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, 2009





 ̈           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)





Check  whether
the issuer (1) filed all reports  required to be filed by Section 13
or 15(d) of the  Exchange  Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing requirements for
the past 90 days. x Yes
 ̈
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, or a smaller reporting company.  (Check
One):





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





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





APPLICABLE
ONLY TO CORPORATE ISSUERS




The
number of shares outstanding the issuer's common stock, $.001 par value, was
65,125,030 as of November 4, 2009.








Chancellor
Group, Inc.





Table of
Contents





Page No.PART
      I
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      Statements
                1Item
      2.
                Management's
      Discussion and Analysis or Plan of Operation
                12Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                14Item
      4.
                Controls
      and Procedures
                14PART
      IIItem
      2.
                Unreported
      Sales of Equity Securities and Use of Proceeds
                15Item
      6.
                Exhibits
                16EXHIBIT
      INDEX
                17


ii





Item
1.  Financial Statements





Chancellor
Group, Inc.





INDEX





Page No.Consolidated
      Balance Sheets as at September 30, 2009 and December 31, 2008
      (Unaudited)
                2Consolidated
      Statements of Operations For the Three and Nine and Months Ended September
      30, 2009 and 2008 (Unaudited)
                3Consolidated
      Statements of Cash Flows For the Nine Months Ended September 30, 2009 and
      2008 (Unaudited)
                4Notes
      to Unaudited Consolidated Financial Statements
                5-11


1


Chancellor
Group, Inc.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)





September 30, 2009
                    
                    
                    December 31, 2008ASSETSCurrent
      Assets:Cash
      in Bank
                    
                    $
                    1,500,646
                    
                    
                    $
                    2,531,525Revenue
      Receivable
                    
                    
                    67,670
                    
                    
                    
                    201,455Prepaid
      Insurance
                    
                    
                    68,962
                    
                    
                    
                    23,665Deferred
      Tax Asset
                    
                    
                    49,502
                    
                    
                    
                    0Total
      Current Assets
                    
                    
                    1,686,780
                    
                    
                    
                    2,756,645Fixed
      Assets:Leases
      and Lease Equipment
                    
                    
                    1,570,584
                    
                    
                    
                    1,396,252Office
      Building & Equipment
                    
                    
                    134,630
                    
                    
                    
                    132,065Auto
      / Transportation Equipment
                    
                    
                    202,723
                    
                    
                    
                    218,661Machinery
      & Equipment
                    
                    
                    450,179
                    
                    
                    
                    442,746Accumulated
      Depreciation
                    
                    
                    (455,745
                    )
                    
                    
                    ( 262,478
                    )Total
      Fixed Assets
                    
                    
                    1,902,371
                    
                    
                    
                    1,927,246Other
      Assets:Unamortized
      Letter of Credit
                    
                    
                    0
                    
                    
                    
                    833Prepaid
      Long Term Hedge
                    
                    
                    0
                    
                    
                    
                    11,100Deposits
                    
                    
                    250
                    
                    
                    
                    4,975Total
      Other Assets
                    
                    
                    250
                    
                    
                    
                    16,908Total
      Assets
                    
                    $
                    3,589,401
                    
                    
                    $
                    4,700,799LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Due
      to Related Party
                    
                    $
                    0
                    
                    
                    $
                    36,500Accounts
      Payable – Gryphon Production
                    
                    
                    46,598
                    
                    
                    
                    224,598Miscellaneous
      Accounts Payable & Suspense
                    
                    
                    5,174
                    
                    
                    
                    5,949Federal
      Income Tax Payable
                    
                    
                    0
                    
                    
                    
                    52,229State
      Income Tax Payable
                    
                    
                    0
                    
                    
                    
                    64,674Stock
      Subscription Payable
                    
                    
                    1,602
                    
                    
                    
                    1,602Total
      Current Liabilities
                    
                    
                    53,374
                    
                    
                    
                    385,552Long
      Term Liabilities:Deferred
      Tax Liability
                    
                    
                    39,722
                    
                    
                    
                    126,802Total
      Long Term Liabilities
                    
                    
                    39,722
                    
                    
                    
                    126,802Stockholders’
      Equity:Common
      Stock:  $.001 par value, 250,000,000 shares authorized,
      65,125,030 shares issued and outstanding
                    
                    
                    65,125
                    
                    
                    
                    65,233Paid
      in Capital
                    
                    
                    3,308,713
                    
                    
                    
                    3,229,905Retained
      Earnings
                    
                    
                    929,807
                    
                    
                    
                    (4,045,659
                    )Treasury
      Stock
                    
                    
                    0
                    
                    
                    
