company, LLC, and Gryphon Field Services, LLC, as borrowers, and CapWest Resources, Inc., as lender.
10.16	First Modification and Amendment, dated as of August 9, 2007 to Advancing Line of Credit/Term Note issued by the Company pursuant to the CapWest Resources, Inc. Loan Agreement.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CHANCELLOR GROUP, INC.
By:	/s/ Bradley Fischer
	Bradley W. Fischer, Chief Executive Officer
	Date: August 30, 2007

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	EXHIBIT INDEX
Exhibit No.	Description
10.13	Modification dated as of July 27, 2007, to Form of Multiple Advance Term Promissory Note issued by the Company pursuant to the CapWest Resources, Inc. Loan Agreement.
10.14	First Amendment, dated as of August 9, 2007, to Loan Agreement, dated April 13, 2007, by and among the Company, Gryphon Production Company, LLC, and Gryphon Field Services, LLC, as borrowers, and CapWest Resources, Inc., as lender.
10.15	Bill of Sale and Assignment of Contractual Rights, dated as of August 9, 2007, by and among the Company, Gryphon Production Company, LLC, and Gryphon Field Services, LLC, as borrowers, and CapWest Resources, Inc., as lender.
10.16	First Modification and Amendment, dated as of August 9, 2007 to Advancing Line of Credit/Term Note issued by the Company pursuant to the CapWest Resources, Inc. Loan Agreement.

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EX-10.13

EXHIBIT 10.13

MODIFICATION OF MULTIPLE ADVANCE TERM NOTE

RE: CHANCELLOR GROUP, INC. GRYPHON PRODUCTION COMPANY, LLC. GRYPHON FIELD SERVICES, ^'LLC

NOTE #128909

WHEREAS, heretofore and under date of April 13, 2007, CHANCELLOR GROUP, INC., GRYPHON PRODUCTION COMPANY, LLC. and GRYPHON FIELD SERVICES, LLC (hereafter called the "Borrower") made, executed and delivered to WESTERN NATIONAL BANK, one certain Multiple Advance Term Note in the original principal amount of $5,000,000.00, with a current balance of $2,300,000.00 payable at maturity, including any and all accrued interest, bearing interest at the rate therein provided, with a final maturity of April 15, 2010; and

WHEREAS, it is mutually desirable, beneficial, and agreeable to the parties hereto that the repayment terms of said Multiple Advance Term Note be modified as hereinafter set out;

NOW, THEREFORE, in consideration of the mutual benefits inuring to each other, it is understood and agreed, by and between the parties hereto that the terms and conditions of the Borrower's Multiple Advance Term Note, as described above, are hereby modified as follows:

Payment date is hereby modified from the 15th day of each month, beginning with the payment due on July 15, 2007, which will be due July 25, 2007. All subsequent payments shall be due on the 25th day of each month thereafter. The maturity date is hereby extended to April 25, 2010.

It is further understood and agreed that all other terms, conditions, and covenants of the aforesaid Multiple Advance Term Note, not otherwise modified hereby, shall be and remain the same, and that this Agreement, when executed by the parties hereto, shall be attached to and become a part of the original Multiple Advance Term Note, and shall have the same force and effect as if the terms and conditions hereof were originally incorporated in the Multiple Advance Term Note prior to its execution.

THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

IN WITNESS WHEREOF, this Agreement is executed by the undersigned parties as of the 27^th day of July, 2007, but effective July 12, 2007.

BORROWER:

CHANCELLOR GROUP, INC.

