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, 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 000-30219ame


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
64,884,980 as of May 13, 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
              9Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              11Item
      4.
              Controls
      and Procedures
              12PART
      IIItem
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              12Item
      6.
              Exhibits
              12EXHIBIT
      INDEX
              13


i




Item
1.  Financial Statements





Chancellor
Group, Inc.




INDEX





Page No.Consolidated
      Balance Sheets as at March 31, 2010 and December 31, 2009
      (Unaudited)
                  2Consolidated
      Statements of OperationsFor
      the Three Months Ended March 31, 2010 and 2009 (Unaudited)
                  3Consolidated
      Statements of Cash FlowsFor
      the Nine Months Ended March 31, 2010 and 2009 (Unaudited)
                  4Notes
      to Unaudited Consolidated Financial Statements
                  5-9


1


Chancellor
Group, Inc.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





March 31, 2010
                          
                          
                          December 31, 2009ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                          
                          $
                          1,298,998
                          
                          
                          $
                          1,404,695Revenue
      Receivable
                          
                          
                          71,328
                          
                          
                          
                          74,344Prepaid
      Insurance
                          
                          
                          21,404
                          
                          
                          
                          54,803Federal
      Income Tax Receivable
                          
                          
                          49,502
                          
                          
                          
                          49,502Total
      Current Assets
                          
                          
                          1,441,232
                          
                          
                          
                          1,583,344Property
      and Equipment:Leases
      and Lease Equipment
                          
                          
                          1,570,584
                          
                          
                          
                          1,570,584Office
      Building & Equipment
                          
                          
                          134,630
                          
                          
                          
                          134,630Auto
      / Transportation Equipment
                          
                          
                          202,723
                          
                          
                          
                          202,723Machinery
      & Equipment
                          
                          
                          458,465
                          
                          
                          
                          458,465Accumulated
      Depreciation
                          
                          
                          (588,341
                          )
                          
                          
                          (521,410
                          )Total
      Property and Equipment, Net
                          
                          
                          1,778,061
                          
                          
                          
                          1,844,992Other
      Assets:Unamortized
      Letter of Credit
                          
                          
                          2,208
                          
                          
                          
                          2,944Deposits
                          
                          
                          250
                          
                          
                          
                          250Total
      Other Assets
                          
                          
                          2,458
                          
                          
                          
                          3,194Total
      Assets
                          
                          $
                          3,221,751
                          
                          
                          $
                          3,431,530LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable – Gryphon Production
                          
                          
                          69,790
                          
                          
                          
                          40,414Accrued
      Expenses
                          
                          
                          -
                          
                          
                          
                          1,653Stock
      Subscription Payable
                          
                          
                          1,602
                          
                          
                          
                          1,602Total
      Current Liabilities
                          
                          
                          71,392
                          
                          
                          
                          43,669Long
      Term Liabilities:Deferred
      Tax Liability, net
                          
                          
                          -
                          
                          
                          
                          -Total
      Long Term Liabilities
                          
                          
                          -
                          
                          
                          
                          -Stockholders’
      Equity:Common
      Stock:  $.001 par value, 250,000,000shares
      authorized, 64,884,980 sharesissued
      and outstanding
                          
                          
                          65,885
                          
                          
                          
                          65,125Paid
      in Capital
                          
                          
                          3,349,753
                          
                          
                          
                          3,308,713Retained
      Earnings
                          
                          
                          14,023
                          
                          
                          
                          929,807Net
      Income (Loss)
                          
                          
                          (279,302
                          )
                          
                          
                          (915,784
                          )Total
      Stockholders’ Equity
                          
                          
                          3,150,359
                          
                          
                          
                          3,387,861Total
      Liabilities and Stockholders’ Equity
                          
                          $
                          3,221,751
                          
                          
                          $
                          3,431,530





See Notes
to Unaudited Consolidated Financial Statements


2


Chancellor
Group, Inc.