                    (36,500
                    )Net
      Income (Loss)
                    
                    
                    (807,340
                    )
                    
                    
                    4,975,466Total
      Stockholders’ Equity
                    
                    
                    3,496,305
                    
                    
                    
                    4,188,445Total
      Liabilities and Stockholders’ Equity
                    
                    $
                    3,589,401
                    
                    
                    $
                    4,700,799





See Notes
to Unaudited Consolidated Financial Statements


2







CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30,
2008


(Unaudited)





For the three months
                      ended September 30,
                    
                    
                    For the nine months
                      ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Sales
      - Net of Royalties Paid:Oil
                    
                    $
                    169,600
                    
                    
                    $
                    331,665
                    
                    
                    $
                    424,441
                    
                    
                    $
                    1,852,948Natural
      Gas
                    
                    
                    22,682
                    
                    
                    
                    43,552
                    
                    
                    
                    60,296
                    
                    
                    
                    335,648Hedge
                    
                    
                    250
                    
                    
                    
                    0
                    
                    
                    
                    71,160
                    
                    
                    
                    0Other
      Income
                    
                    
                    0
                    
                    
                    
                    38,960
                    
                    
                    
                    23,905
                    
                    
                    
                    38,960Gross
      Revenue
                    
                    
                    192,532
                    
                    
                    
                    414,177
                    
                    
                    
                    579,802
                    
                    
                    
                    2,227,556Severance
      Taxes
                    
                    
                    10,552
                    
                    
                    
                    9,620
                    
                    
                    
                    25,914
                    
                    
                    
                    99,764Marketing
      Fees
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    13,213Royalties
      Paid
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    14Net
      Revenue
                    
                    
                    181,980
                    
                    
                    
                    404,557
                    
                    
                    
                    553,888
                    
                    
                    
                    2,114,565Operating
      Expenses:Lease
      Operating Expense
                    
                    
                    64,745
                    
                    
                    
                    245,539
                    
                    
                    
                    248,761
                    
                    
                    
                    893,692Other
      Operating Expense
                    
                    
                    150,389
                    
                    
                    
                    30,216
                    
                    
                    
                    678,560
                    
                    
                    
                    617,797General
      & Administrative Expense
                    
                    
                    152,332
                    
                    
                    
                    149,458
                    
                    
                    
                    378,350
                    
                    
                    
                    214,256Depreciation,
      Depletion & Amortization
                    
                    
                    64,980
                    
                    
                    
                    71,989
                    
                    
                    
                    197,830
                    
                    
                    
                    302,664Total
      Operating Expense
                    
                    
                    432,446
                    
                    
                    
                    497,202
                    
                    
                    
                    1,503,501
                    
                    
                    
                    2,028,409Income
      (loss) From Operations
                    
                    
                    (250,466
                    )
                    
                    
                    (92,645
                    )
                    
                    
                    (949,613
                    )
                    
                    
                    86,156Other
      Income (Expenses):Interest
                    
                    
                    6,260
                    
                    
                    
                    1,836
                    
                    
                    
                    14,320
                    
                    
                    
                    1,836Sale
      of Assets
                    
                    
                    0
                    
                    
                    
                    6,409,927
                    
                    
                    
                    (6,557
                    )
                    
                    
                    6,409,927Organization
      Costs
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0Hedge
      Costs Amortization
                    
                    
                    0
                    
                    
                    
                    (14,800
                    )
                    
                    
                    0
                    
                    
                    
                    (33,300
                    )Total
      Other Income (Expense)
                    
                    
                    6,260
                    
                    
                    
                    6,396,963
                    
                    
                    
                    7,763
                    
                    
                    
                    6,458,081Financing
      Charges:Interest
                    
                    
                    0
                    
                    
                    
                    340,574
                    
                    
                    
                    375
                    
                    
                    
                    588,521Bank
      Fees Amortization
                    
                    
                    402
                    
                    
                    
                    48,899
                    
                    
                    
                    1,696
                    
                    
                    
                    73,764Total
      Financing Charges
                    
                    
                    402
                    
                    
                    
                    389,473
                    
                    
                    
                    2,071
                    
                    
                    
                    662,285Income
      (Loss) before provision forIncome
      Taxes
                    
                    
                    (244,608
                    )
                    
                    
                    5,914,845
                    
                    
                    
                    (943,921
                    )
                    
                    
                    5,881,952Provision
      for Income Taxes(Benefits)
                    
                    
                    (37,617
                    )
                    
                    
                    465,000
                    
                    
                    
                    (136,581
                    )
                    
                    
                    465,000Net
      Income (Loss)
                    
                    $
                    (206,991
                    )
                    