/s/ Bradley W. Fisher,

Bradley W. Fisher, President

GRYPHONPRODUCTION COMPANY, LLC

/s/ Bradley W. Fisher,

Bradley W. Fisher, President

GRYPHON PRODUCTION FIELD SERVICES, LLC

/s/ Bradley W. Fisher,

Bradley W. Fisher, President

ACCEPTED BY:

WESTERN NATIONAL BANK

By: /s/ Marshall N. Vicknair

Marshall N. Vicknair, Senior Vice President

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EX-10.14

EXHIBIT 10.14

FIRST AMENDMENT

TO

LOAN AGREEMENT

THIS FIRST AMENDMENT TO LOAN AGREEMENT (this “Amendment”) is entered into as of the 9^th day of August 2007, by and among CHANCELLOR GROUP, INC., a Nevada corporation, whose address for purposes of this Agreement is 216 S. Price Road, Pampa, Texas 79065 (“Chancellor”), GRYPHON PRODUCTION COMPANY, LLC, a Texas limited liability company, whose address for purposes of this Agreement is P. O. Box 742, Pampa, Texas 79066 (“Production”), and GRYPHON FIELD SERVICES, LLC, a Texas limited liability company, whose address for purposes of this Agreement is P. O. Box 742, Pampa, Texas 79066 (“Field Services”)(Chancellor, Production, and Field Services being collectively referred to herein as the “Borrowers”), and CAPWEST RESOURCES, INC., a Texas corporation, whose address for purposes of this Agreement is 508 West Wall Street, Suite 1100, Midland, Texas 79701 (the ALender@).

NOTICE IS TAKEN OF THE FOLLOWING:

A. Borrowers and Lender have previously entered into that certain Loan Agreement, dated as of April 13, 2007 (the “Loan Agreement”). Capitalized terms not otherwise defined, or re-defined herein, are defined in the Loan Agreement.

B. The Loan Agreement provides for an advancing line of credit/term loan in the amount of Ten Million and No/100 Dollars ($10,000,000.00), with an existing Borrowing Base in the amount of Three Million Seven Hundred Thousand ($3,700,000.00) (the “Loan”). The Loan is evidenced by an Advancing Line of Credit/Term Note, dated as of April 13, 2007, executed by the Borrowers in favor of the Lender (the “Note”). The Note is collateralized by second lien Deeds of Trust covering oil and gas properties in Carson and Gray Counties, Texas (collectively, the “Deeds of Trust”), as well as equipment and other personal property identified in and covered by the Security Agreement, and the Warrants.

C. The Borrowers have asked the Lender to modify the Loan to reflect an increase in the Borrowing Base from Three Million Seven Hundred Thousand Dollars ($3,700,000.00) to Three Million Nine Hundred Fifty Thousand Dollars ($3,950,000.00), and the Lender has agreed to that request. In consideration of the Lender’s consent to their requested increase in the Borrowing Base, the Borrowers have agreed to the modification of various covenants found in the Loan Agreement.

D. The Borrowers and the Lender have agreed to execute this Amendment in order to recognize the increase in the Borrowing Base of the Loan and the modification of various covenants found in the Loan Agreement.

NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the terms of the Loan Agreement as follows:

1. Definitions.

Unless otherwise specifically defined herein, all defined terms used in this Amendment shall have their respective meanings set forth in the Loan Agreement. Capitalized terms not otherwise defined herein shall have the same definitions assigned to them under the terms of the Loan Agreement.

2.Amendments.

A. The definition of “Contractual Rights” found in the Loan Agreement is hereby amended by deleting it in its entirety and substituting the following:

“Contractual Rights” means that certain personal property interest in contractual rights, created pursuant to the terms of the Loan Agreement, which shall now be increased from fifteen percent (15%) to twenty percent (20%) of Borrowers’ Gross Oil and Gas Proceeds, as defined in the Loan Agreement, derived and produced from Borrowers’ Mineral Interests in those certain oil and gas leases and wells located in Carson and Gray Counties, Texas, as set forth in the Loan Agreement. The additional five percent (5%) of such proceeds shall be conveyed to Lender by Borrowers under that certain Bill of Sale and Assignment of Contractual Rights, dated of even date herewith, by and among Borrowers and Lender.

B. Subsection 2.2 (a) of the Loan Agreement is hereby amended by deleting it in its entirety and substituting the following:

2.2 - Borrowing Base.

(a) The Borrowing Base is hereby established at $3,950,000.00.

