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, 2010





 ̈
            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)





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




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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check One):





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





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


x
No





APPLICABLE
ONLY TO CORPORATE ISSUERS




The
number of shares outstanding the issuer's common stock, $.001 par value, was
65,680,030 as of November 15, 2010.








Chancellor
Group, Inc.





Table of
Contents





Page No.PART
      I
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      Statements
                1Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                10Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                14Item
      4.
                Controls
      and Procedures
                14PART
      II
                OTHER
      INFORMATIONItem
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                14Item
      6.
                Exhibits
                15EXHIBIT
      INDEX
                16


ii





Item
1.  Financial Statements





Chancellor
Group, Inc.





INDEX





Page No.Consolidated
      Balance Sheets as of September 30, 2010(Unaudited) and December 31, 2009
      (Audited)
                2Consolidated
      Statements of Operations
                  For
      the Three and Nine Months Ended September 30, 2010 and 2009
      (Unaudited)
                3Consolidated
      Statements of Cash Flows
                  For
      the Nine Months Ended September 30, 2010 and 2009
    (Unaudited)
                4Notes
      to Unaudited Consolidated Financial Statements
                5-10


1


Chancellor
Group, Inc.


CONSOLIDATED
BALANCE SHEETS





September 30, 2010
                        
                        
                        December 31, 2009(Unaudited)
                        
                        
                        (Audited)ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                        
                        $
                        701,307
                        
                        
                        $
                        1,154,695Restricted
      Cash
                        
                        
                        250,000
                        
                        
                        
                        250,000Revenue
      Receivable
                        
                        
                        92,268
                        
                        
                        
                        74,344Prepaid
      Insurance
                        
                        
                        7,772
                        
                        
                        
                        54,803Federal
      Income Tax Receivable
                        
                        
                        -
                        
                        
                        
                        49,502Total
      Current Assets
                        
                        
                        1,051,347
                        
                        
                        
                        1,583,344Property
      and Equipment:Leases
      and Lease Equipment
                        
                        
                        1,746,997
                        
                        
                        
                        1,570,584Office
      Building & Equipment
                        
                        
                        134,630
                        
                        
                        
                        134,630Auto
      / Transportation Equipment
                        
                        
                        199,018
                        
                        
                        
                        202,723Machinery
      & Equipment
                        
                        
                        455,128
                        
                        
                        
                        458,465Accumulated
      Depreciation and Amortization
                        
                        
                        (719,789
                        )
                        
                        
                        ( 521,410
                        )Total
      Property and Equipment, Net
                        
                        
                        1,815,984
                        
                        
                        
                        1,844,992Other
      Assets:Unamortized
      Letter of Credit
                        
                        
                        4,088
                        
                        
                        
                        2,944Deposits
                        
                        
                        250
                        
                        
                        
                        250Total
      Other Assets
                        
                        
                        4,338
                        
                        
                        
                        3,194Total
      Assets
                        
                        $
                        2,871,669
                        
                        
                        $
                        3,431,530LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                        
                        $
                        84,253
                        
                        
                        $
                        19,614Accrued
      Expenses
                        
                        
                        52,065
                        
                        
                        
                        24,055Total
      Current Liabilities
                        
                        
                        136,318
                        
                        
                        
                        43,669Long
      Term Liabilities:Deferred
      Tax Liability, net
                        
                        
                        -
                        
                        
                        
                        -Total
      Long Term Liabilities
                        
                        
                        -
                        
                        
                        
                        -Stockholders’
      Equity:Series
      B Preferred Stock: $1,000 Par Value250,000 shares authorized, none outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      Stock:  $.001 par value, 250,000,000shares authorized, 65,680,030 and 65,124,980 sharesissued and outstanding, respectively
                        
                        
                        65,680
                        
                        
                        
                        65,125Paid
      in Capital
                        
                        
                        3,393,682
                        
                        
                        
                        3,308,713Retained
      Earnings (Deficit)
                        
                        
                        (724,011
                        )
                        
                        
                        14,023Total
      Stockholders’ Equity
                        
                        
                        2,735,351
                        
                        
                        
                        3,387,861Total
      Liabilities and Stockholders’ Equity
                        
                        $
                        2,871,669
                        
                        
                        $
                        3,431,530





See Notes
to Unaudited Consolidated Financial Statements


2





Chancellor
Group, Inc.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30,
2009


(Unaudited)





For thethree months
                        ended September 30,
                      
                      
                      For the nine months
                        ended September 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Sales
      - Net of Royalties Paid:Oil
                      
                      $
                      178,514
                      
                      
                      $
                      169,600
                      
                      
                      $
                      526,031
                      
                      
                      $
                      424,441Natural
      Gas
                      
                      
                      25,008
                      
                      
                      
                      22,682
                      
                      
                      
                      65,495
                      
                      
                      
                      60,296Hedge
                      
                      
                      -
                      
                      
                      
                      250
                      
                      
                      
                      -
                      
                      
                      
                      71,160Other
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      23,905Gross
      Revenues
                      
                      
                      203,522
                      
                      
                      
                      192,532
                      
                      
                      
                      591,526
                      
                      
                      
                      579,802Severance
      Taxes
                      
                      
                      10,114
                      
                      
                      
                      10,552
                      
                      
                      
                      29,105
                      
                      
                      
                      25,914Net
      Revenues
                      
                      
                      193,408
                      
                      
                      
                      181,980
                      
                      
                      
                      562,421
                      
                      
                      
                      553,888Operating
      Expenses:Lease
      Operating Expenses
                      
                      
                      43,472
                      
                      
                      
