- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number 000-30219ame

Chancellor Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

(806-688-9697)

(Registrant's Telephone Number, Including Area Code)

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

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

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

Large accelerated filer ¨	Accelerated filer ¨

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding the issuer's common stock, $.001 par value, was 64,884,980 as of May 13, 2010.

Chancellor Group, Inc.

Table of Contents

		Page No.

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	11

Item 4.	Controls and Procedures	12

PART II

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12

Item 6.	Exhibits	12

EXHIBIT INDEX		13

Item 1. Financial Statements

Chancellor Group, Inc.

INDEX

	Page No.

Consolidated Balance Sheets as at March 31, 2010 and December 31, 2009 (Unaudited)	2

Consolidated Statements of Operations
For the Three Months Ended March 31, 2010 and 2009 (Unaudited)	3

Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2010 and 2009 (Unaudited)	4

Notes to Unaudited Consolidated Financial Statements	5-9

Chancellor Group, Inc.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2010			December 31, 2009
ASSETS
Current Assets:
Cash and Cash Equivalents	$	1,298,998		$	1,404,695
Revenue Receivable		71,328			74,344
Prepaid Insurance		21,404			54,803
Federal Income Tax Receivable		49,502			49,502
Total Current Assets		1,441,232			1,583,344

Property and Equipment:
Leases and Lease Equipment		1,570,584			1,570,584
Office Building & Equipment		134,630			134,630
Auto / Transportation Equipment		202,723			202,723
Machinery & Equipment		458,465			458,465
Accumulated Depreciation		(588,341	)		(521,410	)
Total Property and Equipment, Net		1,778,061			1,844,992

Other Assets:
Unamortized Letter of Credit		2,208			2,944
Deposits		250			250
Total Other Assets		2,458			3,194

Total Assets	$	3,221,751		$	3,431,530

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable – Gryphon Production		69,790			40,414
Accrued Expenses		-			1,653
Stock Subscription Payable		1,602			1,602
Total Current Liabilities		71,392			43,669

Long Term Liabilities:
Deferred Tax Liability, net		-			-
Total Long Term Liabilities		-			-

Stockholders’ Equity:
Common Stock: $.001 par value, 250,000,000
shares authorized, 64,884,980 shares
issued and outstanding		65,885			65,125
Paid in Capital		3,349,753			3,308,713
Retained Earnings		14,023			929,807
Net Income (Loss)		(279,302	)		(915,784	)
Total Stockholders’ Equity		3,150,359			3,387,861
Total Liabilities and Stockholders’ Equity	$	3,221,751		$	3,431,530

See Notes to Unaudited Consolidated Financial Statements

Chancellor Group, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

	March 31, 2010			March 31, 2009
Sales - Net of Royalties Paid:
Oil	$	168,767		$	99,148
Natural Gas		19,000			18,986
Hedge Income		-			60,560
Other Income		-			18,975
Gross Revenues		187,767			197,669

Severance Taxes		9,178			5,944

Net Revenue		178,589			191,725

Operating Expenses:
Lease Operating Expense		48,634			139,190
Other Operating Expense		162,622			343,361
General & Administrative Expense		181,698			85,441
Depreciation, Depletion & Amortization		66,931			67,014
Total Operating Expense		459,885			635,006

Income (loss) From Operations		(281,296	)		(443,281	)

Other Income (Expenses):
Interest		3,514			3,270
Sale of Assets		-			-
Total Other Income (Expense)		3,514			3,270

Financing Charges:
Interest		-			24
Bank Fees Amortization		1,520			1,294
Total Financing Charges		1,520			1,318

Income (Loss) before provision for Income Taxes		(279,302	)		(441,329	)
Provision for Income Taxes(Benefits)		-			(37,487	)
Net Income (Loss)		(279,302			(403,842	)

Net Per Share		(	*)		(	*)

Weighted Average Number of Common Shares Outstanding		65,111,869			65,140,364

* Less than $.01 per Share

See Notes to Unaudited Consolidated Financial Statements

Chancellor Group, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(Unaudited)

	March 31, 2010			March 31, 2009
Cash Flows From Operating Activities:
Net Income (loss)	$	(279,302	)	$	(403,842	)

Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation, Depletion & Amortization		66,932			78,114
Deferred Income Taxes		-			(37,487	)
(Increase) Decrease in Operating Assets		41,800			-
Increase (Decrease) in Operating		37,150			109,249
Liabilities		27,723			(221,005	)
Net Cash Provided by (used for)
Operating Activities		(105,697	)		(474,971	)

Cash Flows From Investing Activities:
Sale of Assets Proceeds
Other Capital Expenditures		-			(200,790	)
Net Cash Provided by (used for)
Investing Activities		-			(200,790	)

Cash Flows From Financing Activities:
Notes Payable Redemptions
Issuances of Common Stock		-			-
Net Cash Provided by (used for)
Financing Activities		-			-

Net Increase (Decrease) in Cash and Cash Equivalents		(105,697	)		(675,761	)
Cash and Cash Equivalents at the Beginning of the Period		1,404,695			2,531,525

Cash and Cash Equivalents at the End of the Period	$	1,298,998		$	1,855,764

Supplemental Disclosures of Cash Flows Information

Interest Paid	$	-		$	1317

Income Taxes Paid	$	-		$	95,382

See Notes to Unaudited Consolidated Financial Statements

CHANCELLOR GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

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

Organization

Chancellor Group, Inc. (the "Company", “our”, “we”, “Chancellor” or the “Company” ) was incorporated in the state of Utah on May 2, 1986, and then, on December 30, 1993, dissolved as a Utah corporation and reincorporated as a Nevada corporation. The Company's primary business purpose is to engage in the exploration and production of oil and gas. On March 26, 1996, the Company's corporate name was changed from Nighthawk Capital, Inc. to Chancellor Group, Inc. The Company’s headquarters is in Pampa, Texas.

Operations

The Company is licensed by the Texas Railroad Commission as oil and gas producers and operators. The Company and its wholly-owned subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services, LLC, own 127 wells, of which 19 are water disposal wells and 2 are gas wells, although “associated” gas is also produced from some oil wells. As of March 31, 2010, approximately 70 oil wells are actively producing. We also own and operate our 15.9 acre property, with its shop, yard and office complex. Company equipment includes two work-over rigs as well as other oil field related equipment.

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

We produced a total of 2,243 barrels of oil and 1,933 mcf of gas in the three months ended March 31, 2010. The oil is light sweet crude and the natural gas has very high heat content, 1600 to 2600 btu/scf.

Significant Accounting Policies

Principles of Consolidation

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

Accounting Year

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

Use of Estimates

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

Products and Services, Geographic Areas and Major Customers

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

Net Income (loss) per share

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

Cash and Cash Equivalents

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

Included in cash in bank at March 31, 2010 are deposits totaling $250,000 which are assigned and held as collateral for a letter of credit issued to the Railroad Commission of Texas as required for its oil and gas activities.

Accounts Receivable

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

Property and Equipment

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

Oil and Gas Properties

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

Depletion

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

Income Tax

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

Revenue Recognition

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

Fair Value Measurements and Disclosures

The company estimates fair values of assets and liabilities which require either recognition or disclosure in the financial statements in accordance with ASC Topic 820 “ Fair Value Measurements ”. As of March 31, 2010 there is no material impact on the consolidated financial statements related to fair value measurements and disclosures.

Fair Value of Financial Instruments

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

Employee Stock-Based Compensation

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

Business Combinations

The Company accounts for business combinations in accordance with Topic 805 “ Business Combinations ” in the ASC. This standard modifies certain aspects of how the acquiring entity recognizes and measures the identifiable assets, the liabilities assumed and the goodwill acquired in a business combination. For the quarter ending March 31, 2010, the Company did not enter into any business combinations.

Subsequent Events

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

Recent Accounting Pronouncements

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

In June 2009, the FASB issued new accounting guidance on consolidation of variable interest entities (“VIEs”) that changes how a reporting entity determines a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards approach to a qualitative approach based on which variable interest holder has the power to direct the economic performance related activities of the VIE as well as the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. This new guidance requires the primary beneficiary assessment to be performed on an ongoing basis and also requires enhanced disclosures that will provide more transparency about a company’s involvement in a VIE. This new guidance is effective for a reporting entity’s first annual reporting period that begins after November 15, 2009. The Company’s adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows.

