- Quarterly Report (10-Q)

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 March 31, 2009

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.

(Exact Name of Registrant as Specified in Its Charter)

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

216 South Price Road, Pampa, TX 79065		79065
(Address of Principal Executive Offices)		(Zip Code)

(806-688-9697)

(Registrant's Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding the issuer's common stock, $.001 par value, was 66,382,781 as of May 19, 2009.

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			16

Item 4T. Controls and Procedures			16

PART II

Item 1. Legal Proceedings			16

Item 6. Exhibits			16

EXHIBIT INDEX			17

Item 1. Financial Statements

Chancellor Group, Inc.

I N D E X

	Page No.
Balance Sheets as at March 31, 2009 and December 31, 2008 (Unaudited)		2

Statements of Operations
For the Three Months Ended March 31, 2009 and 2008 (Unaudited)		3

Statements of Cash Flows
For the Three Months Ended March 31, 2009 and 2008 (Unaudited)		4

Notes to Unaudited Financial Statements		5-10

CHANCELLOR GROUP, INC.

Consolidated Balance Sheets

(Unaudited)

	March 31, 2009			December 31, 2008
ASSETS
Current Assets
Cash in Bank	$	1,855,764		$	2,531,525
Revenue Receivable		65,919			201,455
Prepaid Insurance		8,909			23,665
Federal Income Tax Refund Receivable		43,603			0
Total Current Assets		1,974,195			2,756,645

Fixed Assets
Leasehold Costs – Developed		1,566,926			1,396,252
Office Building & Equipment		132,065			132,065
Fleet – Road		241,844			218,661
Heavy Field Equipment & Tools		452,679			442,746
Accumulated Depreciation		(329,493	)		(262,478	)
Total Fixed Assets		2,064,021			1,927,246

Other Assets
Unamortized Letter of Credit		0			833
Prepaid Long Term Hedge		0			11,100
Deposits		250			4,975
Deferred Tax Assets		49,502			0
Total Other Assets		49,752			16,908

Total Assets	$	4,087,968		$	4,700,799

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Due to Related Party	$	36,500		$	36,500
Accounts Payable – Gryphon Production		53,628			224,598
Accrued Interest Payable		0			0
Miscellaneous Accounts Payable & Suspense		8,144			5,949
Federal Income Tax Payable		0			52,229
State Income Tax Payable		64,674			64,674
Stock Subscription Payable		1,602			1,602
Total Current Liabilities		164,548			385,552

Long Term Liabilities
Deferred Tax Liability		138,817			126,802
Total Long Term Liabilities		138,817			126,802

Stockholders’ Equity
Common Stock: $.001 par value, 250,000,000
shares authorized, 65,232,781 shares
issued and outstanding including 1,000,000
shares held as treasury stock		65,233			65,233
Paid in Capital		3,229,905			3,229,905
Retained Earnings		929,807			(4,045,659	)
Treasury Stock		(36,500	)		(36,500	)
Net Income (Loss)		(403,842	)		4,975,466
Total Stockholders’ Equity		3,784,603			4,188,445
Total Liabilities and Stockholders’ Equity	$	4,087,968		$	4,700,799

See Notes to Unaudited Consolidated Financial Statements

Chancellor Group, Inc.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008

(Unaudited)

	March 31, 2009			March 31, 2008
Sales – Net of Royalties Paid to Others
Oil	$	99,148		$	786,495
Natural Gas		18,986			149,709
Other Income		18,975			1,150
Gross Revenue		137,109			937,354

Severance Taxes		5,944			46,501
Marketing Fees		0			7,733
Royalties Paid		0			12

Net Revenue		131,165			883,108

Operating Expenses
Lease Operating Expense		139,190			317,665
Other Operating Expense		343,361			344,469
General & Administrative Expense		85,441			16,735
Depreciation, Depletion & Amortization		67,014			138,287
Total Operating Expense		635,006			817,156

Income (loss) From Operations		(503,841	)		65,952

Other Income (Expenses)
Interest Income		3,270			0
Hedge Income		71,660			0
Hedge Costs Amortization		(11,100	)		(11,100	)
Total Other Income (Expense)		63,830			(11,100	)

Financing Charges
Interest		24			150,319
Bank Fees Amortization		1,294			14,170
Total Financing Charges		1,318			164,489