                      64,745
                      
                      
                      
                      145,327
                      
                      
                      
                      248,761Other
      Operating Expenses
                      
                      
                      168,219
                      
                      
                      
                      150,389
                      
                      
                      
                      501,347
                      
                      
                      
                      678,560General
      & Administrative Expenses
                      
                      
                      162,912
                      
                      
                      
                      152,332
                      
                      
                      
                      454,532
                      
                      
                      
                      378,350Depreciation,
      Depletion & Amortization
                      
                      
                      66,566
                      
                      
                      
                      64,980
                      
                      
                      
                      200,429
                      
                      
                      
                      197,830Total
      Operating Expenses
                      
                      
                      441,169
                      
                      
                      
                      432,446
                      
                      
                      
                      1,301,635
                      
                      
                      
                      1,503,501Loss 
      from Operations
                      
                      
                      (247,761
                      )
                      
                      
                      (
      250,466
                      )
                      
                      
                      (739,214
                      )
                      
                      
                      (
      949,613
                      )Other
      Income (Expenses):Interest
      Income
                      
                      
                      2,574
                      
                      
                      
                      6,260
                      
                      
                      
                      9,383
                      
                      
                      
                      14,320Loss
      on Sale of Assets
                      
                      
                      (2,394
                      )
                      
                      
                      -
                      
                      
                      
                      (2,394
                      )
                      
                      
                      (
      6,557
                      )Total
      Other Income (Expense)
                      
                      
                      180
                      
                      
                      
                      6,260
                      
                      
                      
                      6,989
                      
                      
                      
                      7,763Financing
      Charges:Interest
      Expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      375Bank
      Fees Amortization
                      
                      
                      2,585
                      
                      
                      
                      402
                      
                      
                      
                      5,809
                      
                      
                      
                      1,696Total
      Financing Charges
                      
                      
                      2,585
                      
                      
                      
                      402
                      
                      
                      
                      5,809
                      
                      
                      
                      2,071Loss 
      before Provision for Income Taxes
                      
                      
                      (250,166
                      )
                      
                      
                      (
      244,608
                      )
                      
                      
                      (738,034
                      )
                      
                      
                      (
      943,921
                      )Provision
      for Income Taxes
                      
                      
                      -
                      
                      
                      
                      ( 37,617
                      )
                      
                      
                      -
                      
                      
                      
                      (
      136,581
                      )Net
      Loss
                      
                      $
                      (250,166
                      )
                      
                      $
                      (
      206,991
                      )
                      
                      $
                      (738,034
                      )
                      
                      $
                      (
      807,340
                      )Net
      Income (Loss) per Share (Basic and Fully Diluted)
                      
                      $
                      (*
                      )
                      
                      $
                      (*
                      )
                      
                      $
                      (
      .01
                      )
                      
                      $
                      (
      .01
                      )Weighted
      Average Number of Common Shares  Outstanding
                      
                      
                      65,247,589
                      
                      
                      
                      64,873,508
                      
                      
                      
                      65,104,813
                      
                      
                      
                      65,145,492





* Less
than $.01 per Share


See Notes
to Unaudited Consolidated Financial Statements


3





Chancellor
Group, Inc.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009


(Unaudited)





September 30, 2010
                    
                    
                    September 30, 2009Cash
      Flows From Operating Activities:Net
      Loss
                    
                    $
                    (738,034
                    )
                    
                    $
                    (
      807,340
                    )Adjustments
      to Reconcile Net Loss to Net Cash(Used
      in) Operating Activities:Depreciation,
      Depletion & Amortization
                    
                    
                    200,429
                    
                    
                    
                    197,830Deferred
      Income Taxes
                    
                    
                    -
                    
                    
                    
                    (
      136,581
                    )Non-Cash
      Compensation
                    
                    
                    85,526
                    
                    
                    
                    78,700(Increase)
      Decrease in Operating Assets
                    
                    
                    81,455
                    
                    
                    
                    88,649Increase
      (Decrease) in Operating Liabilities
                    
                    
                    92,649
                    
                    
                    
                    (
      295,678
                    )Net
      Cash (Used in) Operating Activities
                    
                    
                    (277,975
                    )
                    
                    
                    (
      874,420
                    )Cash
      Flows From Investing Activities:Sale
      of Assets Proceeds
                    
                    
                    1,000
                    
                    
                    
                    28,000Capital
      Expenditures
                    
                    
                    (176,413
                    )
                    
                    
                    (
      184,459
                    )Net
      Cash (Used in) Investing Activities
                    
                    
                    (175,413
                    )
                    
                    
                    (
      156,459
                    )Cash
      Flows From Financing Activities:Issuances
      of Common Stock
                    
                    
                    -
                    
                    
                    
                    -Net
      Cash Provided by (Used for) Financing Activities
                    
                    
                    -
                    
                    
                    
                    -Net
      (Decrease) in Cash and Cash Equivalents
                    
                    
                    (453,388
                    )
                    
                    
                    (
      1,030,879
                    )Cash
      and Cash Equivalents at the Beginning of the Period
                    
                    
                    1,154,695
                    
                    
                    
                    2,281,525Cash
      and Cash Equivalents at the End of the Period
                    
                    $
                    701,307
                    
                    
                    $
                    1,250,646Supplemental
      Disclosures of Cash Flows InformationInterest
      Paid
                    
                    $
                    -
                    
                    
                    $
                    375Income
      Taxes Paid
                    
                    $
                    -
                    
                    
                    $
                    -





See Notes
to Unaudited Consolidated Financial Statements


4





CHANCELLOR
GROUP, INC.





NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





September
30, 2010





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





Organization





Chancellor
Group, Inc. (the "Company", “our”, “we”, “Chancellor” or the “Company” ) was
incorporated in the state of Utah on May 2, 1986, and then, on December 30,
1993, 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. On March 26, 1996, the Company's
corporate name was changed from Nighthawk Capital, Inc. to Chancellor Group,
Inc.  The Company’s headquarters is located in Pampa, Texas.





Operations





The
Company is licensed by the Texas Railroad Commission as an oil and gas producer
and operator.  The Company and its wholly-owned subsidiaries, Gryphon
Production Company, LLC and Gryphon Field Services, LLC, own 140 wells, of which
23 are water disposal wells and 2 are gas wells, although “associated” gas is
also produced from some oil wells.  As of September 30, 2010, approximately
72 oil wells are actively producing.  We also own and operate our 15.9 acre
property, with its shop, yard and office complex. Company equipment includes two
work-over rigs as well as other oil field related equipment.





In
addition, we own approximately 4,510 gross and net acres of production rights on
six leases, which includes 500 gross and net acres of undeveloped acreage,
approximately 300 acres of which was previously owned by Mobil, and the balance
of approximately 200 acres on the Worley Combs lease.  The six leases have
the production rights for oil, casing-head gas and natural gas.





We
produced a total of 7,156 barrels of oil and 7,909 mcf of gas in the nine months
ended September 30, 2010. 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 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.





Accounting
Year





The
Company employs a calendar accounting year. The Company recognizes income and
expenses based on the accrual method of accounting under generally accepted
accounting standards in the United States of America.





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.





Products and Services,
Geographic Areas and Major Customers





The
Company plans to develop its domestic oil and gas properties, located in Gray
county and Hutchinson county, Texas, and possibly to acquire additional
producing oil and gas properties. The Company’s major customers, to which the
majority of its oil and gas production is sold, are Plains Marketing and DCP
Midstream.


5





Net Income (loss) per
share





The net
income (loss) per share is computed by dividing 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.





Cash and Cash
Equivalents





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





Restricted
Cash





Included
in restricted cash at September 30, 2010 are deposits totaling $250,000, which
are assigned and held as collateral for a letter of credit issued to the
Railroad Commission of Texas as required for its oil and gas
activities.





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.  An allowance for doubtful accounts was not considered
necessary or recorded at September 30, 2010.





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.





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.





Depletion





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





Long-Lived
Assets





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 Topic 360 “Property, Plant and
Equipment” in the ASC.  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.




Asset Retirement
Obligations




In
accordance with accounting standards for asset retirement obligations (ASC 410),
the Company is supposed to record the fair value of a liability for an
asset retirement obligation (ARO) when there is a legal obligation associated
with the retirement of a tangible long-lived asset and the liability can be
reasonably estimated.  The associated asset retirement costs are
capitalized as part of the carrying amount of the related oil and gas
properties.  As of September 30, 2010, there has been no asset retirement
obligations recorded.





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.


6


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.





Fair Value Measurements and
Disclosures





The
Company estimates fair values of assets and liabilities which require either
recognition or disclosure in the financial statements in accordance with FASB
ASC Topic 820 “Fair Value
Measurements”.  As of September 30, 2010 there is no material impact
on the consolidated financial statements related to fair value measurements and
disclosures.  Fair value measurements include the following
levels:





Level
      1:
            Quoted
      market prices in active markets for identical assets or liabilities.
      Valuations for assets and liabilities traded in active exchange markets,
      such as the New York Stock Exchange.  Level 1 also includes U.S.
      Treasury and federal agency securities and federal agency mortgage-backed
      securities, which are traded by dealers or brokers in active
      markets.  Valuations are obtained from readily available pricing
      sources for market transactions involving identical assets or
      liabilities.




Level
      2:
            Observable
      market based inputs or unobservable inputs that are corroborated by market
      data. Valuations for assets and liabilities traded in less active dealer
      or broker markets.  Valuations are obtained from third party pricing
      services for identical or similar assets or
  liabilities.




Level
      3:
            Unobservable
      inputs that are not corroborated by market data. Valuations for assets and
      liabilities that are derived from other valuation methodologies, including
      option pricing models, discounted cash flow models and similar techniques,
      and not based on market exchange, dealer, or broker traded
      transactions.  Level 3 valuations incorporate certain assumptions and
      projections in determining the fair value assigned to such assets or
      liabilities.




Fair Value of Financial
Instruments





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





Employee Stock-Based
Compensation





Compensation
expense is recognized for performance-based stock awards if management deems it
probable that the performance conditions are or will be met.  Determining
the amount of stock-based compensation expense requires us to develop estimates
that are used in calculating the fair value of stock-based compensation, and
also requires us to make estimates of assumptions including expected stock price
volatility which is derived based upon our historical stock prices.





Business
Combinations





The
Company accounts for business combinations in accordance with FASB ASC Topic 805
“Business
Combinations”.  This standard modifies certain aspects of how the
acquiring entity recognizes and measures the identifiable assets, the
liabilities assumed and the goodwill acquired in a business combination. 
For the nine months ending September 30, 2010, the Company did not enter into
any business combinations.





