10-Q 1 v132205_10q.htm

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 September 30, 2008

¨	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
(Address of principal executive offices)		(Zip Code)

(806-688-9697)

(Issuer's telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. (Check One):

Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer ¨		Smaller reporting company x
(Do not check if a smaller reporting company)

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding the issuer's common stock, $.001 par value, was 63,802,781 as of November 14, 2008.

Table of Contents

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

Item 2.	Management's Discussion and Analysis or Plan of Operation	11

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	14

Item 4T.	Controls and Procedures	15

PART II

Item 5.	Other Information	15

Item 6.	Exhibits	15

EXHIBIT INDEX		16

Item 1. Financial Statements

Chancellor Group, Inc.

I N D E X

		Page No.

Balance Sheets as at September 30, 2008 and December 31, 2007 (Unaudited)		2

Statements of Operations
For the Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited)		3

Statements of Cash Flows
For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)		4

Notes to Financial Statements (Unaudited)		5-10

Chancellor Group, Inc.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2008			December 31, 2007
ASSETS
Current Assets
Cash in Bank	$	3,744,096		$	218,118
Revenue Receivable		115,080			248,680
Prepaid Insurance		63,793			0
Total Current Assets		3,922,969			466,798

Fixed Assets
Leasehold Costs - Developed		1,182,198			4,938,564
Office Building & Equipment		132,065			126,073
Fleet - Road		134,402			62,263
Heavy Field Equipment & Tools		182,535			405,593
Accumulated Depreciation		( 226,354	)		(411,495	)
Total Fixed Assets		1,404,846			5,120,998

Other Assets
Unamortized Debt Expense		0			55,500
Unamortized Letter of Credit		2,084			0
Prepaid Long Term Hedge		22,200			70,848
Deposits		250			250
Total Other Assets		24,534			126,598

Total Assets	$	5,352,349		$	5,714,394

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts Payable — Chancellor	$	0		$	109,828
Accounts Payable – Gryphon Production		216,219			264,800
Accrued Interest Payable		0			113,028
Miscellaneous Accounts Payable & Suspense		11,697			10,044
Estimated Income Tax		465,000			0
Stock Subscription Payable		1,602			1,602
Total Current Liabilities		694,518			499,302

Long Term Liabilities
Note Payable — Senior Debt		0			2,108,332
Note Payable – Subordinated Debt		0			3,797,345
Installment Loan – Equipment		0			63,576
Note Payable - Investors		0			5,160
Total Long Term Liabilities		0			5,974,413

Stockholders’ Equity
Common Stock: $.001 par value, 250,000,000 shares authorized, 64,802,781 shares issued and outstanding		64,803			62,605
Paid in Capital		3,221,735			3,223,733
Retained Earnings		( 4,045,659	)		( 3,323,438	)
Net Income (Loss)		5,416,952			( 722,221	)
Total Stockholders’ Equity		4,657,831			( 759,321	)
Total Liabilities and Stockholders’ Equity	$	5,352,349		$	5,714,394

See Notes to Unaudited Consolidated Financial Statements

Chancellor Group, Inc.

CONSOLIDATED STATEMENT OF OPERATIONS

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

(Unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
	2008			2007			2008			2007
Sales - Net of Royalties Paid
Oil	$	331,665		$	887,892		$	1,852,948		$	1,156,335
Natural Gas		43,552			170,624			335,648			192,536
Other Income		38,960			2,165			38,960			2,165
Gross Revenue		414,177			1,060,681			2,227,556			1,351,036

Severance Taxes		9,620			52,881			99,764			66,762
Marketing Fees		0			7,194			13,213			8,669
Royalties Paid		0			10,454			14			10,454

Net Revenue		404,557			990,152			2,114,565			1,265,151

Operating Expenses
Lease Operating Expense		245,539			180,646			893,692			268,803
Other Operating Expense		30,216			299,365			617,797			653,762
General & Administrative Expense		149,458			77,213			214,256			165,298
Depreciation, Depletion & Amortization		71,989			137,109			302,664			273,922
Total Operating Expense		497,202			694,333			2,028,409			1,361,785