Income (Loss) before provision for Income Taxes		(441,329	)		(109,637	)

Provision for Income Taxes		(37,487	)		0

Net Income (Loss)		(403,842	)	$	(109,637	)

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

Weighted Average Number of Common Shares Outstanding		65,232,781			64,802,781

* Less than $.01 per Share

See Notes to Unaudited Consolidated Financial Statements

Chancellor Group, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND MARCH 31, 2008

(Unaudited)

	March 31, 2009			March 31, 2008
Cash Flows From Operating Activities:
Net Income (loss)	$	(403,842	)	$	(109,637	)

Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation & Amortization		78,114			149,387
Deferred Income Taxes		(37,487	)		0
(Increase) Decrease in Operating Assets		109,249			(110,322	)
Increase (Decrease) in Operating
Liabilities		(221,005	)		110,185
Net Cash Provided by (used for)
Operating Activities		(474,971	)		39,613

Cash Flows From Investing Activities
Capital Expenditures		(200,790	)		( 41,599	)
Net Cash Provided by (used for)
Investing Activities		(200,790	)		( 41,599	)

Cash Flows From Financing Activities
Notes Payable		0			( 33,749	)
Sales of Common Stock		0			200
Net Cash Provided by (used for)
Financing Activities		0			( 33,549	)

Net Increase (Decrease) in Cash		(675,761	)		( 35,535	)
Cash at the Beginning of the Period		2,531,525			218,118

Cash at the End of the Period	$	1,855,764		$	182,583

Supplemental Disclosures of Cash Flows Information
Interest Paid	$	1,317	$	150,319

Income Taxes Paid	$	95,382	$	0

See Notes to Unaudited Consolidated Financial Statements

CHANCELLOR GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

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

Organization

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

Operations

The Company is licensed by the Texas Railroad Commission as oil and gas producers and operators. The Company, and its wholly-owned subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services, LLC, own 127 wells, of which 84 are actively producing (two of which are natural gas wells). We also own and operate our 15.9 acre property, with its shop, yard and office complex. Company equipment includes two work-over rigs as well as other oil field related equipment.

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

As of March 31, 200 9 , 84 wells are producing. Total productive capacity at March 31, 2009 is estimated to be approximately 55 bopd and 63 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.

Included in cash in bank at March 31, 2009 are deposits totaling $500,000 which are assigned and held as collateral for two letters of credit issued to the Railroad Commission of Texas as required for its oil and gas activities.

Accounting Year

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

Use of Estimates

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

Net Income (loss) per share

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

Property and Equipment

Property and equipment are recorded at cost and depreciated under the straight line method over the estimated useful life of the equipment. The estimated useful life of leasehold costs, equipment and tools ranges from five to seven years. The useful life of the office building and warehouse is estimated to be twenty years.

Depletion

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

Accounts Receivable

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

Products and Services, Geographic Areas and Major Customers

The Company plans to develop its domestic oil and gas properties, located in Gray and Carson counties, Texas, and possibly to acquire additional producing oil and gas properties. The Company’s major customers, which primarily all oil and gas production is sold to, are Plains Marketing and DCP Midstream.

Revenue Recognition

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

Financial Instruments

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

Employee Stock-Based Compensation

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

Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 155, "Accounting for Certain Hybrid Financial Instruments." SFAS 155 resolves certain accounting issues related to various hybrid financial instruments. The Company has adopted the provisions of SFAS No. 155 which are effective for fiscal years beginning after September 15, 2006. The adoption did not have a material effect on the results of operations of the Company.

In June, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No.48, “Accounting for Uncertainty in Income Taxes , an Interpretation of SFAS No.109” (“FIN 48”). The interpretation creates a single model to address accounting for uncertainty in tax positions. Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest

and penalties, accounting in interim periods, disclosure and transition of certain tax positions. The Company adopted the provisions of FIN 48 effective January 1, 2007. The adoption of this accounting principle did not have an effect on the Company’s consolidated financial statements at, and for the years ended December 31, 2007 and 2008.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements, as amended in February 2008 by FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No.157. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FSP FAS 157-2 defers the effective date of SFAS 157 for all nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. As such, management partially adopted the provisions of SFAS 157 effective January 1, 2008. The partial adoption of this statement did not have a material impact on the financial statements. Management expects to adopt the remaining provisions of SFAS 157 beginning in 2009. The adoption did not have a material impact on the consolidated financial statements.