The
Company complies with the accounting guidance related to consolidation of
variable interest entities (“VIEs”) that requires a reporting entity determine
if a primary beneficiary that would consolidate the VIE from a quantitative risk
and rewards approach to a qualitative approach based on which variable interest
holder has the power to direct the economic performance related activities of
the VIE as well as the obligation to absorb losses or right to receive benefits
that could potentially be significant to the VIE. This guidance requires the
primary beneficiary assessment to be performed on an ongoing basis and also
requires enhanced disclosures that will provide more transparency about a
company’s involvement in a VIE. This new guidance is effective for a reporting
entity’s first annual reporting period that begins after November 15,
2009.  The Company did not have any VIEs that required consolidation in
these financial statements.





Subsequent
Events





Events
occurring after September 30, 2010 were evaluated as of November 15, 2010, the
date this Quarterly Report was issued, in compliance FASB ASC Topic 855
“Subsequent Events”, to ensure that any subsequent events that met the criteria
for recognition and/or disclosure in this report have been
included.


7





Recent Accounting
Pronouncements





In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement No.
168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles”, which was primarily codified into Topic 105 “Generally Accepted Accounting
Standards” in the ASC.  This standard will become the single source
of authoritative nongovernmental U.S. generally accepted accounting principles
("GAAP"), superseding existing FASB, American Institute of Certified Public
Accountants ("AICPA"), Emerging Issues Task Force ("EITF"), and related
accounting literature.  This guidance reorganizes the thousands of GAAP
pronouncements into roughly 90 accounting topics and displays them using a
consistent structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections.  This guidance is effective for financial statements issued for
reporting periods that end after September 15, 2009. Beginning in the third
quarter of the Company’s 2009 fiscal year, this guidance impacts the Company’s
financial statements and related disclosures as all references to authoritative
accounting literature reflect the newly adopted codification.





In
January 2010, the Financial Accounting Standards Board issued ASU 2010-03 to
align the oil and gas reserve estimation and disclosure requirements of
Extractive Industries — Oil and Gas Topic of the Accounting Standards
Codification with the requirements in the SEC's final rule, Modernization of the Oil and Gas
Reporting Requirements. We implemented ASU 2010-03 as of December 31,
2009.  Key items in the new rules include changes to the pricing used to
estimate reserves and calculate the full cost ceiling limitation, whereby a
12-month average price is used rather than a single day spot price, the use of
new technology for determining reserves, the ability to include nontraditional
resources in reserves and the ability to disclose probable and possible
reserves.  Management has elected not to include probable and possible
reserves in its reserve studies and related disclosures.




In
January 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2010-6, "Improving Disclosures about Fair Value
Measurements." This update requires additional disclosure within the roll
forward of activity for assets and liabilities measured at fair value on a
recurring basis, including transfers of assets and liabilities between Level 1
and Level 2 of the fair value hierarchy and the separate presentation of
purchases, sales, issuances and settlements of assets and liabilities within
Level 3 of the fair value hierarchy. In addition, the update requires enhanced
disclosures of the valuation techniques and inputs used in the fair value
measurements within Levels 2 and 3. The new disclosure requirements are
effective for interim and annual periods beginning after December 15, 2009,
except for the disclosure of purchases, sales, issuances and settlements of
Level 3 measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010. As ASU 2010-6 only requires enhanced disclosures, the
Company does not expect that the adoption of this update will have a material
effect on its financial position, cash flows and results of
operations.




Reclassifications





The
company reclassified its accrued property tax liability as of December 31, 2009,
which was previously included in accounts payable, to conform to the current
presentation.  The Company also reclassified its restricted cash as of
December 31, 2009, which was previously included in cash and cash equivalents.
The reclassifications had no effect on the Company’s financial condition,
results of operation, or cash flows.





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





At
September 30, 2010, the Company had a federal net operating loss carry-forward
of approximately $1,905,000.  A deferred tax asset of approximately
$380,000 has been partially offset by a valuation allowance of approximately
$205,000 due to federal net operating loss carry-back and carry-forward
limitations.





At
September 30, 2010, the Company also had approximately $175,000 in deferred
income tax liability attributable to timing differences between federal income
tax depreciation, depletion and book depreciation, which has been offset against
the deferred tax asset related to the net operating loss
carry-forward.





Management
evaluated the Company’s tax positions under FASB ASC No. 740 Uncertain Tax Positions, and
concluded that the Company had taken no uncertain tax positions that require
adjustment to the consolidated financial statements to comply with the
provisions of this guidance.  With few exceptions, the Company is no longer
subject to income tax examinations by the U.S. federal, state or local tax
authorities for years before 2007.


8





NOTE 3.
STOCKHOLDERS' EQUITY





Preferred
Stock





The
Company is authorized to issue up to 250,000 shares, par value $1,000 per share,
of convertible Preferred Series B stock ("Series B"). Each Series B share is
convertible into 166.667 shares of the Company's common stock upon election by
the shareholder of the Series B Share, 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
65,680,030 shares issued and outstanding as of September 30, 2010.





Stock based
Compensation





For the
nine months ending September 30, 2010, the company recognized $2,750 in
stock-based compensation expense related to stock issued to key employees for
employment services performed.





For the
nine months ending September 30, 2010. The company recognized $82,776 in
professional fees expense related to stock issued to unrelated parties for
business development services performed.





Non-employee Stock Options
and Warrants





The
Company accounts for non-employee stock options under FASB ASC Topic 505 “Equity-Based Payments to
Non-Employees”, 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 year
ended December 31, 2009, no options were issued, exercised or cancelled. 
For the quarter ending September 30, 2010, no options were issued, exercised or
cancelled.