In January 2010, the FASB issued new accounting guidance to require additional fair value related disclosures including transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosure guidance about the level of disaggregation and about inputs and valuation techniques. This new guidance is effective for the first reporting period beginning after December 15, 2009 except for the requirement to separately disclose purchases, sales, issuances and settlements relating to Level 3 measurements, which is effective for the first reporting period beginning after December 15, 2010. The Company’s adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows. The Company expects that the adoption of the Level 3 related gross disclosure requirement, which is effective in 2011, will not have a material impact on the financial position, results of operations or cash flows.

NOTE 2. INCOME TAXES

Deferred income taxes arise from temporary differences in recognition of certain revenues and expenses between financial statement and income tax basis of accounting, and also net operating loss carry-forwards and other tax credit carry-forwards

At March 31, 2010, the Company had a federal net operating loss carry-forward of approximately $1,425,000. A deferred tax asset of approximately $285,000 has been partially offset by a valuation allowance of approximately $115,000 due to federal net operating loss carry-back and carry-forward limitations.

At March 31, 2010, the Company also had approximately $170,000 in deferred income tax liability attributable to timing differences between federal income tax depreciation, depletion and book depreciation, which has been offset against the deferred tax asset related to the net operating loss carry-forward.

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

NOTE 3. STOCKHOLDERS' EQUITY

Preferred Stock

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

Common Stock

The Company has 250,000,000 authorized shares of common stock, par value $.001, with 64,884,980 shares issued and outstanding as of March 31, 2010 (see footnotes regarding Treasury Stock, Sale of Assets and Related Party Transactions for additional information).

Stock Options and Warrants

Non-employee Stock Options and Warrants

The Company accounts for non-employee stock options under Topic 718 “ Compensation-Stock Compensation” in the ASC, whereby options costs are recorded based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. During all quarters for the year ended December 31, 2009, no options were issued, exercised or cancelled. For the quarter ending March 31, 2010, no options were issued, exercised or cancelled.

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

Employee Stock Options

The Company accounts for employee stock options under SFAS 123 (as amended by SFAS 148) which was primarily codified into Topic 718 “ Compensation-Stock Compensation” in the ASC. The Company issued no employee stock options and had none outstanding as of the close of the year ending December 31, 2009. There were no stock options issued in the quarter ending March 31, 2010.

NOTE 4. PROPERTY AND EQUIPMENT

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

	Balance						Balance
	December 31,						March 31,
	2009		Additions		Deletions		2010
Auto/Transportation Equipment	$	202,723	$	-	$	-	$	202,723
Buildings & Improvements		125,280						125,280
Leases & Lease Equipment		1,570,584						1,570,584
Furniture, Fixtures & Office Equipment		9,350						9,350
Machinery & Equipment		458,465						458,465
	$	2,366,402	$	-	$	-	$	2,366,402

Less: Accumulated Depreciation		521,410		66,931		-		588,341
	$	1,845,550	$	66,931	$	-	$	1,778,061

NOTE 5. CONTINGENT LIABILITY

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

NOTE 6. LONG-TERM DEBT

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

At March 31, 2010, the Company has an irrevocable blanket letter of credit totaling $250,000 issued to the Railroad Commission of Texas as required for its oil and gas activities, which is secured by certain bank deposits totaling $250,000.

NOTE 7. ACCUMULATED COMPENSATED ABSENCES

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

NOTE 8. RELATED PARTY TRANSACTIONS

The Company has used the services of a consulting company owned by the Chairman of the Board. The Company has paid $24,000 for those services during the quarter ending March 31, 2010.

NOTE 9. SUBSEQUENT EVENT

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

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein, the effects of existing or continued deterioration in economic conditions in the United States or the markets in which we operate; and acts of war or terrorism inside the United States or abroad.

BACKGROUND

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

Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.OB. As of May 14, 2010, there were 64,884,980 shares of our common stock issued and outstanding.

Three Months Ended March 31, 2010

In the three month period ended March 31, 2010, we produced and sold 2,243 net barrels of oil and 1,933 mcf of gas, attributable to our net revenue interest in our producing properties, while generating revenues of $187,767, as compared with 2,623 net barrels of oil and 3,570 net mcf of gas, generating revenues of $118,134, in the comparable period of 2009. At March 31, 2010, we had approximately 70 producing oil wells and 2 producing gas wells, with additional “associated” gas coming from some oil wells. The oil is light sweet crude and the natural gas has very high heat content, 1600 to 2600 btu/scf.