                    $
                    5,449,845
                    
                    
                    $
                    (807,340
                    )
                    
                    $
                    5,416,952Net
      Income (Loss) per Share (Basic and
                      Fully
      Diluted)
                    
                    $
                    (
                    *)
                    
                    $
                    0.0841
                    
                    
                    $
                    (
                    *)
                    
                    $
                    0.0836Weighted
      Average Number of Common Shares Outstanding
                    
                    
                    64,873,508
                    
                    
                    
                    64,802,781
                    
                    
                    
                    65,145,492
                    
                    
                    
                    64,802,781


* Less
than $.01 per Share


See Notes
to Unaudited Consolidated Financial Statements


3












CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008


(Unaudited)





September 30, 2009
                      
                      
                      September 30, 2008Cash
      Flows From Operating Activities:Net
      Income (loss)
                      
                      $
                      (807,340
                      )
                      
                      $
                      87,992Adjustments
      to reconcile net income(loss)
      to net cash provided by(used
      for) operating activities:Depreciation,
      Depletion & Amortization
                      
                      
                      197,830
                      
                      
                      
                      (185,142
                      )Deferred
      Income Taxes
                      
                      
                      (136,581
                      )
                      
                      
                      0Non-Cash
      Stock Compensation
                      
                      
                      78,700
                      
                      
                      
                      0(Increase)
      Decrease in Operating Assets
                      
                      
                      88,649
                      
                      
                      
                      171,871Increase
      (Decrease) in Operating Liabilities
                      
                      
                      (295,678
                      )
                      
                      
                      195,217Net
      Cash Provided by (used for) Operating Activities
                      
                      
                      (874,420
                      )
                      
                      
                      269,938Cash
      Flows From Investing Activities:Sale
      of Assets Proceeds
                      
                      
                      28,000
                      
                      
                      
                      9,824,890Other
      Capital Expenditures
                      
                      
                      (184,459
                      )
                      
                      
                      (594,636
                      )Net
      Cash Provided by (used for)Investing
      Activities
                      
                      
                      (156,459
                      )
                      
                      
                      9,230,254Cash
      Flows From Financing Activities:Notes
      Payable Redemptions
                      
                      
                      0
                      
                      
                      
                      (5,974,414
                      )Issuances
      of Common Stock
                      
                      
                      0
                      
                      
                      
                      200Net
      Cash Provided by (used for)Financing
      Activities
                      
                      
                      0
                      
                      
                      
                      (5,974,214
                      )Net
      Increase (Decrease) in Cash
                      
                      
                      (1,030,879
                      )
                      
                      
                      3,525,978Cash
      at the Beginning of the Period
                      
                      
                      2,531,525
                      
                      
                      
                      218,118Cash
      at the End of the Period
                      
                      $
                      1,500,646
                      
                      
                      $
                      3,744,096Supplemental
      Disclosures of Cash Flows InformationInterest
      Paid
                      
                      $
                      375
                      
                      
                      $
                      588,521Income
      Taxes Paid
                      
                      $
                      0
                      
                      
                      $
                      0





See Notes
to Unaudited Consolidated Financial Statements


4





CHANCELLOR
GROUP, INC.





NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





September
30, 2009





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 September 30, 2009, 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 9,116 barrels of oil and 10,273 mcf of gas in the nine
months ended September 30, 2009. 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.





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 September 30, 2009 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.





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 balance sheet, approximates fair
value.





Employee Stock-Based
Compensation





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


6





Recent Accounting
Pronouncements





In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, as
amended in February 2008 by FASB Staff Position FAS 157-2, which was primarily
codified into Topic 820 “Fair
Value Measurements” of the FASB Accounting Standards Codification
(“ASC”).  The guidance defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements.  FSP FAS 157-2 defers the effective date of SFAS 157 for
all nonfinancial assets and liabilities, except those items recognized or
disclosed at fair value on an annual or more frequently recurring basis, until
January 1, 2009. As such, management partially adopted the provisions of SFAS
157 effective January 1, 2008. The partial adoption of this statement did not
have a material impact on the financial statements. Management adopted the
remaining provisions of SFAS 157 beginning in 2009.  The adoption of
the remaining provisions did not have a material impact on the consolidated
financial statements.





Effective
for the period ended September 30, 2009, the Company implemented Financial
Accounting Standards Board (“FASB”) Staff Position FAS 107-1 and APB 28-1,
“Interim Disclosures about
Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”),
which amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and Accounting Principles Board Opinion 28,
“Interim Financial
Reporting,”, which was primarily codified into Topic 820 “Fair Value Measurements” of
the ASC.  This guidance requires disclosures about fair value of
financial instruments effective for annual and interim reporting periods of
publicly traded companies. This adoption did not have an impact on the Company’s
financial position or results of operations.