The
Company currently has outstanding warrants expiring December 31, 2014 to
purchase an aggregate of 6,000,000 shares of common stock; these warrants
consist of warrants to purchase 2,000,000 shares at an exercise price of $.025
per share, and warrants to purchase 4,000,000 shares at an exercise price of
$0.02 per share.  In July 2009, the Company issued additional warrants
expiring June 30, 2014 to purchase an aggregate of 500,000 shares of common
stock at an exercise price of $0.125 per share.  In June 2010, the Company
issued additional warrants expiring June 30, 2014 to purchase an aggregate of
168,000 shares of common stock at an exercise price of $.0125 per
share.





Employee Stock
Options





The
Company accounts for employee stock options under FASB ASC Topic 718 “Compensation-Stock
Compensation”. The Company issued no employee stock options and had none
outstanding as of the close of the year ending December 31, 2009. There were no
stock options issued for the quarters ending through September 30,
2010.





NOTE 4.
PROPERTY AND EQUIPMENT





A summary
of fixed assets at September 30, 2010 is as follows:





Balance
                
                
                
                
                
                
                
                
                BalanceDecember 31,
                
                
                
                
                
                
                
                
                September 30,2009
                
                
                Additions
                
                
                Deletions
                
                
                2010Auto/Transportation
      Equipment
                
                $
                202,723
                
                
                $
                -
                
                
                $
                3,705
                
                
                $
                199,018Buildings
      & Improvements
                
                
                125,280
                
                
                
                -
                
                
                
                -
                
                
                
                125,280Leases
      & Lease Equipment
                
                
                1,570,584
                
                
                
                176,413
                
                
                
                -
                
                
                
                1,746,997Furniture,
      Fixtures & Office Equipment
                
                
                9,350
                
                
                
                -
                
                
                
                -
                
                
                
                9,350Machinery
      & Equipment
                
                
                458,465
                
                
                
                -
                
                
                
                3,337
                
                
                
                455,128$
                2,366,402
                
                
                $
                176,413
                
                
                $
                7,042
                
                
                $
                2,535,773Less:
      Accumulated Depreciation and Amortization
                
                $
                521,410
                
                
                
                200,429
                
                
                
                2,050
                
                
                $
                719,789$
                1,844,992
                
                
                
                
                
                
                
                
                
                
                $
                1,815,984


9





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





The
Company had no long-term debt at September 30, 2010.





At
September 30, 2010, the Company has an irrevocable blanket letter of credit
totaling $250,000 issued to the Railroad Commission of Texas as required for its
oil and gas activities, which is secured by certain bank deposits totaling
$250,000.  The Company has  recognized approximately $4,000 in
amortization expense related to bank fees associated with this letter of credit
in the nine months ending September 30, 2010, and currently has approximately
$4,000 in unamortized bank fees as of September 30, 2010.





NOTE 7.
ACCUMULATED COMPENSATED ABSENCES





It is the
Company’s policy to permit employees to accumulate a limited amount of earned
but 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.
RELATED PARTY TRANSACTIONS





The
Company has used the services of a consulting company owned by the Chairman of
the Board.  The Company has paid $72,000 for those services during the nine
months ending September 30, 2010.  The Company has paid directors fees to a
company owned by the chairman of the board in the amount of $9,000, and to two
other directors in the amounts of $9,000 each, during the nine months ending
September 30, 2010.





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, the effects of
existing or continued deterioration in economic conditions in the United States
or the markets in which we operate; and acts of war or terrorism inside the
United States or abroad.





BACKGROUND





The
Company is an independent oil and gas exploration and development company
focused on building and revitalizing our oil and gas properties located in the
State of Texas. The Company is organized as a producing oil and gas company and
licensed as an operator by the Texas Railroad Commission. We are in the business
of acquisition, exploration, and development of oil and natural gas
properties





Our
common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB.  As of November 15, 2010, there were 65,680,030 shares of
our common stock issued and outstanding.


10





RESULTS
OF OPERATIONS





Three
Months Ended September 30, 2010





In the
three month period ended September 30, 2010, we produced and sold 2.489 net
barrels of oil and 2.976 mcf of gas, attributable to our net revenue interest in
our producing properties, while generating net revenues of $203,522, as compared
with 2.644 net barrels of oil and 3,853 net mcf of gas, generating net revenues
of $192,532, in the comparable period of 2009. At September 30, 2010, we had
approximately 72 producing oil wells and 2 producing gas wells, with additional
“associated” gas coming from some oil wells.  The oil is light sweet crude
and the natural gas has very high heat content, 1600 to 2600
btu/scf.





Nine
Months Ended September 30, 2010





In the
nine month period ended September 30, 2010, we produced and sold 7,156 net
barrels of oil and 7,909 mcf of gas, attributable to our net revenue interest in
our producing properties, while generating net revenues of $591,526, as compared
with 8,193 net barrels of oil and 10,847 net mcf of gas, generating net revenues
of $484,737, in the comparable period of 2009. At September 30, 2010, we had
approximately 72 producing oil wells and 2 producing gas wells, with additional
“associated” gas coming from some oil wells.  The oil is light sweet crude
and the natural gas has very high heat content, 1600 to 2600
btu/scf.





The
Company and its wholly-owned subsidiaries, Gryphon Production Company, LLC and
Gryphon Field Services, LLC, own 140 wells, of which 23 are water disposal wells
and 2 are gas wells, although “associated” gas is also produced from some oil
wells.  As of September 30, 2010, approximately 72 oil wells were actively
producing.  We also own and operate our 15.9 acre property, with its shop,
yard and office complex. Company equipment includes two work-over rigs as well
as other oil field related equipment.