In February 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The amendment to SFAS No. 115 applies to all entities with investments in available-for-sale or trading securities. The statement is effective for fiscal years beginning after November 15, 2007. The adoption did not have a material effect on the results of operations of the Company, and the Company did not make any options to record its financial assets or liabilities at fair value.

In December 2007, the FASB issued SFAS 141R, Business Combinations. SFAS 141R continues to require the purchase method of accounting to be applied to all business combinations, but it significantly changes the accounting for certain aspects of business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) valuing non-controlling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS 141R also includes a substantial number of new disclosure requirements.

SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Management expects SFAS 141R will have an impact on the accounting for future business combinations once adopted but the effect is dependent upon the acquisitions that are made in the future.

In December 2007, the FASB issued SFAS 160, Non-controlling Interests in Consolidated Financial Statements. SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary (minority interest) is an ownership interest in the consolidated entity that should be reported as equity in the Consolidated Financial Statement and separate from the parent company’s equity. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the Consolidated Statement of Operations, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. This statement is effective for us on January 1, 2009. The adoption did not have a material impact on the consolidated financial statements.

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 161, Disclosures about Derivative Instruments and Hedging Activities –an amendment of SFAS 133. SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires: (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk related; and (3) cross-referencing within the footnotes. SFAS 161 is effective for us on January 1, 2009. The adoption did not have a material impact on the consolidated financial statements.

NOTE 2. INCOME TAXES

Deferred income taxes arise from temporary differences in recognition of certain revenues and expenses between financial statement and income tax basis of accounting, and also net operating loss carry-forwards and other tax credit carry-forwards. Under IRC Section 382, net operating loss carryovers may be limited should a significant change in ownership occur. The Company accounts for income taxes pursuant to SFAS 109.

At March 31, 2009, the Company has a federal net operating loss of approximately $440,000. A deferred tax asset of approximately $100,000 has been partially offset by a valuation allowance of approximately $50,000 due to federal NOL carry-back and carry-forward limitations.

At March 31, 2009, the Company has approximately $138,800 in deferred income tax liability attributable to timing differences between federal income tax depreciation, depletion and book depreciation.

NOTE 3. STOCKHOLDERS' EQUITY

Preferred Stock

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

Common Stock

The Company has 250,000,000 authorized shares of common stock, par value $.001, with 65,232,781 shares issued and outstanding (which includes 1,000,000 shares of Treasury Stock not held for retirement) as of March 31, 2009 (see footnotes regarding Treasury Stock, Sale of Assets and Related Party Transactions for additional information).

Treasury Stock

In early 2008 in the context of our prior bankruptcy proceeding, Koala Pictures Proprietary Ltd. ("Koala"), controlled by our Chairman and Chief Executive Officer Maxwell Grant, had transferred 1,000,000 shares of our common stock to New Concept Energy, Inc. (“NCE”), which had entered into discussions with us. Following dismissal of the bankruptcy proceeding in August 2008, we settled all matters with NCE for $110,000 pursuant to a Settlement Agreement and Release of All Claims, dated September 4, 2008, and repurchased the 1,000,000 shares of common stock. In May 2009, our Board of Directors authorized retransfer of the 1,000,000 shares of common stock back to Koala, since Koala had originally transferred these shares to NCE for the benefit of the Company in the context of the Company's discussions with NCE .

Stock Options and Warrants

Non-employee Stock Options and Warrants

The Company accounts for non-employee stock options under SFAS 123 (as amended by SFAS 148), whereby options costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. During all quarters for the years ended December 31, 2007 and 2008, no options were issued, exercised or cancelled. For quarter ending March 31, 2009 no options were issued, exercised or cancelled

The Company currently has outstanding warrants to purchase an aggregate of 6,000,000 shares of common stock expiring December 31, 2009, of which warrants to purchase 2,000,000 shares are at an exercise price of $.025 per share, and 4,000,000 of which are at an exercise price of $0.02 per share.