Income (loss) From Operations		( 92,645	)		295,819			86,156			( 96,634	)

Other Income (Expenses)
Interest		1,836			0			1,836			0
Sales of Assets (Net of Cost)		6,409,927						6,489,545
Organization Costs		( 0	)		( 0	)		( 0	)		( 49,299	)
Hedge Costs Amortization		( 14,800	)		( 11,100	)		( 33,300	)		( 22,200	)
Total Other Income (Expense)		6,396,963			( 11,100	)		6,458,081			( 71,499	)

Financing Charges
Interest		( 340,574	)		( 274,271	)		( 588,521	)		( 313,584	)
Bank Fees Amortization		( 48,899	)		( 14,170	)		( 73,764	)		( 28,339	)
Total Financing Charges		( 389,473	)		( 288,441	)		( 662,285	)		( 341,923	)

Income (Loss) before provision for Income Taxes		5,914,845			( 3,722	)		5,881,952			( 510,056	)

Provision for Income Taxes		465,000			0			465,000			0

Net Income (Loss)	$	5,449,845		$	( 3,722	)	$	5,416,952		$	( 510,056	)

Net Income (Loss) per Share (Basic and Fully Diluted)	$	0.0841		$	( *	)	$	0.0836		$	( *	)

Weighted Average Number of Common Shares
Outstanding		64,802,781			64,577,781			64,802,781			63,016,406

* Less than $.01 per Share

See Notes to Unaudited Consolidated Financial Statements

Chancellor Group, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

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

(Unaudited)

	2008			2007
Cash Flows From Operating Activities:
Net Income (loss)	$	86,156		$	( 96,634	)

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation & Amortization		( 185,142	)		273,922
(Increase) Decrease in Operating Assets		171,871			( 398,293	)
Increase (Decrease) in Operating Liabilities		195,217			( 276,205	)
Net Cash Provided by (used for) Operating Activities		268,102			( 497,210	)

Cash Flows From Investing Activities
Sale of Assets		9,824,890
Interest Income		1,836
Other Capital Expenditure		( 594,636	)		( 5,507,821	)
Net Cash Provided by (used for)
Investing Activities		9,232,090			( 5,507,821	)

Cash Flows From Financing Activities
Notes Payable		( 5,974,414	)		6,023,212
Paid in Capital		( 1,998	)		47,500
Sales of Common Stock		2,198			0
Net Cash Provided by (used for)
Financing Activities		( 5,974,214	)		6,070,712

Net Increase (Decrease) in Cash		3,525,978			65,681
Cash at the Beginning of the Period		218,118			829

Cash at the End of the Period	$	3,744,096		$	66,510

See Notes to Unaudited Consolidated Financial Statements

Chancellor Group, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

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

Organization

Chancellor Group, Inc. (the "Company") was incorporated in the State of Utah on May 2, 1986, and then, on December 31, dissolved as a Utah corporation and reincorporated as a Nevada corporation. The Company's primary business purpose is to engage in the exploration and production of oil and gas. In 1996 the Company's corporate name was changed from Nighthawk Capital, Inc. to Chancellor Group, Inc.

Operations

The Company is licensed by the Texas Railroad Commission as oil and gas producers and operators. The Company, and its wholly-owned subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services, LLC, own 131 wells, of which 62 are actively producing (two of which are natural gas wells). We also own and operate from our 15.9 acre property, with its shop, yard and office complex. The Company equipment includes two work-over rigs as well as other oil field related equipment.

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

As of September 30, 2008, 62 wells are producing. Productive capacity at September 30, 2008 is estimated to be 42 bopd and 24 mcfd gas. The oil is light sweet crude and the natural gas has very high heat content, 1600 to 2600 btu/scf.

Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Chancellor Group, Inc., and those of its wholly owned subsidiaries: Gryphon Production Company, LLC, and Gryphon Field Services, LLC. These entities are collectively hereinafter referred to as "the Company". Any inter-company accounts and transactions have been eliminated.

Oil and Gas Properties

The Company follows the successful efforts method of accounting for its oil and gas activities. Under this accounting method, costs associated with the acquisition, drilling and equipping of successful exploratory and development wells are capitalized. Geological and geophysical costs, delay rentals and drilling costs of unsuccessful exploratory wells are charged to expense as incurred. The carrying value of mineral leases is depleted over the minimum estimated productive life of the leases, or ten years. Undeveloped properties are periodically assessed for possible impairment due to un-recoverability of costs invested. Cash received for partial conveyances of property interests is treated as a recovery of cost and no gain or loss is recognized.

Income Tax

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Cash and Cash Equivalents

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

Accounting Year

The Company employs a calendar accounting year. The Company recognizes income and expenses based on the accrual method of accounting.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Net Income (loss) per share

The net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share.

Property and Equipment

Property and equipment are recorded at cost and depreciated under the straight line method over the estimated useful life of the equipment. This life is estimated to be five years. The useful life of the office building and warehouse is estimated to be 20 years.

Depletion

The carrying value of the mineral leases is depleted over the minimum estimated productive life of the leases, or ten years.

Accounts Receivable

The Company reviews accounts receivable periodically for collectibles and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary.

Products and Services, Geographic Areas and Major Customers

The Company plans to develop its domestic oil and gas properties, located in Gray and Carson counties, Texas, and possibly to acquire additional producing oil and gas properties. The Company’s major customers are Valero Marketing, DCP Midstream, and Eagle Rock Energy.

Revenue Recognition

The Company recognizes revenue when a product is sold to a customer, either for cash or as evidenced by an obligation on the part of the customer to pay.

Financial Instruments

The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and long term debt, as reported in the accompanying balance sheet, approximates fair value.

Employee Stock-Based Compensation

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

New Financial Accounting Standards

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

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

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

NOTE 2. INCOME TAXES

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

At December 31, 2007, the Company had approximately $4.6 million in unused federal net operating loss carry-forwards (NOL), which begin to expire principally in the year 2011. It is estimated that the entire NOL will be used this tax year. The resulting estimated income tax liability will be $465,000. The net operating loss carry-forward is not expected to be limited under the Change of Control provisions of the Internal Revenue Code section 382.

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

NOTE 3. STOCKHOLDERS' EQUITY

Common Stock

The Company has 250,000,000 authorized shares of common stock, par value $.001, with 64,802,781 shares issued and outstanding as of September 30, 2008 which was unchanged from the year end.

Preferred Stock

Preferred Series B Stock - The Company has provided for the issuance of 250,000 shares, par value $1,000 per share, of convertible Preferred Series B stock ("Series B"). Each Series B share is convertible at into 166.667 shares of the Company's common stock upon election by the shareholder, with dates and terms set by the Board. No shares of Series B preferred stock are outstanding.

Stock Options

Non-employee Stock Options

The Company accounts for non-employee stock options under SFAS 123 (as amended by SFAS 148), whereby options costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. During the years ended December 31, 2006 and 2007, no options were issued, exercised or cancelled. There were no stock options issued in the first quarter of 2008.

The Company currently has stock options outstanding in the following amounts: 2,000,000 options exercisable for one share of common stock at an exercise price of $0.025 per share, currently exercisable, expiring December 31, 2009, and 4,000,000 options exercisable for one share of common stock at an exercise price of $0.02 per share, currently exercisable, expiring December 31, 2009.