In
December 2007, the FASB issued SFAS 141R, “Business Combinations”, which
was primarily codified into 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.  This guidance is
effective for fiscal years beginning after December 15,
2008.  Although this guidance will impact the Company’s accounting for
business combinations completed on or after January 1, 2009, it did not impact
the Company’s financial statements, as the Company did not enter into any
business combinations during the nine months ended September 30,
2009.





In
December 2007, the FASB issued SFAS 160, “Non-controlling Interests in
Consolidated Financial Statements”, which was primarily codified into
Topic 810 “Consolidations” in the
ASC.  This guidance established new accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary.  It clarifies that a non-controlling interest in a
subsidiary (minority interest) is an ownership interest in the consolidated
entity that should be reported as equity in the Consolidated Financial Statement
and separate from the parent company’s equity. Among other requirements, this
guidance requires consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the non-controlling interest. It
also requires disclosure, on the face of the Consolidated Statement of
Operations, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. This guidance became effective for us on
January 1, 2009. The adoption did not have a material impact on the consolidated
financial statements





In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 161, “Disclosures about Derivative
Instruments and Hedging Activities” –an amendment of SFAS 133, which was
primarily codified into Topic 815 “Derivatives and Hedging” in
the ASC.  This guidance expands the disclosure requirements for
derivative instruments, how derivative instruments and related hedged items are
accounted for, and how derivative instruments and related hedged items affect
the entity’s financial position, financial performance, and cash
flows.  This guidance is effective for fiscal years beginning after
November 15, 2008.  This guidance became effective for the Company on
January 1, 2009.  The adoption did not have a material impact on the
consolidated financial statements.





In June
2009, the 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 May
2009, the FASB issued SFAS No. 165, “Subsequent Events” which was
primarily codified into Topic 855 “Subsequent Events” in the
ASC.  This guidance establishes principles and requirements for
subsequent events.  Specifically, it sets forth guidance pertaining to
the period after the balance sheet date during which management should consider
events or transactions for potential recognition or disclosure, circumstances
under which an event or transaction would be recognized after the balance sheet
date and the required disclosures that should be made about events or
transactions that occurred after the balance sheet date.  This
guidance is effective for interim or annual financial periods ending after
September 15, 2009, and as such became effective for the Company on September
30, 2009.  The Company’s adoption of the standard resulted in
additional disclosures surrounding the Company’s subsequent events (See Note 10
below).


7





NOTE 2.
INCOME TAXES





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





At
September 30, 2009, the Company had a federal net operating loss of
approximately $1,095,000.  A deferred tax asset of approximately
$170,000 has been partially offset by a valuation allowance of approximately
$52,000 due to federal NOL carry-back and carry-forward
limitations.





At
September 30, 2009, the Company had approximately $156,000 in deferred income
tax liability attributable to timing differences between federal income tax
depreciation, depletion and book depreciation.





NOTE 3.
STOCKHOLDERS' EQUITY





Preferred
Stock





The
Company has provided for the issuance of 250,000 shares, par value $1,000 per
share, of convertible Preferred Series B stock ("Series B"). Each Series B share
is convertible 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
65,125,030 shares issued and outstanding as of September 30, 2009 (see footnotes
regarding Treasury Stock, Sale of Assets and Related Party Transactions for
additional information).





Treasury
Stock





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





Stock Options and
Warrants





Non-employee Stock Options
and Warrants





The
Company accounts for non-employee stock options under SFAS 123 (as amended by
SFAS 148), which was primarily codified into 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 years ended
December 31, 2007 and 2008, no options were issued, exercised or
cancelled.  For the quarter ending September 30, 2009, 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, 2008. There were no
stock options issued in the first three quarters of the Company’s 2009 fiscal
year.


8





NOTE 4.
FIXED ASSETS




A summary
of fixed assets at September 30, 2009 follows:





Balance
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            BalanceDecember 31,
                                              2008
                                            
                                            
                                            Additions
                                            
                                            
                                            Deletions
                                            
                                            
                                            September 30,
                                              2009Auto/Transportation
      Equipment
                                            
                                            $
                                            218,661
                                            
                                            
                                            $
                                            23,183
                                            
                                            
                                            $
                                            39,121
                                            
                                            
                                            $
                                            202,723Buildings
      & Improvements
                                            
                                            
                                            125,280
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            125,280Leases
      & Lease Equipment
                                            
                                            
                                            1,396,252
                                            
                                            
                                            
                                            174,333
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            1,570,585Furniture,
      Fixtures & Office Equipment
                                            