C. Article VI of the Loan Agreement is hereby amended by adding the following sections:

6.16 - Interest Payments. On or before August 20, 2007, Chancellor agrees to tender to Lender all accrued and owing interest payments, specifically including, but not limited to those interest payment due as of July 30, 2007, and the Borrowers agree to be completely current on all interest payment due and accrued on or before August 30, 2007. Lender agrees to accept payments of interest only (and not payments based upon Borrowers’ Gross Oil and Gas Proceeds) through December 30, 2007. Thereafter, as to all payments beginning with the one to be made on January 30, 2008, payments shall be tendered based upon the formula provided in the Loan Agreement under Section 2.4.

6.17 - Use of Loan Proceeds Attributable to the Increased Borrowing Base. Borrowers agree that out of the loan proceeds attributable to Lender’s consent to the increase in the Borrowing Base provided for in this Amendment, Borrowers will use a maximum of Eighty Thousand Dollars ($80,000.00) of such proceeds for the payment of operating expenses, and a minimum of One Hundred and Seventy Thousand Dollars ($170,000.00) for the purpose of restoring existing oil and gas wells to productive status.

6.18 -Equity Contributions. On or before October 31, 2007, Borrowers shall have obtained an additional equity contribution of Two Hundred Fifty Thousand Dollars ($250,000.00).

6.19 -Reduction in General and Administrative Expenses. Borrowers agree to reduce their consolidated general and administrative expenses paid to members of its management team to a maximum of Twenty Thousand Dollars ($20,000.00), beginning with those payments to be tendered to such management team members for their services during the month of August. Borrowers agree to maintain such general and administrative expenses at this level until such time as Borrowers have fulfilled the covenant stated in Section 6.18 above and have demonstrated to the satisfaction of the Lender (acting in its sole and absolute discretion) that the Borrowers have met, and are continuing to meet, the forecasts for monthly production, revenues, and expenses, as stated in the pro forma business plan that Borrowers presented to the Lender in connection with their application for the Loan.

6.20 - Budgeted Oil and Gas Sales Figures. Borrowers agree that they will reach the budgeted oil and gas sales figures of 5,300 barrels of oil (“BO”)(with net production to Borrowers of 4,134 BO) and 10,000 million cubic feet (“MCFG”) of natural gas production (producing net production to Borrowers of 8,750 MCFG), forecast in their pro forma business plan, and attain a producing well count of 245 wells on or before December 31, 2007. Should Borrowers fail to fulfill this covenant, they agree to reduce the general and administrative expenses provide for in Section 6.19 above from the amount of Twenty Thousand Dollars ($20,000.00) to the amount of Ten Thousand Dollars ($10,000.00), beginning with general and administrative expenses paid to management for the month of January 2008.

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6.21 - Bank Statements from Bank of America, N.A. Within fifteen (15) days of the execution of this Amendment, Borrowers shall provide Lender with copies of any and all statements that they have received from Bank of America, N.A. in Pampa, Texas. Following the initial delivery of copies of such statements, Borrowers shall continue to provide Lender with such copies, by transmitting such a copy to Lender, via certified mail, return receipt requested, or electronically, on or before fifteen (15) days after their receipt of such a statement.

D. Section 7.1 of the Loan Agreement is hereby amended by adding the following sections:

7.1 - Consolidated Debt Service Coverage Ratio. Beginning with the financial reports due for July 2007, Borrowers shall attempt to comply with Section 7.1 of the Loan Agreement by not permitting their Consolidated Debt Service Coverage Ratio to be less than 1.1 to 1.0 at any time. As stated in the Loan Agreement, the Consolidated Debt Service Coverage Ratio shall be calculated monthly based upon year-to-date figures for the current calendar year, beginning on July 1, 2007, and shall be reported to Lender by Borrowers within forty-five (45) days after the end of each calendar month. Should Borrowers be unable to fulfill this negative covenant or the covenant covering the same matter in the Senior Loan Agreement, the Lender agrees to reduce its minimum Consolidated Debt Service Coverage Ratio to the same level as that required by the Senior Lender, until December 31, 2007, at which point the Lender’s original ratio shall be automatically reinstated into the terms of this Loan Agreement.

3.Effectiveness.