In
addition, we own approximately 4,510 acres of production rights on six leases,
which includes 500 acres of undeveloped acreage in Gray county, approximately
300 acres of which was previously owned by Mobil, and the balance of
approximately 200 acres on the Worley Combs lease.  The six leases have the
production rights for oil, casing-head gas and natural gas





In May
2010, the Company acquired 16 wells in Hutchinson County, Texas, approximately
15 miles from its main operation in Gray County, Texas, for a purchase price of
$150,000, paid in cash.  There are 15 potential producing wells and 1 water
disposal well.  The acquired property also contains a gas gathering system
not currently in production. The company has started using its own workover
rigs, related equipment and personnel to restore most of the newly acquired
wells and gas system and expects to fund the restoration plan through existing
capital and future production from this field.  In the quarter ending
September 2010, the company brought 4 of the newly acquired wells into
production, which produced 330 bbls of oil generating approximately $23,000 of
gross revenues.  The company capitalized approximately $16,000 in
restoration costs related to these wells for the quarter ending September 30,
2010.





Our other
near-term plans include continued maintenance of existing wells, our primary
focus being to operate our properties and to enhance production by ongoing
treatment.  Additionally, production is expected to increase by remedial
repairs that improve and prolong the production life of existing wells. 
The Company also intends to review several of leases for the possibility of
drilling the wells deeper to reach additional producing strata. 
Feasibility studies are planned to consider drilling replacement wells in the
locations of wells that were previously plugged and abandoned due to either low
prices or integrity issues with the well bore casing.  There is
approximately 500 acres of undeveloped leased property that needs to be reviewed
and studied for the possibility of drilling for new production.





The
following table shows the approximate volumes and average sales and prices for
oil and gas we produced in the nine months ended September 30, 2010, as compared
with sales and price information for the comparable period in 2009:




Nine Months EndedSeptember 30,
                    2010
                  
                  
                  September 30,
                    2009Oil
      and Gas Sales(1)Oil
      Sales(Bbl)
                  
                  
                  7,156
                  
                  
                  
                  8,193Natural
      Gas Sales (Mcf)
                  
                  
                  7,909
                  
                  
                  
                  10,847Average
      Sales Price:Oil,
      per Bbl:
                  
                  $
                  73.51
                  
                  
                  $
                  51.80Gas,
      per MMCF:
                  
                  $
                  8.78
                  
                  
                  $
                  5.56





(1)
            Sales
      of 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.


11





The
decreases in production volumes for the nine months ending September 30, 2010
compared to the nine months ending September 30, 2009 were primarily due to
disruptions in production due to severe winter weather experienced in early 2010
in the Texas Panhandle region.  The Company also experienced a short
disruption with producing wells due to a tornado in the summer of  2010
which temporarily damaged certain electrical power lines to the wells. 
These production disruptions were temporary in nature and have been resolved as
of September 30, 2010.  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 to 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
& CAPTIAL RESOURCES





As of
September 30, 2010 the Company had $701,307 of cash on hand.   We have
a retained earnings deficit of $724,011 and have a stockholders' equity balance
of $2,735,351 at September 30, 2010.  The Company’s decrease in cash on
hand from December 31, 2009 of approximately $450,000 is primarily due to
operating losses and the capital expenditure of approximately $175,000 related
to the new property acquisition in Hutchinson county, which was finalized in May
2010.  The Company expects the increased production revenues from its
current and ongoing restoration of the newly acquired properties to
substantially improve future operating results and stabilize its future net cash
flows from operations.  The Company plans to fund additional restoration
expenditures from current and future revenues.  We continue to explore
future property acquisitions similar to this acquisition.  The Company does
not currently have any debt financing for its assets or operations and does not
currently have any plans for any debt financing in the near future.





CONTRACTUAL
OBLIGATIONS





On July
1, 2009, the Company entered into a 24-month non-exclusive consultant agreement
with PK Advisors, LLC (“PK”) in connection with the Company’s interest in
creating a strategy for growing the core business, creating market awareness and
providing general strategic corporate advice.  In accordance with this
agreement, during each month in the period of 18 months beginning on January 1,
2010, until the consulting agreement is terminated, the Company is obligated to
issue 40,000 shares of unregistered common stock and five year warrants to
purchase 14,000 shares of our common stock with a strike price of $.125 to
PK.  Additional cash consideration would be payable to PK for any future
investment transactions for which PK provides assistance. The Company recorded
professional fees expense of $6,600 related to this agreement in the quarter
ending September 30, 2010.  The Company did not issue any of these warrants
to PK during the three months ended September 30, 2010; instead the Company
anticipates issuing these warrants during the quarter ending December 31, 2010
(in addition to the warrants that the Company is otherwise obligated to issue
during such quarter).





On July
1, 2009, the Company entered into a 24-month non-exclusive consultant agreement
with Equity Source Partners, LLC (“ESP”) in connection with the Company’s
interest in creating a strategy for growing the core business, creating market
awareness and providing general strategic corporate advice. In accordance with
this agreement, during each month in the period of 18 months beginning on
January 1, 2010, until the consulting agreement is terminated, the Company is
obligated to issue 30,000 shares of unregistered common stock and five year
warrants to purchase 14,000 shares of our common stock with a strike price of
$.125 to ESP.  Additional cash consideration would be payable to ESP for
any future investment transactions for which ESP provides assistance. The
Company recorded professional fees expense of $4,950 related to this agreement
in the quarter ending September 30, 2010.  The Company did not issue any of
these warrants to ESP during the three months ended September 30, 2010; instead
the Company anticipates issuing these warrants during the quarter ending
December 31, 2010 (in addition to the warrants that the Company is otherwise
obligated to issue during such quarter).