                                            
                                            6,785
                                            
                                            
                                            
                                            2,565
                                            
                                            
                                            
                                            0
                                            
                                            
                                            
                                            9,350Machinery
      & Equipment
                                            
                                            
                                            442,747
                                            
                                            
                                            
                                            9,932
                                            
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            450,179$
                                            2,189,725
                                            
                                            
                                            $
                                            210,013
                                            
                                            
                                            $
                                            41,621
                                            
                                            
                                            $
                                            2,358,117Less:
      Accumulated Depreciation
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            455,745$
                                            1,902,372





NOTE 5.
CONTINGENT LIABILITY





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





NOTE 6.
LONG-TERM DEBT





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


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





At the
August 29, 2008 closing of the sale of certain assets of the Company (as
described below in Note 8), the notes held by our lenders, WNB and Capwest, plus
interest thereon to the date of closing, were paid in full with payments of
$2,063,549.53 and $4,220,617.47, respectively.





The
Company had no long-term debt at September 30, 2009.





At
September 30, 2009, 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.


9





NOTE 8.
SALE OF ASSETS





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





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





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





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





The
financial statements reflect the sale of the Oil and Gas Assets, effective
retroactively as of June 1, 2008.  The following is a detailed list of
the sale proceeds and the closing costs incurred with respect to such
sale.





Sales
      Price
                  
                  
                  
                  
                  $
                  13,250,000Adjustments
      to Sales PriceEstimated
      Liability for Well Plugging Expense
                  
                  $
                  (160,000
                  )Retention
      of HH Merten Lease
                  
                  
                  ( 9,642
                  )(169,642
                  )$
                  (169,642
                  )Closing
      Costs and Other Related ExpendituresAcquisition
      of Warrants
                  
                  $
                  850,000Acquisition
      of 2% ORRI
                  
                  
                  700,000Acquisition
      of 6.25% ORRI
                  
                  
                  232,500Acquisition
      of NCE Stock
                  
                  
                  110,000Commissions
                  
                  
                  232,500Legal
                  
                  
                  350,494Other
                  
                  
                  1,599Notes
      payable (including accrued interest)
                  
                  
                  6,284,167Total
      Closing Costs
                  
                  
                  8,761,260$
                  (8,761,260
                  )Net
      Proceeds Received from Sale
                  
                  
                  
                  
                  
                  $
                  4,319,098





NOTE 9.
RELATED PARTY TRANSACTIONS





Until
April 2009, the Company used the services of a local accounting firm in Pampa,
Texas to provide the disbursing of the payroll with related expense and accounts
payable while maintaining the general ledger.  The Company’s former
President was a 50% owner of that accounting firm, which was paid $11,512 for
accounting services through April 2009.  Effective in late April 2009,
the Company disengaged this firm and has engaged an unrelated accounting firm in
Amarillo, Texas to provide these services.


10





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





The
Company has used the services of a consulting company owned by the Chairman of
the Board.  The Company has paid $72,000 for those services during the
Company’s 2009 fiscal year.





In early
2008 in the context of our prior bankruptcy proceeding, Koala, controlled by our
Chairman and Chief Executive Officer, Maxwell Grant, had transferred 1,000,000
shares of our common stock to NCE, which had entered into discussions with
us.  Following dismissal of the bankruptcy proceeding in August 2008, we
settled all matters with NCE for $110,000 pursuant to a Settlement Agreement and
Release of All Claims, dated September 4, 2008, and repurchased the 1,000,000
shares of common stock.  In May 2009, our Board of Directors authorized
issuance of 1,000,000 shares of common stock to Koala, which shares were issued
on July 13, 2009, since Koala had originally transferred 1,000,000 shares to NCE
for the benefit of the Company in the context of the Company's discussions with
NCE.  On July 17, 2009, the 1,000,000 share certificate representing
the shares repurchased from NCE and held as treasury stock was
cancelled.





On July
13, 2009, the Company issued 150,000 shares of common stock to Koala on behalf
of Maxwell Grant, our Chairman and Chief Executive Officer, 300,000 shares of
common stock to Robert Gordon and 300,000 shares of common stock to Dudley Muth,
both also members of our Board of Directors.  Such shares were issued
to our directors for services rendered as directors over long periods of time,
in some cases dating back to March 2006.  The Company recorded an
expense for Director’s Fees in the amount of $30,000 in the third quarter of
2009 related to these stock issuances.





On August
10, 2009, the Company issued to Koala a warrant expiring December 31, 2014 to
purchase 2,500,000 shares of common stock, at a purchase price of $.02 per
share; the Company issued this warrant in replacement of a warrant held by Koala
to purchase the same number of shares at the same per share exercise price,
expiring December 31, 2009, which was originally issued for services rendered in
a shareholder derivative action in Nevada some years ago.