A. Except to the extent specifically amended and supplemented hereby, all of the terms, conditions and provisions of the Loan Agreement shall remain unmodified, and the Loan Agreement, as amended and supplemented by this Amendment, is ratified and confirmed as being in full force and effect.

B. All references to the Loan Agreement herein or in any other document or instrument between Borrower and Lender shall hereinafter be construed to be references to the Loan Agreement as modified by this Amendment.

4. Counterparts: This Amendment may be executed in any number of counterparts, each of which when executed and delivered shall be deemed an original, but all of which constitute one instrument. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto.

5. Notice of Final Agreement:

THIS WRITTEN AGREEMENT AND ANY OTHER INSTRUMENTS EXECUTED BY THE PARTIES CONTEMPORANEOUSLY HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

{The remainder of this page is intentionally left blank. Signature page follows.}

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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written.

BORROWERS:
CHANCELLOR GROUP, INC.
By:	/s/ Bradley Fischer
	BRADLEY FISCHER
	President

	GRYPHON PRODUCTION COMPANY, LLC
By:	By: /s/ Bradley Fischer
	BRADLEY FISCHER President

	GRYPHON FIELD SERVICES, LLC
By:	By: /s/ Bradley Fischer
	BRADLEY FISCHER President

	LENDER:
	CAPWEST RESOURCES, INC.
By:	By: /s/ Mark McKinney
	MARK D. MCKINNEY President

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EX-10.15

EXHIBIT 10.15

BILL OF SALE AND ASSIGNMENT OF CONTRACTUAL RIGHTS

STATE OF TEXAS	§
	§
COUNTIES OF CARSON	§
	§
AND GRAY	§

THIS BILL OF SALE AND ASSIGNMENT OF CONTRACTUAL RIGHTS (the “Bill of Sale”) is made and entered into as of the 9^th day of August 2007, by and among CHANCELLOR GROUP, INC., a Nevada corporation, whose address is 216 S. Price Road, Pampa, Texas 79065 ("Chancellor"), GRYPHON PRODUCTION COMPANY, LLC, a Texas limited liability company, whose address is P.O. Box 742, Pampa, Texas 79066 ("Gryphon Production"), and GRYPHON FIELD SERVICES, LLC, a Texas limited liability company, whose address is P.O. Box 742, Pampa, Texas 79066 ("Gryphon Field Services") (collectively, with Chancellor and Gryphon Production, individually and collectively, the “Seller”), and CAPWEST RESOURCES, INC., a Texas corporation, whose address is 508 West Wall Street, Suite 1100, Midland, Texas 79701 (the “Purchaser”). The Seller and the Purchaser are sometimes hereinafter collectively referred to as the “Parties”.

NOTICE IS TAKEN OF THE FOLLOWING:

A. The Parties have previously entered into that certain Loan Agreement, dated as of April 13, 2007 (the “Loan Agreement”). Pursuant to the terms of the Loan Agreement, the Purchaser has agreed to advance to the Seller an advance term loan, in the original principal amount of Ten Million and No/100 Dollars ($10,000,000.00) (the “Loan”). The Loan is evidenced by that certain Advancing Line of Credit/ Term Note, in the original principal amount of Ten Million and No/100 Dollars ($10,000,000.00), executed by Seller, as Maker, in favor of the Purchaser (the “Note”), and the Seller’s performance under that Note is secured by those certain Deeds of Trust, Mortgages, Security Agreements, Assignments of Production and Financing Statements, to be recorded in Carson and Gray Counties, Texas, among other documents (the “Deeds of Trust”). Additionally, the Parties have entered into that certain First Amendment to Loan Agreement, dated of even date herewith (the “First Amendment”).

B. The parties have also entered into that certain Bill of Sale and Assignment of Contractual Rights, also dated as of April 13, 2007, and recorded respectively in Volume 45, Page 206 of the Official Public Records of Carson County, Texas and Volume 861, Page 1700 of the Official Public Records of Gray County, Texas (the “Original Bill of Sale”). Under the terms of the Original Bill of Sale, the Seller conveyed to the Purchaser an additional fifteen percent (15.0%) of the Gross Oil and Gas Proceeds, as defined therein. This Bill of Sale conveys an interest that is in addition to, but not in lieu of, the interest conveyed under the Original Bill of Sale. As so amended, the Loan Agreement, the Note, and the Deeds of Trust are collectively referred to as the “Loan Papers.”