At the closing of the purchase of the Caldwell Assets, pursuant to an Agreement to Issue Warrants, dated April 13, 2007, with CapWest Resources, Inc. (“CapWest”), we had issued CapWest a warrant (“CapWest Warrants”) to purchase 2,000,000 shares of our common stock, at a purchase price of $0.001 per share. At the August 29, 2008 closing under the Agreement with Legacy, for a total additional consideration of $1,550,000, Capwest assigned the CapWest Warrants back to the Company for cancellation and conveyed to the Company the twenty (20%) percent production payment and two (2%) percent overriding royalty held by Capwest.

Employee Stock Options

The Company accounts for non-employee stock options under SFAS 123 (as amended by SFAS 148). The Company issued no employee stock options and had none outstanding at the end of 2005, 2006 or as of the close of the year ending December 31, 2007. There were no stock options issued in the first and second quarters of 2008.

NOTE 6. CONTINGENT LIABILITY

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

NOTE 7. LONG-TERM DEBT

To finance the acquisition of the assets purchased from Caldwell Production Company, Inc., on April 13, 2007, we closed on a Loan Agreement with Western National Bank (“WNB”) for a senior loan facility (the “WNB Loan Agreement”). At the closing of the purchase of the Caldwell Assets, we drew down $2.3 million under the WNB Loan Agreement. The interest rate under the WNB Loan Agreement was a variable rate equal to the prime rate as defined in this Agreement plus 2%, but in no event to be less than 9.25%.

On April 13, 2007, we had also entered into a Loan Agreement with CapWest for an advancing line of credit/term loan facility (the “CapWest Loan Agreement”), under which we drew down at closing $2,700,000 for the balance of the purchase price of the leases, $291,500 for the equipment, $111,000 for bank fees, legal expenses and associated costs, and $130,000 for initial working capital. The interest rate under the CapWest Loan Agreement was a variable rate equal to the prime rate as defined in this Agreement plus 4%. Under the CapWest Loan Agreement, CapWest had a 2% overriding royalty interest in the Leases.

At the August 29, 2008 closing of the sale of a portion of our oil and gas properties under the Agreement with Legacy described in Note 9, the notes held by our lenders, WNB and Capwest, plus interest thereon to the date of closing, were paid in full with payments of $2,063,549.53 and $4,220,617.47, respectively.

The Company had no long-term debt at September 30, 2008.

Note 8. ACCUMULATED COMPENSATED ABSENCES

It is the Company’s policy to permit employees to accumulate a limited amount of earned by unused vacation, which will be paid to employees upon separation from the Company’s service. The cost of vacation and sick leave is recognized when payments are made to employees. These amounts are immaterial and not accrued.

Note 9. SALE OF ASSETS

On April 16, 2007, the Company closed the acquisition of assets from Caldwell Production Company, Inc., consisting of 48 mineral leases with 631 wells, of which approximately 100 were believed to be producing wells and 531 inactive well bores equipped with necessary production equipment, and related operating facilities and equipment including an office warehouse facility, ten pickup trucks, two pulling rigs, a backhoe, a winch truck and a water truck. The purchase price for such oil field equipment was $291,500. The purchase price for the mineral leases and an existing office building, including an attached warehouse/shop building valued at $81,630, was $5,000,000. The oil and natural gas leases purchased were on approximately 14,000 acres in Gray and Carson Counties, Texas, with a well spacing of 10 acres, and are in the Panhandle Field, discovered in 1920. After closing the acquisition, the Company opened corporate offices for our production and oil field service subsidiaries at the purchased facilities in Pampa, Texas.

To finance the acquisition of the assets purchased from Caldwell Production Company, Inc., on April 13, 2007, we drew down $2.3 million under the WNB Loan Agreement. On April 13, 2007, we also drew down at closing under the CapWest Loan Agreement $2,700,000 for the balance of the purchase price of the leases, $291,500 for the equipment, $111,000 for bank fees, legal expenses and associated costs, and $130,000 for initial working capital.

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

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

The financial statements for the three- and nine-month periods ended September 30, 2008, reflect the sale of the Oil and Gas Assets, effective retroactively to June 1, 2008. The following is the details of the sale and closing costs.