On August
10, 2009, the Company issued to Dudley Muth, a member of our Board of Directors,
a Warrant expiring December 31, 2014 to purchase 1,000,000 shares of common
stock, at a purchase price of $.025 per share, issued in replacement of a
warrant held by Mr. Muth to purchase the same number of shares at the same per
share exercise price, expiring December 31, 2009, which was originally issued
for services rendered in a shareholder derivative action in Nevada some years
ago.





NOTE 10.
SUBSEQUENT EVENTS




Events
occurring after September 30, 2009 were evaluated as of November 4, 2009, the
date this Quarterly Report was issued, in compliance with
SFAS No. 165, which was primarily codified into 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. No such
events were noted.
  11





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





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





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





Our
common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB.  As of November 4, 2009, there were 65,125,030 shares
of our common stock issued and outstanding.





Nine Months Ended September
30, 2009





Our oil
production operations began April 16th, 2007
with an effective date of April 1st,
2007.  During the period ending December 31, 2007, we produced and
sold 23,120 barrels of oil and produced and sold 55,831 mcf gas, generating
$2,075,956 revenues after royalties, with a one month lag in receipt of revenues
for the prior month’s sales, as compared with 24,114 barrels of oil and 48,759
mcf of gas, generating $2,351,433 in gross revenues, in
2008.  Effective June 1, 2008, we sold producing properties with 173
producing wells to Legacy Reserves Operating LP.  We had 84 wells
actually producing oil and gas on December 31, 2008. In the nine month period
ended September 30, 2009, we produced and sold 9,116 net barrels of oil and
11,223 mcf of gas, attributable to our net revenue interest in our producing
properties, while generating revenues of $484,737, as compared with 18,565 net
barrels of oil and 43,058 net mcf of gas, generating revenues of $2,188,597, in
the comparable period of 2008. At September 30, 2009, we had approximately 70
oil wells and 2 gas wells producing with additional “associated” gas coming from
some oil wells.





Three Months Ended September
30, 2009





In the
three month period ended September 30, 2009, we produced a total of 2,644
barrels of oil and 3,853 mcf of gas, while generating revenues of $192,282. The
oil is light sweet crude and the natural gas has very high heat content, 1600 to
2600 btu/scf.





RESULTS
OF OPERATIONS





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





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.


12





The
following table shows the approximate volumes and average sales prices for oil
and gas we produced in the three months ended September 30, 2009, as compared
with sales and price information for the comparable period in 2008:




Nine Months EndedSeptember 30,
                    2009
                  
                  
                  September 30,
                    2008Oil
      and Gas Sales(1)Oil
      Sales(Bbl)
                  
                  
                  2,644
                  
                  
                  
                  2,521Natural
      Gas Sales (Mcf)
                  
                  
                  3,853
                  
                  
                  
                  1,539Average
      Sales Price:Oil,
      per Bbl:
                  
                  $
                  64.15
                  
                  
                  $
                  131.57Gas,
      per MMCF:
                  
                  $
                  5.88
                  
                  
                  $
                  15.87





(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
September 30, 2009 the Company had $1,500,646 of cash on
hand.   We have retained earnings of $122,467 and have a
stockholders' equity balance of $3,496,305 at September 30, 2009.





CONTRACTUAL
OBLIGATIONS





In
September 2009, the Company terminated its existing contract with Pacific Stock
Transfer, effective immediately, and engaged Quicksilver Stock Transfer as
Transfer Agent.





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.  425,000 shares of
unregistered common stock and five year warrants to purchase 250,000 shares of
our common stock with a strike price of $.125, subject to adjustment in certain
circumstances as set forth in the warrant, were issued to Patrick Kolenik
(“Kolenik”) on behalf of PK upon execution of this agreement.  Kolenik
may exercise the warrants either by paying the Company the aggregate exercise
price for the shares of common stock underlying the warrant being exercised or
by electing to exercise the warrant through cashless exercise as set forth in
the warrant.  The Company recorded Professional Fees Expense of
$17,000 related to the execution of this agreement in the quarter ending
September 30, 2009.  The Company is further 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 Kolenik on behalf of
PK per month for the next 18 months beginning January 1, 2009, until the
consulting agreement is terminated.  Additional cash consideration
would be payable to PK for any future investment transactions for which PK
provides assistance.