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND MARCH 31, 2009


(Unaudited)





March 31, 2010
                
                
                March 31, 2009Sales
      - Net of Royalties Paid:Oil
                
                $
                168,767
                
                
                $
                99,148Natural
      Gas
                
                
                19,000
                
                
                
                18,986Hedge
      Income
                
                
                -
                
                
                
                60,560Other
      Income
                
                
                -
                
                
                
                18,975Gross
      Revenues
                
                
                187,767
                
                
                
                197,669Severance
      Taxes
                
                
                9,178
                
                
                
                5,944Net
      Revenue
                
                
                178,589
                
                
                
                191,725Operating
      Expenses:Lease
      Operating Expense
                
                
                48,634
                
                
                
                139,190Other
      Operating Expense
                
                
                162,622
                
                
                
                343,361General
      & Administrative Expense
                
                
                181,698
                
                
                
                85,441Depreciation,
      Depletion & Amortization
                
                
                66,931
                
                
                
                67,014Total
      Operating Expense
                
                
                459,885
                
                
                
                635,006Income
      (loss) From Operations
                
                
                (281,296
                )
                
                
                (443,281
                )Other
      Income (Expenses):Interest
                
                
                3,514
                
                
                
                3,270Sale
      of Assets
                
                
                -
                
                
                
                -Total
      Other Income (Expense)
                
                
                3,514
                
                
                
                3,270Financing
      Charges:Interest
                
                
                -
                
                
                
                24Bank
      Fees Amortization
                
                
                1,520
                
                
                
                1,294Total
      Financing Charges
                
                
                1,520
                
                
                
                1,318Income
      (Loss) before provision for Income Taxes
                
                
                (279,302
                )
                
                
                (441,329
                )Provision
      for Income Taxes(Benefits)
                
                
                -
                
                
                
                (37,487
                )Net
      Income (Loss)
                
                
                (279,302
                
                
                
                (403,842
                )Net
      Per Share
                
                
                (
                *)
                
                
                (
                *)Weighted
      Average Number of Common Shares Outstanding
                
                
                65,111,869
                
                
                
                65,140,364





* Less
than $.01 per Share


See Notes
to Unaudited Consolidated Financial Statements


3





Chancellor
Group, Inc.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND MARCH 31, 2009


(Unaudited)





March 31, 2010
                      
                      
                      March 31, 2009Cash
      Flows From Operating Activities:Net
      Income (loss)
                      
                      $
                      (279,302
                      )
                      
                      $
                      (403,842
                      )Adjustments
      to reconcile net income(loss)
      to net cash provided by(used
      for) operating activities:Depreciation,
      Depletion & Amortization
                      
                      
                      66,932
                      
                      
                      
                      78,114Deferred
      Income Taxes
                      
                      
                      -
                      
                      
                      
                      (37,487
                      )(Increase)
      Decrease in Operating Assets
                      
                      
                      41,800
                      
                      
                      
                      -Increase
      (Decrease) in Operating
                      
                      
                      37,150
                      
                      
                      
                      109,249Liabilities
                      
                      
                      27,723
                      
                      
                      
                      (221,005
                      )Net
      Cash Provided by (used for)Operating
      Activities
                      
                      
                      (105,697
                      )
                      
                      
                      (474,971
                      )Cash
      Flows From Investing Activities:Sale
      of Assets ProceedsOther
      Capital Expenditures
                      
                      
                      -
                      
                      
                      
                      (200,790
                      )Net
      Cash Provided by (used for)Investing
      Activities
                      
                      
                      -
                      
                      
                      
                      (200,790
                      )Cash
      Flows From Financing Activities:Notes
      Payable RedemptionsIssuances
      of Common Stock
                      
                      
                      -
                      
                      
                      
                      -Net
      Cash Provided by (used for)Financing
      Activities
                      
                      
                      -
                      
                      
                      
                      -Net
      Increase (Decrease) in Cash and Cash Equivalents
                      
                      
                      (105,697
                      )
                      
                      
                      (675,761
                      )Cash
      and Cash Equivalents at the Beginning of the Period
                      
                      
                      1,404,695
                      
                      
                      
                      2,531,525Cash
      and Cash Equivalents at the End of the Period
                      
                      $
                      1,298,998
                      
                      
                      $
                      1,855,764Supplemental
      Disclosures of Cash Flows InformationInterest
      Paid
                      
                      $
                      -
                      
                      
                      $
                      1317Income
      Taxes Paid
                      
                      $
                      -
                      
                      
                      $
                      95,382





See Notes
to Unaudited Consolidated Financial Statements


4


CHANCELLOR
GROUP, INC.





NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





March 31,
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 in Pampa, Texas.





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 19 are
water disposal wells and 2 are gas wells, although “associated” gas is also
produced from some oil wells.  As of March 31, 2010, approximately 70
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 4,200 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 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 2,243 barrels of oil and 1,933 mcf of gas in the three
months ended March 31, 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, 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 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.