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

Employee Stock Options

The Company accounts for non-employee stock options under SFAS 123 (as amended by SFAS 148). The Company issued no employee stock options and had none outstanding at the end of 2006, 2007 or as of the close of the year ending December 31, 2008. There were no stock options issued in the first quarter of 2009.

NOTE 4. FIXED ASSETS

A summary of fixed assets at March 31, 2009, follows:

	Balance
	December 31,						Balance
	2008		Additions		Deletions		March 31, 2009
Auto/Transportation Equipment	$	218,661	$	23,183	$	0	$	241,844
Buildings & Improvements		125,280						125,280
Leases & Lease Equipment		1,396,252		170,674		0		1,566,926
Furniture, Fixtures & Office Equipment		6,785						6,785
Machinery & Equipment		442,747		9,933		0		452,679
	$	2189725	$	203,790	$	0	$	2,393,514
Less: Accum. Depr.								329,493
							$	2,064,021

NOTE 5. CONTINGENT LIABILITY

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

NOTE 6. LONG-TERM DEBT

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

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

At the August 29, 2008 closing under the Agreement, the notes held by our lenders, WNB and Capwest, plus interest thereon to the date of closing, were paid in full with payments of $2,063,549.53 and $4,220,617.47, respectively.

The Company had no long-term debt at March 31, 2009.

At March 31, 2009, the Company has two irrevocable blanket letters of credit totaling $500,000 issued to the Railroad Commission of Texas as required for its oil and gas activities, which are secured by deposits totaling $500,000 included in cash in bank.

NOTE 7. ACCUMULATED COMPENSATED ABSENCES

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

NOTE 8. SALE OF ASSETS

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

To finance the acquisition of the assets purchased from Caldwell Production Company, Inc., on April 13, 2007, we closed on a Loan Agreement with WNB for a senior loan facility. At the closing of the purchase of the Caldwell Assets, we drew down $2.3 million under the WNB Loan Agreement. On April 13, 2007, we also entered into a Loan Agreement with CapWest for an advancing line of credit/term loan facility, under which we drew down at closing $2,700,000 for the balance of the purchase price of the leases, $291,500 for the equipment, $111,000 for bank fees, legal expenses and associated costs, and $130,000 for initial working capital.

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

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

The financial statements reflect the sale of the Oil and Gas Assets, effective retroactively to June 1, 2008. The following is the details of the sale and closing costs.

Sales Price			$	13,250,000
Adjustments to Sales Price
Estimated Liability for Well Plugging Expense				( 160,000	)
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 6.25% ORRI		232,500
Acquisition of NCE 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			$	4,319,098

NOTE 9. RELATED PARTY TRANSACTIONS

The Company has used the services of a local accounting firm in Pampa, Texas to provide the disbursing of the payroll with related expense and accounts payable while maintaining the general ledger. The Company’s President, at that time, has a one-half interest in that firm. The Company has paid $10,161 for those accounting services this year. Effective in late April 2009, The Company disengaged the Pampa related firm and has engaged an unrelated accounting firm in Amarillo, Texas to provide these services.

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

The Company has used the services of a consulting company owned by the Chairman of the Board. The Company has paid $24,000 for those services this year.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

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

BACKGROUND

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

BACKGROUND

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

On July 22, 2008, we had entered into an Agreement, effective as of June 1, 2008 with Legacy Reserves Operating LP (“Legacy”) for the sale of oil and gas wells accounting for approximately 84% of our oil and gas production to Legacy for a purchase price of $13,250,000. At the August 29, 2008 closing under this Agreement with Legacy, the notes held by the lenders that provided the financing for our initial acquisition of oil and gas leases, plus interest thereon to the date of closing, were paid in full.

Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.OB. As of May 19, 2009, there were 66,382,781 shares of our common stock issued and outstanding.

Three Months Ended March 31, 2009

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 and sold 23,120 barrels of oil and produced and sold 55,831 mcf gas, generating $2,075,956 revenues after royalties, with a one month lag in receipt of revenues for the prior months sales, as compared with 24,114 barrels of oil and 48,759 mcf of gas, generating $2,351,433 in gross revenues in 2008. Effective June 1, 2008, we sold producing properties with 173 producing wells to Legacy Reserves Operating LP. We had 84 wells actually producing oil and gas on December 31, 2008. In the three month period ended March 31, 2009, we produced and sold 2,623 barrels of oil and 3,570 mcf of gas, attributable to our net revenue interest in our producing properties, while generating revenues of $118,134, as compared with 8,268 net barrels of oil and 18,599 net mcf of gas, generating revenues of $936,204 in the comparable period of 2008. At March 31, 2009, we had 86 wells actually producing. During this period, we restored an additional 11 wells.