B. The Parties have agreed to enter into this Bill of Sale in furtherance of the terms, conditions and obligations between the Parties, as more particularly set forth in the Loan Papers.

C. The Parties make reference to the Loan Papers and incorporate the same herein by reference insofar as the same relate to this Bill of Sale for all purposes, counterparts of said Loan Papers, being in the possession of each of the Parties.

NOW THEREFORE, for and in consideration of Ten Dollars ($10.00) in hand paid by Purchaser, the receipt of which is acknowledged by Seller, and the mutual promises contained in the Loan Papers, Seller hereby sells, assigns, transfers, and sets over to Purchaser, its successors and assigns, to commence as set out below, a personal property interest in contractual rights, and not an interest in real property, equal to five percent (5%) of the Gross Oil and Gas Proceeds (as the phrase “Gross Oil and Gas Proceeds” is defined herein), derived and produced from Seller's Mineral Interests in those certain oil and gas leases and wells located in Carson and Gray Counties, Texas, and more particularly described on Exhibit “A” attached hereto and incorporated herein for all purposes, Seller's Mineral Interests therein, as of the date hereof, being also set forth on Exhibit “A” (collectively, the “Mortgaged Property”).

For purposes of this Bill of Sale, “Gross Oil and Gas Proceeds” means for any period, the aggregate amount of all revenue paid to and received by Borrower and derived from any disposition of oil, gas, or associated hydrocarbons, and any revenues derived from the sale or settlement of crude oil or natural gas options attributable to the Mortgaged Properties, less all: (a) amounts attributable to production, severance, excise, ad valorem, windfall profits or any other tax or assessment against the Mortgaged Properties or levied on or measured by production; (b) payments due to other working interest owners in the Mortgaged Property; (c) payments due to the owners (other than Borrower) of any royalties, overriding royalties, net profits interests (other than the interest of CapWest Resources, Inc. in overriding royalty interests and Contractual Rights, as provided for under the Subordinate Loan Agreement), production payments and any other similar interests which are payable out of or attributable to any production of such oil, gas, or associated hydrocarbons in existence as of the date of this Agreement; and (d) payments for delay rentals, shut-in royalty payments and other similar types of payments to lessors or similar parties reasonably required to maintain the Mortgaged Properties in effect.

Seller represents to Purchaser that it is the owner of an undivided interest in the Mortgaged Property, and has the authority and power to make this Bill of Sale to Purchaser of five percent (5%) of the Gross Oil and Gas Proceeds (the “Contractual Rights”) derived and produced from Seller’s Mineral Interests in the Property.

The Contractual Rights assigned shall be paid within ten (10) days of the receipt of such proceeds by Seller, the payments to Purchaser to commence effective the first day of the month following Payout all as more particularly set forth in the Loan Agreement of even date herewith, and this Bill of Sale shall be recorded in accordance with the terms and conditions of said Loan Agreement, and as provided below.

Purchaser shall have and hold said Contractual Rights unto Purchaser, its successor and assigns. For the same consideration Seller covenants with and warrants to Purchaser that the Contractual Rights are free and clear of all liens and encumbrances, and that Seller will warrant and forever defend the title thereto unto Purchaser, its successors and assigns, against all persons whomsoever lawfully having or claiming an interest therein by, through or under Seller, but none other.

The Loan Papers are incorporated herein by reference for a more particular description of the Contractual Rights, their manner of computation, certain provisions governing the sale of the Contractual Rights by Purchaser or in combination with the sale of Seller's Mineral Interests in the Property and for all other pertinent purposes. To the extent there is a conflict between the terms of this Bill of Sale and the terms of the Loan Papers or the Loan Papers contain terms pertaining to the Contractual Rights not contained herein, the terms of the Loan Papers shall control.