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, 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.





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.





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.





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 ASC
Topic 820 “Fair Value
Measurements”.  As of March 31, 2010 there is no material
impact on the consolidated financial statements related to fair value
measurements and disclosures.





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.


6





Employee Stock-Based
Compensation





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





Business
Combinations





The
Company accounts for business combinations in accordance with Topic 805 “Business Combinations” in the
ASC.  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 quarter
ending March 31, 2010, the Company did not enter into any business
combinations.





Subsequent
Events




Events
occurring after March 31, 2010 were evaluated as of May 13, 2010, the date this
Quarterly Report was issued, in compliance Topic 855 “Subsequent Events” in the
ASC, to ensure that any subsequent events that met the criteria for recognition
and/or disclosure in this report have been included.





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 June
2009, the FASB issued new accounting guidance on consolidation of variable
interest entities (“VIEs”) that changes how a reporting entity determines 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 new 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’s adoption of this new guidance did not have a material
impact on its financial position, results of operations or cash
flows.





In
January 2010, the FASB issued new accounting guidance to require additional fair
value related disclosures including transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating
to Level 3 measurements. It also clarifies existing fair value disclosure
guidance about the level of disaggregation and about inputs and valuation
techniques. This new guidance is effective for the first reporting period
beginning after December 15, 2009 except for the requirement to separately
disclose purchases, sales, issuances and settlements relating to Level 3
measurements, which is effective for the first reporting period beginning after
December 15, 2010. The Company’s adoption of this new guidance did not have a
material impact on its financial position, results of operations or cash flows.
The Company expects that the adoption of the Level 3 related gross disclosure
requirement, which is effective in 2011, will not have a material impact on the
financial position, results of operations 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 March
31, 2010, the Company had a federal net operating loss carry-forward of
approximately $1,425,000.  A deferred tax asset of approximately
$285,000 has been partially offset by a valuation allowance of approximately
$115,000 due to federal net operating loss carry-back and carry-forward
limitations.





At March
31, 2010, the Company also had approximately $170,000 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.


7





No
reserves for uncertain income tax positions have been recorded pursuant to the
guidance for uncertainty in income taxes under ASC Topic 740, Income
Taxes.





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 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
64,884,980 shares issued and outstanding as of March 31, 2010 (see footnotes
regarding Treasury Stock, Sale of Assets and Related Party Transactions for
additional information).





Stock Options and
Warrants





Non-employee Stock Options
and Warrants





The
Company accounts for non-employee stock options under Topic 718 “Compensation-Stock Compensation”in the ASC, 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 March 31, 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 are 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.




Employee Stock
Options





The
Company accounts for employee stock options under SFAS 123 (as amended by SFAS
148) which was primarily codified into Topic 718 “Compensation-Stock Compensation”in the ASC. 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 in the quarter ending March 31, 2010.





NOTE 4.
PROPERTY AND EQUIPMENT





A summary
of fixed assets at March 31, 2010 is as follows:





Balance
                                
                                
                                
                                
                                
                                
                                
                                
                                BalanceDecember 31,
                                
                                
                                
                                
                                
                                
                                
                                
                                March 31,2009
                                
                                
                                Additions
                                
                                
                                Deletions
                                
                                
                                2010Auto/Transportation
      Equipment
                                
                                $
                                202,723
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                202,723Buildings
      & Improvements
                                
                                
                                125,280
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                125,280Leases
      & Lease Equipment
                                
                                
                                1,570,584
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,570,584Furniture,
      Fixtures & Office Equipment
                                
                                
                                9,350
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                9,350Machinery
      & Equipment
                                
                                
                                458,465
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                458,465$
                                2,366,402
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                2,366,402Less:
      Accumulated Depreciation
                                
                                
                                521,410
                                
                                
                                
                                66,931
                                
                                
                                
                                -
                                
                                
                                
                                588,341$
                                1,845,550
                                
                                
                                $
                                66,931
                                
                                
                                $
                                -
                                
                                
                                $
                                1,778,061





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.


8




NOTE 6.
LONG-TERM DEBT





The
Company had no long-term debt at March 31, 2010.





At March
31, 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.





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 $24,000 for those services during the
quarter ending March 31, 2010.