Sales Price			$	13,250,000
Adjustments to Sales Price
Estimated Liability for Well Plugging Expense				( 110,000	)
Retention of HH Merten Lease				( 9,642	)
			$	13,130,358
Closing Costs and Other Related Expenditures
Acquisition of Warrants	$	850,000
Acquisition of 2% ORRI		700,000
Acquisition of 6% ORRI		232,500
Acquisition of Treasury Stock		110,000
Commissions		232,500
Legal		350,494
Other		1,599
Notes payable (including accrued interest)		6,284,167		(8,761,260	)

Net Received from Sale			$	4,369,098

Note 10. RELATED PARTY TRANSACTIONS

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

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

The Company has used the services of a consulting company owned by the Chairman of the Board. The Company has paid $84,000 for those services this year.

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

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

We are in the business of acquisition, exploration, and development of natural gas and oil properties, and have completed an initial acquisition of oil and gas leases and related facilities and equipment as described below under “Plan of Operation.” This acquisition was financed with debt provided by Western National Bank (“WNB”) and CapWest Resources, Inc. (“CapWest”). As set forth in detail below, on October 30, 2007, we had filed for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court, Northern District of Texas. We operated the Company in the bankruptcy proceeding until August 15, 2008, when the Court issued an order dismissing the bankruptcy cases of the Company and of its two operating subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services, LLC.

On July 22, 2008, we had entered into an Agreement, effective as of June 1, 2008 with Legacy Reserves Operating LP (“Legacy”) for the sale of oil and gas wells accounting for approximately 70% of our oil and gas production to Legacy for a purchase price of $13,250,000. At the August 29, 2008 closing under this Agreement with Legacy, the notes held by our lenders, WNB and CapWest, plus interest thereon to the date of closing, were paid in full.

Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.PK. As of November 1, 2008, there were 63,802,781 shares of our common stock issued and outstanding.

Nine Months Ended September 30, 2008

We had no production operations in the first quarter of calendar year 2007. Our oil production operations began April 16^th, 2007 with an effective date of April 1^st, 2007. During the period ending December 31, 2007 we produced 23,120 barrels of oil and produced 55,831 mcf gas. We had 84 wells actually producing oil and gas on April 16, 2007 and restored an additional 119 wells by December 31, 2007. In the nine month period ended September 30, 2008, giving effect retroactively to June 1, 2008, of the sale of 492 producing oil and gas wells to Legacy Reserves Operating LP, we produced from 18,565 barrels of oil and 43,058 mcf gas, while generating revenues of $2,188,597. At September 30, 2008, we had 62 wells actually producing.

Three Months Ended September 30, 2008

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

PLAN OF OPERATION

On April 16, 2007, we closed the acquisition of assets from Caldwell Production Company, Inc., consisting of 48 mineral leases with 631 wells, of which approximately 100 were thought to be producing wells and 531 inactive well bores equipped with necessary production equipment, and related operating facilities and equipment including an office warehouse facility, ten pickup trucks, two pulling rigs, a backhoe, a winch truck and a water truck. The purchase price for the mineral leases and an existing office building including an attached warehouse/shop building valued at $81,630, was $5,000,000, and for the equipment $291,500. The oil and natural gas leases purchased are on approximately 14,000 acres in Gray and Carson Counties, Texas, with a well spacing of 10 acres, and are in the Panhandle Field, discovered in 1920. After closing the acquisition, we has opened corporate offices for our production and oil field service subsidiaries at the purchased facilities in Pampa, Texas. After the initial acquisition, the Gryphon Production Company subsidiary we have acquired additional trucks, including an electrical repair “bucket” truck, which is needed to restore electric power to several previously non-producing wells. The cost of this additional equipment was $34,000 and associated tools and equipment was $6,422. We have also acquired a replacement backhoe machine for $67,000. Subsequently, additional field equipment and tools were purchased for $31,184. We were also required to invest $38,949 in the rehabilitation and restoration of the office building.