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. 292,500 shares of
unregistered common stock and five year warrants to purchase 225,000 shares of
our common stock with a strike price of $.125, subject to adjustment in certain
circumstances as set forth in the warrant, were issued to Cary Sucoff (“Sucoff”)
on behalf of ESP upon execution of this agreement.  Sucoff may
exercise these warrants either by paying the Company the aggregate exercise
price for the shares of common stock underlying the warrant being exercised or
by electing to exercise the warrant through cashless exercise as set forth in
the warrant.  32,500 shares of unregistered common stock and five year
warrants to purchase 25,000 shares of our common stock with a strike price of
$.125, subject to adjustment in certain circumstances as set forth in the
warrant, were issued to Francis Anderson (“Anderson”) on behalf of ESP upon
execution of this agreement.  Anderson may exercise these warrants
either by paying the Company the aggregate exercise price for the shares of
common stock underlying the warrant being exercised or by electing to exercise
the warrant through cashless exercise as set forth in the
warrant.  The Company recorded Professional Fees Expense of $13,000
related to the execution of this agreement in the quarter ending September 30,
2009. The Company is further 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 per month for the next 18 months
beginning January 1, 2009, until this consulting agreement is
terminated.  Additional cash consideration would be payable to ESP for
any future investment transactions for which ESP provides
assistance.


13





On August
28, 2009, the Company engaged 2S Partners as a non-exclusive consultant and
finder to assist the Company in identifying properties of interest for potential
future acquisitions.  Consideration for the engagement is contingent
upon contract closing for such services.





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 of SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", which was primarily codified into 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
September 30, 2009, 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.





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.  This officer has, as of the close of the
period covered by this Quarterly Report, evaluated the Company's disclosure
controls and procedures (as defined in Rules 13a-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.


14





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
                
                Underwriter
                
                Underwriting DiscountsJuly 13, 2009
                
                425,000
      shares of common stock.
                
                Advisor
                
                NA
                
                $17,000/NAJuly 13, 2009
                
                292,500
      shares of common stock.
                
                Advisor
                
                NA
                
                $13,000/NAJuly 13, 2009
                
                32,500
      shares of common stock.
                
                Advisor
                
                NA
                
                $1,400/NAJuly 13, 2009
                
                280,000
      shares of common stock.
                
                Former
      Officer
                
                NA
                
                $11,200/NAJuly 13, 2009
                
                300,000
      shares of common stock
                
                Director
                
                NA
                
                $12,000/NAJuly 13, 2009
                
                300,000
      shares of common stock
                
                Director
                
                NA
                
                $12,000/NAJuly 13, 2009
                
                150,000
      shares of common stock
                
                Koala
      Pictures Proprietary Ltd.(2)
                
                NA
                
                $6,000/NAJuly 13, 2009
                
                Warrants
      expiring June 30, 2014 to purchase 25,000 shares of common stock at the
      purchase prices of $.125 per share.(3)
                
                Advisor
                
                NA
                
                $0/NAJuly 13, 2009
                
                Warrants
      expiring June 30, 2014 to purchase 225,000 shares of common stock at the
      purchase prices of $.125 per share.(3)
                
                Advisor
                
                NA
                
                $0/NAJuly 13, 2009
                
                Warrants
      expiring June 30, 2014 to purchase 250,000 shares of common stock at the
      purchase prices of $.125 per share.(3)
                
                Advisor
                
                NA
                
                $0/NAAugust 10, 2009
                
                Warrant
      expiring December 31, 2014 to purchase 2,500,000 shares of common stock,
      at a purchase price of $.02 per share, issued in replacement of a warrant
      to purchase the same number of shares at the same per share exercise price
      expiring December 31, 2009.
                
                Koala
      Pictures Proprietary Ltd.(2)
                
                NA
                
                $0/NAAugust 10, 2009
                
                Warrants
      expiring December 31, 2014 to purchase 1,000,000 shares and 1,500,000
      shares of common stock, respectively, at the respective purchase prices of
      $.025 and $.02 per share, issued in replacement of two warrants to
      purchase the same numbers of shares at the same per share exercise prices
      expiring December 31, 2009.
                
                Private
      Investor
                
                NA
                
                $0/NAAugust 10, 2009
                
                Warrant
      expiring December 31, 2014 to purchase 1,000,000 shares of common stock,
      at a purchase price of $.025 per share, issued in replacement of a warrant
      to purchase the same number of shares at the same per share exercise price
      expiring December 31, 2009.
                
                Director.
                
                NA
                
                $0/NA


15


(1)
            The
      issuances to five private investors and to three directors, one of whom is
      also an officer of the Company, are viewed by the Company as exempt from
      registration under the Securities Act of 1933, as amended (“Securities
      Act”), alternatively as transactions not involving any public offering or
      exempt under the provisions of Regulation D promulgated by the SEC under
      the Securities Act.