CRITICAL
ACCOUNTING POLICIES





The
Securities and Exchange Commission (the “SEC”) 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 their business and financial reporting
requirements.  The SEC suggests in FRR 60 that an accounting policy is
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 provided in this Quarterly Report on Form
10-Q.


12





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 Topic 360 “Property, Plant and
Equipment” in the ASC.  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.





Natural
Gas and Oil Properties





In
January 2010, the Financial Accounting Standards Board issued ASU 2010-03 to
align the oil and gas reserve estimation and disclosure requirements of
Extractive Industries — Oil and Gas Topic of the Accounting Standards
Codification with the requirements in the SEC's final rule, Modernization of the Oil and Gas
Reporting Requirements. We implemented ASU 2010-03 as of December 31,
2009.  Key items in the new rules include changes to the pricing used to
estimate reserves and calculate the full cost ceiling limitation, whereby a
12-month average price is used rather than a single day spot price, the use of
new technology for determining reserves, the ability to include nontraditional
resources in reserves and the ability to disclose probable and possible
reserves.  Management has elected not to include probable and possible
reserves in its reserve studies and related disclosures.





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.




Income
Taxes




As part
of the process of preparing the consolidated financial statements, we are
required to estimate the federal and state income taxes in each of the
jurisdictions in which Chancellor operates. This process involves estimating the
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as derivative instruments,
depreciation, depletion and amortization, and certain accrued liabilities for
tax and accounting purposes. These differences and our net operating loss
carry-forwards result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet. We must then assess, using all available
positive and negative evidence, the likelihood that the deferred tax assets will
be recovered from future taxable income. If we believe that recovery is not
likely, we must establish a valuation allowance. Generally, to the extent
Chancellor establishes a valuation allowance or increases or decreases this
allowance in a period, we must include an expense or reduction of expense within
the tax provision in the consolidated statement of operations.




Under
accounting guidance for income taxes, an enterprise must use judgment in
considering the relative impact of negative and positive evidence. The weight
given to the potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively verified. The more
negative evidence that exists (i) the more positive evidence is necessary
and (ii) the more difficult it is to support a conclusion that a valuation
allowance is not needed for some portion or all of the deferred tax asset. Among
the more significant types of evidence that we consider are:




§
            taxable
      income projections in future years;




§
            whether
      the carry-forward period is so brief that it would limit realization of
      tax benefit;




§
            future
      sales and operating cost projections that will produce more than enough
      taxable income to realize the deferred tax asset based on existing sales
      prices and cost structures; and




§
            our
      earnings history exclusive of the loss that created the future deductible
      amount coupled with evidence indicating that the loss is an aberration
      rather than a continuing condition.





OFF-BALANCE
SHEET ARRANGEMENTS





As of
September 30, 2010, the Company had not entered into any off-balance sheet
arrangements or third-party guarantees, nor does our business ordinarily require
us to do so.


13


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. 
Because we are currently operating our wells at their maximum (or near maximum)
levels of production, a decline in crude oil and natural gas prices will likely
reduce our revenues unless we implement offsetting production increases through
further acquisitions or through additional exploration and development
activities.  However, there can be no assurance we will be able to
implement offsetting production increases. We are currently pursuing the ability
to increase production capacity in the near future with our new property
acquisition in Hutchinson county, which was finalized in May 2010. A significant
decline in the prices of oil or natural gas could have a material adverse effect
on our financial condition and results of operations. We do not use
derivative commodity instruments for trading purposes.





ITEM
4.  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 on Form 10-Q.  This officer has, as of the close of
the period covered by this Quarterly Report on Form 10-Q, evaluated the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)).  Based upon that evaluation, this officer concluded that
our disclosure controls and procedures were effective as of that date to ensure
that information required to be disclosed by us in our reports filed or
submitted under the Exchange Act is (a) accumulated and communicated to our
management, including our principal executive and financial officer, as
appropriate to allow timely discussions regarding required disclosure and (b)
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.  There were no changes to the Company's
internal controls in this period identified in connection with this evaluation
that have materially affected, or are reasonably likely materially to affect,
the Company’s internal control over financial reporting.





PART
II—OTHER INFORMATION





ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds.





The
following table sets forth the sales of unregistered securities since the
Company’s last report filed under this item.





Principal  
      Total
      Offering Price/Date
                                          
                                          Title and Amount  (1)
                                          
                                          Purchaser
                                          
                                          ConsiderationSeptember
      7, 2010
                                          
                                          90,000 shares of common stock.
                                          
                                          Advisor
                                          
                                          $
                                          0
                                          (1)September
      7, 2010
                                          
                                          120,000
      shares of common stock.
                                          
                                          Advisor
                                          
                                          $
                                          0
                                          (1)September
      7, 2010
                                          
                                          100,000
      shares of common stock.
                                          
                                          Advisor
                                          
                                          $
                                          0
                                          (2)September
      7, 2010
                                          
                                          100,000
      shares of common stock.
                                          
                                          Advisor
                                          
                                          $
                                          0
                                          (3)September
      7, 2010
                                          
                                          50,000 shares of common stock.
                                          
                                          Advisor
                                          
                                          $
                                          0
                                          (4)September
      7, 2010
                                          
                                          75,000 shares of common stock.
                                          
                                          Advisor
                                          
                                          $
                                          0
                                          (5)September
      7, 2010
                                          
                                          20,000 shares of common stock.
                                          
                                          Employee
                                          
                                          $
                                          0
                                          (6)September
      7, 2010
                                          
                                          30,000 shares of common stock.
                                          
                                          Employee
                                          
                                          $
                                          0
                                          (6)


(1)
            Securities
      issued in consideration for advisory services.  See the disclosure
      provided in ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS—CONTRACTUAL OBLIGATIONS for
      a description of these services. The Company recorded professional fees
      expense of $11,550 related to the issuance of these securities in the
      quarter ending September 30, 2010.