We commenced operations on April 16, 2007 with what were 84 actually producing wells.

As of September 30, 2008, following the sale of producing oil and gas wells accounting for approximately 80% of our oil and gas production to Legacy, 62 wells are producing. Productive capacity on September 30, 2008 was estimated to be 42 bopd and 24 mcfd. The oil is light sweet crude and the natural gas has very high heat content, 1600 to 2600 btu/scf.

The following table is for the three months ended:

	September 30, 2008		September 30, 2007
Oil and Gas Sales
Oil Sales(Bbl)		2,521		9,131
Natural Gas Sales (Mcf)		1,539		23,689

Average Sales Price:
Oil, per Bbl:		131.57		76.59
Gas, per MMCF:		15.87		6.8

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

Generally, in managing our business we must deal with many factors inherent in our industry. First and foremost is wide fluctuation of oil and gas prices. Oil and gas markets are cyclical and volatile, with future price movements difficult to predict. While our revenues are a function of both production and prices, wide swings in prices often have the greatest impact on our results of operations.

Our operations entail significant complexities. Advanced technologies requiring highly trained personnel are utilized in restoration of wells and production. The oil and gas industry is highly competitive. We compete with major and diversified energy companies, independent oil and gas companies, and individual operators. In addition, the industry as a whole competes with other businesses that supply energy to industrial, commercial, and residential end users. Our ability to recruit and retain experienced personnel is vital to the success of our endeavors.

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

On October 30, 2007, due to notices of default received from WNB and CapWest, we filed a bankruptcy petition under Chapter 11 of the United States Bankruptcy Code, and our operating subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services, LLC, filed bankruptcy petitions under Chapter 11 of the Code on October 29 and October 30, 2007, respectively. We filed a Plan of Reorganization on March 1, 2008, and an amendment thereto on April 21, 2008. We operated the Company in the bankruptcy proceeding until August 15, 2008, when the Bankruptcy Court issued an order dismissing the bankruptcy cases of the Company and of its two operating subsidiaries.

Sale of Oil and Gas Assets to Legacy Reserves Operating LP

On July 22, 2008, we had entered into an Agreement, effective as of June 1, 2008, with Legacy for the sale of oil and gas wells accounting for approximately 80% of our oil and gas production to Legacy for a purchase price of $13,250,000. At the August 29, 2008 closing under this Agreement, the notes held by our lenders, WNB and Capwest, plus interest thereon to the date of closing, were paid in full.

LIQUIDITY AND CAPITAL RESOURCES

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

CRITICAL ACCOUNTING POLICIES

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

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

New Financial Accounting Standards

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Credit Risk – Our accounts receivables are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area.

Commodity Price Risk – We are exposed to market risks related to price volatility of crude oil and natural gas. The prices of crude oil and natural gas affect our revenues, since sales of crude oil and natural gas comprise all of the components of our revenues. A decline in crude oil and natural gas prices will likely reduce our revenues, unless we implement offsetting production increases. We do not use derivative commodity instruments for trading purposes.

ITEM 4T. CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Principal Financial Officer is primarily responsible for the accuracy of the financial information that is presented in this quarterly Report. This officer has as of the close of the period covered by this Quarterly Report, evaluated the Company's disclosure controls and procedures (as defined in Rules 13a-4c and 15d-14c promulgated under the Securities Exchange Act of 1934) and determined that such controls and procedures were effective in ensuring that material information relating to the Company was made known to him during the period covered by this Quarterly Report. In his evaluation, no changes were made to the Company's internal controls in this period that have materially affected, or are reasonably likely materially to affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 5. OTHER INFORMATION.

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

ITEM 6. Exhibits.

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

32	Certification of Principal Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Chancellor Group, Inc.
		(Registrant)

	By:	/s/ Thomas Grantham
		President (Principal Executive Officer) and
		Chief Financial Officer

Dated: November 14, 2008

EXHIBIT INDEX

Exhibit Number		Description

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.