(2)
            Koala
      Pictures Proprietary Ltd is controlled by our Chairman and Chief Executive
      Officer, Maxwell Grant.


(3)
            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 additional terms of conversion and
      exercise of these warrants.





ITEM
6.  Exhibits.





2.1
            Plan
      of Reorganization dated March 1, 2008, filed with the United States
      Bankruptcy Court for the Northern District of Texas, Amarillo Division,
      filed herewith.





2.2
            Order
      dated August 15, 2008, of United States Bankruptcy Court, Northern
      District of Texas,  Dismissing the Company’s and its
      Subsidiaries’ Chapter 11 Cases (incorporated by reference to Exhibit
      No.2.2 to the Company’s Current Report on Form 8-K, filed with the
      Securities and Exchange Commission on August 19,
  2008).





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.





10.1
            Agreement
      and Plan of Reorganization, dated October 19, 2000, between Chacellor
      Group, Inc. and Southwin financial, Ltd. (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 November 21,
    2000).





10.23
            Warrant
      issued August 10, 2009 to Koala Pictures Proprietary Ltd. To purchase and
      aggregate of 2,500,000 shares of common stock on or before December 31,
      2014.





10.24
            Warrant
      issued August 10, 2009, to Dudley Muth to purchase an aggregate of
      1,000,000 shares of common stock on or before December 31,
      2014.





10.25
            Warrant
      issued July 13, 2009, to Cary Sucoff to purchase an aggregate of 225,000
      shares of common stock on or before June 30,
  2014.





10.26
            Warrant
      issued August 10, 2009, to Ernest P. Andrews to purchase an aggregate of
      1,000,000 shares of common stock on or before December 31,
      2014.





10.27
            Warrant
      issued August 10, 2009, to Ernest P. Andrews to purchase an aggregate of
      1,500,000 shares of common stock on or before December 31,
      2014.





10.28
            Warrant
      issued July 13, 2009, to Francis Anderson to purchase an aggregate of
      25,000 shares of common stock on or before June 30,
  2014.





10.29
            Warrant
      issued July 13, 2009, to Patrick Kolenik to purchase an aggregate of
      250,000 shares of common stock on or before June 30,
  2014.





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.


16




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 4, 2009





EXHIBIT
INDEX




ExhibitNumber
                    
                    Description2.1
                    
                    Plan
      of Reorganization dated March 1, 2008, filed with the United States
      Bankruptcy Court for the Northern District of Texas, Amarillo Division,
      filed herewith.2.2
                    
                    Order
      dated August 15, 2008, of United States Bankruptcy Court, Northern
      District of Texas,  Dismissing the Company’s and its
      Subsidiaries’ Chapter 11 Cases (incorporated by reference to Exhibit
      No.2.2 to the Company’s Current Report on Form 8-K, filed with the
      Securities and Exchange Commission on August 19, 2008).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, 2000.10.1
                    
                    Agreement
      and Plan of Reorganization, dated October 19, 2000, between Chacellor
      Group, Inc. and Southwin financial, Ltd. (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 November 21,
    2000).10.23
                    
                    Warrant
      issued August 10, 2009 to Koala Pictures Proprietary Ltd. to purchase an
      aggregate of 2,500,000 shares of common stock on or before December 31,
      2014.10.24
                    
                    Warrant
      issued August 10, 2009, to Dudley Muth to purchase an aggregate of
      1,000,000 shares of common stock on or before December 31,
      2014.10.25
                    
                    Warrant
      issued July 13, 2009, to Cary Sucoff to purchase an aggregate of 225,000
      shares of common stock on or before June 30, 2014.10.26
                    
                    Warrant
      issued August 10, 2009, to Ernest P. Andrews to purchase an aggregate of
      1,000,000 shares of common stock on or before December 31,
      2014.10.27
                    
                    Warrant
      issued August 10, 2009, to Ernest P. Andrews to purchase an aggregate of
      1,500,000 shares of common stock on or before December 31,
      2014.10.28
                    
                    Warrant
      issued July 13, 2009, to Francis Anderson to purchase an aggregate of
      25,000 shares of common stock on or before June 30,
  2014.10.29
                    
                    Warrant
      issued July 13, 2009, to Patrick Kolenik to purchase an aggregate of
      250,000 shares of common stock on or before June 30,
  2014.31
                    
                    Certification
      of Principal Executive Officer and Chief Financial Officer Pursuant to
      Section 302 of the Sarbanes  Oxley Act of
  2002.32
                    
                    Certification
      of Principal Executive Officer and Chief Financial Officer Pursuant to
      18  U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Oxley Act of
2002.


17