NOTE 9.
SUBSEQUENT EVENT





On May 6,
2010, the Company entered into a purchase agreement with an unrelated third
party seller to purchase certain assets effective May 1, 2010, including all of
the oil, gas and casinghead gas leasehold estates of the seller located in
Hutchinson County, Texas, and also all or substantially all of the equipment,
structures and personal property located upon the land subject to such leasehold
estates and used in connection with seller’s oil and gas operations.  This
transaction is expected to close on or before May 24, 2010.  The cash
purchase price of the transaction is $150,000.   In addition, the
Company agreed to pay seller for its crude petroleum inventory on hand at
closing, expected to be approximately $7,000 in value.




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 May 14, 2010, there were 64,884,980 shares of
our common stock issued and outstanding.




9





Three Months Ended March 31,
2010





In the
three month period ended March 31, 2010, we produced and sold 2,243 net barrels
of oil and 1,933 mcf of gas, attributable to our net revenue interest in our
producing properties, while generating revenues of $187,767, as compared with
2,623 net barrels of oil and 3,570 net mcf of gas, generating revenues of
$118,134, in the comparable period of 2009. At March 31, 2010, we had
approximately 70 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.





RESULTS
OF OPERATIONS





The
Company and its wholly-owned subsidiaries, Gryphon Production Company, LLC and
Gryphon Field Services, LLC, own 127 wells, of which 19 are water disposal wells
and 2 are gas wells, although “associated” gas is also produced from some oil
wells.  As of March 31, 2010, approximately 70 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 4,200 acres of production rights on six leases,
which includes 500 acres of undrilled 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





Our
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 has plans to reenter certain abandoned wells,
which were taken out of production due to extremely low oil and gas prices,
bringing oil and gas from these wells 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 shows the approximate volumes and average sales prices for oil
and gas we produced in the three months ended March 31, 2010, as compared with
sales and price information for the comparable period in 2009:




Three Months EndedMarch 31,
                    2010
                  
                  
                  March 31,
                    2009Oil
      and Gas Sales(1)Oil
      Sales(Bbl)
                  
                  
                  2,243
                  
                  
                  
                  2,644Natural
      Gas Sales (Mcf)
                  
                  
                  1,933
                  
                  
                  
                  3,853Average
      Sales Price:Oil,
      per Bbl:
                  
                  $
                  75.23
                  
                  
                  $
                  64.15Gas,
      per MMCF:
                  
                  $
                  9.83
                  
                  
                  $
                  5.88







(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 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
March 31, 2010 the Company had $1,298,998 of cash on hand.   We
have a retained earnings deficit of $265,302 and have a stockholders' equity
balance of $3,150,359 at March 31, 2010.


10




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 March 31, 2010.





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 March 31, 2010.





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.





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.





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.





OFF-BALANCE
SHEET ARRANGEMENTS





As of
March 31, 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.




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 six 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.


11





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 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
                                    
                                    ConsiderationFebruary
      5, 2010
                                    
                                    30,000
      shares of common stock.
                                    
                                    Advisor
                                    
                                    $
                                    0
                                    (1)February
      5, 2010
                                    
                                    40,000
      shares of common stock.
                                    
                                    Advisor
                                    
                                    $
                                    0
                                    (1)March
      15, 2010
                                    
                                    250,000
      shares of common stock.
                                    
                                    Advisor
                                    
                                    $
                                    0
                                    (2)March
      15, 2010
                                    
                                    250,000
      shares of common stock.
                                    
                                    Advisor
                                    
                                    $
                                    0
                                    (3)March
      15, 2010
                                    
                                    50,000
      shares of common stock
                                    
                                    Advisor
                                    
                                    $
                                    0
                                    (4)March
      15, 2010
                                    
                                    60,000
      shares of common stock
                                    
                                    Advisor
                                    
                                    $
                                    0
                                    (1)March
      15, 2010
                                    
                                    80,000
      shares of common stock
                                    
                                    Advisor
                                    
                                    $
                                    0
                                    (1)


(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.


(2)
            Securities
      issued in consideration for advisory services. The Company recorded
      professional fees expense of $13,750 related to the issuance of these
      securities in the quarter ending March 31,
2010.


(3)
            Securities
      issued in consideration for advisory services. The Company recorded
      professional fees expense of $13,750 related to the issuance of these
      securities in the quarter ending March 31,
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 March 31,
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.





All of
the issuances described above are exempt from registration under the Securities
Act of 1933, as amended, 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.


12





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:
May 13, 2010





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, 2000.10.1
                  
                  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.




13