(2)
            Securities
      issued in consideration for advisory services. The Company recorded
      professional fees expense of $5,500 related to the issuance of these
      securities in the quarter ending September 30,
  2010.


(3)
            Securities
      issued in consideration for advisory services. The Company recorded
      professional fees expense of $5,500 related to the issuance of these
      securities in the quarter ending September 30,
  2010.


(4)
            Securities
      issued in consideration for advisory services. The Company recorded
      professional fees expense of $2,750 related to the issuance of these
      securities in the quarter ending September 30,
  2010.


(5)
            Securities
      issued in consideration for advisory services. The Company recorded
      professional fees expense of $4,125 related to the issuance of these
      securities in the quarter ending September 30,
  2010.


(6)
            Securities
      issued as compensation for employment services.  The Company recorded
      stock compensation expense of $2,750 related to the issuance of these
      securities in the quarter ending September 30,
  2010.





The
Company did not engage an underwriter with respect to any of the issuances of
securities described in the foregoing table, and none of these issuances gave
rise to any underwriting discount or commission.


14





All of
the issuances described above are exempt from registration under the Securities
Act of 1933, as amended (the “Securities Act”), pursuant to Rule 505 promulgated
thereunder.  Alternatively, none of the issuances described above
constituted a “public offering” of securities under Section 4(2) of the
Securities Act, and, accordingly, all of such issuances are exempt from
registration under the Securities Act.





ITEM
6.  Exhibits.





3.1
            Certificate
      of Incorporation of Nighthawk Capital, Inc. (Utah) (incorporated by
      reference to Exhibit 2.1 to the Company’s Registration Statement on Form
      10-SB12G, filed with the Securities and Exchange Commission on April 5,
      2000).





3.2
            Articles
      on Incorporation on Nighthawk Capital, Inc. (Nevada) (incorporated by
      reference to Exhibit 2.2 to the Company’s Registration Statement on Form
      10-SB12G, filed with the Securities and Exchange Commission on April 5,
      2000).





3.3
            Articles
      of Merger of Nighthawk Capital, Inc. (Utah) into Nighthawk Capital, Inc.
      (Nevada) (incorporated by reference to Exhibit 2.3 to the Company’s
      Registration Statement on Form 10-SB12G, filed with the Securities and
      Exchange Commission on April 5,
2000).





3.4
            By-Laws
      (incorporated by reference to Exhibit 2.4 to the Company’s Registration
      Statement on Form 10-SB12G, filed with the Securities and Exchange
      Commission on April 5, 2000.





4.1
            Form
      of warrant issuable to PK and ESP.





10.1
            Purchase
      Agreement by and between Charlie Heater, d/b/a H 5 Producers, a sole
      proprietorship, and Gryphon Production Co., LLC, dated as of May 6, 2010
      (incorporated by reference to Exhibit No. 10.1 to the Company’s Current
      Report on Form 8-K, filed with the Securities and Exchange Commission on
      May 10, 2010).





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





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





SIGNATURES





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





Chancellor
      Group, Inc.(Registrant)By:
                /s/ 
      Maxwell GrantChief
      Executive Officer andPrincipal
      Financial Officer





Dated:
November 15, 2010


15





EXHIBIT
INDEX





Exhibit Number
              
              Description3.1
              
              Certificate
      of Incorporation of Nighthawk Capital, Inc. (Utah) (incorporated by
      reference to Exhibit 2.1 to the Company’s Registration Statement on Form
      10-SB12G, filed with the Securities and Exchange Commission on April 5,
      2000).3.2
              
              Articles
      on Incorporation on Nighthawk Capital, Inc. (Nevada) (incorporated by
      reference to Exhibit 2.2 to the Company’s Registration Statement on Form
      10-SB12G, filed with the Securities and Exchange Commission on April 5,
      2000).3.3
              
              Articles
      of Merger of Nighthawk Capital, Inc. (Utah) into Nighthawk Capital, Inc.
      (Nevada) (incorporated by reference to Exhibit 2.3 to the Company’s
      Registration Statement on Form 10-SB12G, filed with the Securities and
      Exchange Commission on April 5, 2000).3.4
              
              By-Laws
      (incorporated by reference to Exhibit 2.4 to the Company’s Registration
      Statement on Form 10-SB12G, filed with the Securities and Exchange
      Commission on April 5, 2000.4.1
              
              Form
      of warrant issuable to PK and ESP.10.1
              
              Purchase
      Agreement by and between Charlie Heater, d/b/a H 5 Producers, a sole
      proprietorship, and Gryphon Production Co., LLC, dated as of May 6, 2010
      (incorporated by reference to Exhibit No. 10.1 to the Company’s Current
      Report on Form 8-K, filed with the Securities and Exchange Commission on
      May 10, 2010).31
              
              Certification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32
              
              Certification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      18  U.S.C. Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Oxley Act of
2002.


16