PLAN OF OPERATION

On April 16, 2007, we closed the acquisition of assets from Caldwell Production Company, Inc., consisting of 48 mineral leases with 621 wells, of which approximately 100 were considered to be producing wells and 531 inactive well bores equipped with necessary production equipment, and related operating facilities and equipment including an office warehouse facility, ten pickup trucks, two pulling rigs, a backhoe, a winch truck and a water truck. The purchase price for the mineral leases and an existing office building including an attached warehouse/shop building valued at $81,630, was $5,000,000, and for the equipment $291,500. The oil and natural gas leases purchased are on approximately 8,000 acres in Gray and Carson Counties, Texas, with a well spacing of 10 acres, and are in the Panhandle Field, discovered in 1920. After closing the acquisition, we has opened corporate offices for our production and oil field service subsidiaries at the purchased facilities in Pampa, Texas. After the initial acquisition, the Gryphon Production Company subsidiary we have acquired additional trucks, including an electrical repair “bucket” truck, which is needed to restore electric power to several previously non-producing wells. The cost of this additional equipment was $34,000 and associated tools and equipment was $6,422. We have also acquired a replacement backhoe machine for $67,000. Subsequently, additional Field equipment and tools were purchased for $31,184. We were also required to invest $38,949 in the rehabilitation and restoration of the office building.

We commenced operations on April 16, 2007 with what were 84 actually producing wells. As of December 31, 2007, 203 wells are producing. Productive capacity on April 16, 2007 was estimated to be 70 bopd and 90 mcfd. Total productive capacity at March 31, 2009 is estimated to be approximately 60 bopd and 63 mcfd gas. The oil is light sweet crude and the natural gas has very high heat content, 1600 to 2600 btu/scf.

Our near-term plans include continued maintenance of existing wells, our primary focus being to operate our properties and to restore 5-10 wells per month to production. In some circumstances enhanced production is expected to be achieved by an ongoing treatment plan to reduce paraffin down-hole, in flow lines, treatment equipment, and salt water disposal wells. Additionally, production is expected to increase by remedial repairs that improve and prolong the production life of existing wells. The Company also has plans to reenter certain abandoned wells, which were taken out of production due to extremely low oil and gas prices, bringing that oil and gas into the market. Several of the leases need to studied and reviewed for the possibility of drilling the wells deeper to reach additional producing strata. Feasibility studies are planned to consider drilling replacement wells in the locations of wells that were previously plugged and abandoned due to either low prices or integrity issues with the well bore casing. There is approximately 500 acres of undeveloped leased property that needs to be reviewed and studied for the possibility of drilling for new production.

The following table is for the three months ended:

	Three Months Ended
	March 31, 2009		March 31, 2008
Oil and Gas Sales(1)
Oil Sales(Bbl)		2,623		8,268
Natural Gas Sales (Mcf)		3,570		18,599

Average Sales Price:
Oil, per Bbl:	$	38.08	$	95.07
Gas, per MMCF:	$	5.32	$	8.05

(1)	Sales oil and gas are those attributable to our respective net revenue interests in our producing properties, and do not take account of severance taxes or other operating expenses.

There is no assurance that management will be able to continue to increase production, or to maintain current production levels.

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

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

Liquidity & Capital Resources

As of March 31, 2009 the Company had $1,855,765 of cash on hand. We have a retained earnings of $526,799 and have a stockholders' equity of $3,785,437 at March 31, 2009.

CRITICAL ACCOUNTING POLICIES

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

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

The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various fields make these estimates generally less precise than other estimates included in the financial statement disclosures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash equivalents have original maturities of three months or less. Our interest income is sensitive to changes in the general level of U.S. interest rates.

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

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

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 6. Exhibits.

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

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

SIGNATURES

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

	Chancellor Group, Inc. (Registrant)

Dated: May 20, 2009	By:	/s/ Maxwell Grant
		Chief Executive Officer and
		Principal Financial Officer

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.

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