This Bill of Sale maybe executed in any number of counterparts, each of which shall be deemed to be an original, and each of which can be recorded in the county records, but all of which taken together shall constitute one and the same instrument. Seller and Purchaser agree that Purchaser shall gather all such counterparts and is authorized to take the same apart and reassemble the parts into one complete counterpart, copies of which will be delivered to Seller.

As stated, the contractual interest conveyed under this Bill of Sale is in addition to, and not in lieu of, the interest conveyed under the Original Bill of Sale. This Bill of Sale is executed and delivered on the day and year first written above, but effective as of the date of recording of this Bill of Said under the terms of the Loan Agreement.

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	CHANCELLOR GROUP, INC.
216 S. Price Road Pampa, Texas 79065
	By:	/s/ Bradley Fischer
		Bradley W. Fischer
		President

	GRYPHON PRODUCTION COMPANY, LLC
P.O. Box 742 Pampa, Texas 79066
	By:	/s/ Bradley Fischer
		Bradley W. Fischer
		President

	GRYPHON FIELD SERVICES, LLC
P.O. Box 742 Pampa, Texas 79066
	By:	/s/ Bradley Fischer
		Bradley W. Fischer
		President

		SELLER
	CAPWEST RESOURCES, INC.
508 West Wall Street, Suite 1100 Midland, Texas 79701
	By:	/s/ Mark McKinney
		MARK D. MCKINNEY
		President
		PURCHASER

THE STATE OF                    TX	§
	§
COUNTY OF                  GRAY	§

This instrument was acknowledged before me on the 21day of August 2007 by BRADLEY FISCHER, President of CHANCELLOR GROUP, INC., a Nevada corporation, on behalf of said corporation.

/s/ Brandi Wyatt

Notary Public, State of

THE STATE OF                    TX	§
	§
COUNTY OF                  GRAY	§

This instrument was acknowledged before me on the 21 day of August 2007 by BRADLEY FISCHER, President of GRYPHON PRODUCTION COMPANY, LLC, a Texas limited liability company, on behalf of said company.

/s/ Brandi Wyatt

Notary Public, State of

THE STATE OF                    TX	§
	§
COUNTY OF                  GRAY	§

This instrument was acknowledged before me on the 21 day of August 2007 by BRADLEY FISCHER, President of GRYPHON FIELD SERVICES, LLC, a Texas limited liability company, on behalf of said company.

/s/ Brandi Wyatt

Notary Public, State of

THE STATE OF TEXAS	§
	§
COUNTY OF MIDLAND	§

This instrument was acknowledged before me on the 28th day of August 2007, by MARK D. MCKINNEY, President of CAPWEST RESOURCES, INC., a Texas corporation, on behalf of said corporation.

/s/ Sandy Pruitt

Notary Public, State of Texas

EX-10.16

EXHIBIT 10.16

FIRST MODIFICATION AND AMENDMENT

TO

ADVANCING LINE OF CREDIT/TERM NOTE

THIS FIRST MODIFICATION AND AMENDMENT TO ADVANCING LINE OF CREDIT/TERM NOTE (this “Modification”) is entered into as of the 9^th day of August 2007, by and among CHANCELLOR GROUP, INC., a Nevada corporation, whose address for purposes of this Agreement is 216 S. Price Road, Pampa, Texas 79065 (“Chancellor”), GRYPHON PRODUCTION COMPANY, LLC, a Texas limited liability company, whose address for purposes of this Agreement is P. O. Box 742, Pampa, Texas 79066 (“Production”), and GRYPHON FIELD SERVICES, LLC, a Texas limited liability company, whose address for purposes of this Agreement is P. O. Box 742, Pampa, Texas 79066 (“Field Services”)(Chancellor, Production, and Field Services being collectively referred to herein as the “Maker”), and CAPWEST RESOURCES, INC., a Texas corporation, whose address for purposes of this Agreement is 508 West Wall Street, Suite 1100, Midland, Texas 79701 (the ALender@).

NOTICE IS TAKEN OF THE FOLLOWING:

A. Maker and Lender have previously entered into that certain Loan Agreement, dated as of April 13, 2007 (the “Loan Agreement”). Capitalized terms not otherwise defined, or re-defined herein, are defined in the Loan Agreement.