RESULTS OF OPERATIONS

The Company and its wholly-owned subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services, LLC, own 127 wells, of which 19 are water disposal wells and 2 are gas wells, although “associated” gas is also produced from some oil wells. As of March 31, 2010, approximately 70 oil wells were actively producing. We also own and operate our 15.9 acre property, with its shop, yard and office complex. Company equipment includes two work-over rigs as well as other oil field related equipment.

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

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

The following table shows the approximate volumes and average sales prices for oil and gas we produced in the three months ended March 31, 2010, as compared with sales and price information for the comparable period in 2009:

	Three Months Ended
	March 31, 2010		March 31, 2009
Oil and Gas Sales(1)
Oil Sales(Bbl)		2,243		2,644
Natural Gas Sales (Mcf)		1,933		3,853

Average Sales Price:
Oil, per Bbl:	$	75.23	$	64.15
Gas, per MMCF:	$	9.83	$	5.88

(1)

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

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

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

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

LIQUIDITY & CAPTIAL RESOURCES

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

CONTRACTUAL OBLIGATIONS

On July 1, 2009, the Company entered into a 24-month non-exclusive consultant agreement with PK Advisors, LLC (“PK”) in connection with the Company’s interest in creating a strategy for growing the core business, creating market awareness and providing general strategic corporate advice. In accordance with this agreement, during each month in the period of 18 months beginning on January 1, 2010, until the consulting agreement is terminated, the Company is obligated to issue 40,000 shares of unregistered common stock and five year warrants to purchase 14,000 shares of our common stock with a strike price of $.125 to PK. Additional cash consideration would be payable to PK for any future investment transactions for which PK provides assistance. The Company recorded professional fees expense of $6,600 related to this agreement in the quarter ending March 31, 2010.

On July 1, 2009, the Company entered into a 24-month non-exclusive consultant agreement with Equity Source Partners, LLC (“ESP”) in connection with the Company’s interest in creating a strategy for growing the core business, creating market awareness and providing general strategic corporate advice. In accordance with this agreement, during each month in the period of 18 months beginning on January 1, 2010, until the consulting agreement is terminated, the Company is obligated to issue 30,000 shares of unregistered common stock and five year warrants to purchase 14,000 shares of our common stock with a strike price of $.125 to ESP. Additional cash consideration would be payable to ESP for any future investment transactions for which ESP provides assistance. The Company recorded professional fees expense of $4,950 related to this agreement in the quarter ending March 31, 2010.

CRITICAL ACCOUNTING POLICIES

The Securities and Exchange Commission (the “SEC”) recently issued "Financial Reporting Release No. 60 Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies provide additional disclosures, discussion and commentary on those accounting policies considered most critical to their business and financial reporting requirements. The SEC suggests in FRR 60 that an accounting policy is critical if it is important to the Company's financial condition and results of operations and requires significant judgment and estimates on the part of management in the application of the policy. For a summary of the Company's significant accounting policies, including the critical accounting policies discussed below, please refer to the accompanying notes to the financial statements provided in this Quarterly Report on Form 10-Q.

The Company assesses potential impairment of its long-lived assets, which include its property and equipment and its identifiable intangibles such as deferred charges, under the guidance Topic 360 “ Property, Plant and Equipment ” in the ASC. The Company must continually determine if a permanent impairment of its long-lived assets has occurred and write down the assets to their fair values and charge current operations for the measured impairment.

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

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2010, the Company had not entered into any off-balance sheet arrangements or third-party guarantees, nor does our business ordinarily require us to do so.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

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

ITEM 4T. CONTROLS AND PROCEDURES

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

PART II—OTHER INFORMATION

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

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

	Principal Total Offering Price/
Date	Title and Amount (1)	Purchaser	Consideration

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

(1)

Securities issued in consideration for advisory services. See the disclosure provided in ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—CONTRACTUAL OBLIGATIONS for a description of these services.

(2)

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

(3)

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

(4)

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

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

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

ITEM 6. Exhibits.

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

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

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

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

10.1

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

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

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

SIGNATURES

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

		Chancellor Group, Inc.
		(Registrant)

	By:	/s/ Maxwell Grant
		Chief Executive Officer and
		Principal Financial Officer

Dated: May 13, 2010

EXHIBIT INDEX

Exhibit Number		Description

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

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

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

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