B. The Loan Agreement provides for an advancing line of credit/term loan in the amount of Ten Million and No/100 Dollars ($10,000,000.00), with an existing Borrowing Base in the amount of Three Million Seven Hundred Thousand ($3,700,000.00) (the “Loan”). The Loan is evidenced by an Advancing Line of Credit/Term Note, dated as of April 13, 2007, executed by the Maker in favor of the Lender (the “Note”). The Note is collateralized by second lien Deeds of Trust covering oil and gas properties in Carson and Gray Counties, Texas (collectively, the “Deeds of Trust”), as well as equipment and other personal property identified in and covered by the Security Agreement, and the Warrants.

C. The Maker and the Bank have now entered into that certain First Amendment to Loan Agreement, dated of even date herewith (the “First Amendment”). Pursuant to the terms of the First Amendment, the Maker and the Bank have agreed to enter into this Modification in order to effect the amendments in the Note, to which they have now agreed.

NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend the terms of the Loan Agreement as follows:

1. Definitions.

Unless otherwise specifically defined herein, all defined terms used in this Modification shall have their respective meanings set forth in the Loan Agreement. Capitalized terms not otherwise defined herein shall have the same definitions assigned to them under the terms of the Loan Agreement.

2.Amendments.

Paragraph 8 of the Note is hereby amended by deleting it in its entirety and substituting the following:

On or before August 20, 2007, Maker shall pay to Lender all accrued, but unpaid, interest payments, specifically including, but not limited to, those interest payments due as of July 30, 2007. Further, the Maker shall pay to Lender the regularly scheduled interest payment due on or before August 30, 2007. If Maker tenders these interest payments as agreed, then Lender agrees to accept monthly payments of interest only, beginning on September 30, 2007 and continuing through December 31, 2007. Beginning on January 31, 2008, Maker shall make payments of outstanding principal and interest, on a monthly basis, in an amount equal to the greater of: (a) fifty-one percent (51%) of Borrower’s Gross Oil and Gas Proceeds, as defined in the Loan Agreement, or (b) the accrued interest due on a monthly basis under the terms of this Note, the first such payment to be made on January 31, 2008, and thereafter on the last Business Day of each succeeding month until May 15, 2010, the date of final maturity hereunder at which point all outstanding principal and accrued interest shall be due. All payments shall be first applied to: (a) the payment of accrued interest and principal due and owing on the Senior Debt; (ii) to the payment of accrued interest due and owing on the Subordinate Facility; and (iii) to principal due and outstanding under the Subordinate Debt. Following full and final payment of the Senior Debt, payments will continue to be due to the Subordinate Lender on the last day of each month. Interest shall be computed and paid by Borrower upon the actual amount advanced to Borrower. Adjustments in the Variable Rate may be made by Lender, from time to time, as the Prime Rate may change.

3.Effectiveness.

A. Except to the extent specifically amended and supplemented hereby, all of the terms, conditions and provisions of the Note shall remain unmodified, and the Note, as amended and supplemented by this Modification, is ratified and confirmed as being in full force and effect.

B. All references to the Note herein or in any other document or instrument between Borrower and Lender shall hereinafter be construed to be references to the Note as modified by this Modification.

4. Counterparts: This Modification may be executed in any number of counterparts, each of which when executed and delivered shall be deemed an original, but all of which constitute one instrument. In making proof of this Modification, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto.

5. Notice of Final Agreement:

THIS WRITTEN AGREEMENT AND ANY OTHER INSTRUMENTS EXECUTED BY THE PARTIES CONTEMPORANEOUSLY HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

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IN WITNESS WHEREOF, the parties hereto have executed this Modification as of the date and year first above written.

MAKER:
CHANCELLOR GROUP, INC.
By:	/s/ Bradley Fischer
	BRADLEY FISCHER
	President

GRYPHON PRODUCTION COMPANY, LLC
By:	/s/ Bradley Fischer
	BRADLEY FISCHER
	President

GRYPHON FIELD SERVICES, LLC
By:	/s/ Bradley Fischer
	BRADLEY FISCHER
	President