- Annual Report (10-K)

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended: December 31, 2011

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from __________ to __________

Commission File No. 000-30219

CHANCELLOR GROUP, INC.
(Exact name of Registrant as Specified in Its Charter)

Nevada 50-0024298
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)

500 Taylor Street, Plaza Two - Suite 200, Amarillo, TX 79105
(Address of principal executive offices, including zip code)

Issuer's Telephone Number, Including Area Code: (806) 322-2731

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by checkmark if the registrant is not required to file reports to
Section 13 or 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

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 (ss.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 [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of the last business day of the registrant's most recently
completed second fiscal quarter was $2,682,401

Number of shares of Common Stock outstanding as of March 26, 2012: 68,560,030
Documents incorporated by reference: None
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TABLE OF CONTENTS

PART I

Item 1. Business. 1

Item 1A. Risk Factors. 3

Item 1B. Unresolved Staff Comments. 5

Item 2. Properties. 5

Item 3. Legal Proceedings 8

Item 4. (Removed and Reserved) 8

PART II

Item 5. Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities 8

Item 6. Selected Financial Data. 9

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9

Items 7A. Quantitative and Qualitative Disclosures About Market Risk. 13

Item 8. Financial Statements and Supplementary Data. 15

Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure. 33

Item 9A (T). Controls and Procedures. 33

Item 9B. Other Information 33

PART III

Item 10. Directors, Executive Officers and Corporate Governance. 34

Item 11. Executive Compensation 35

Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. 36

Item 13. Certain Relationships and Related Transactions, and Director
Independence. 37

Item 14. Principal Accountant Fees and Services 37

Item 15. Exhibits and Financial Statement Schedules. 37

SIGNATURES 39
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PART I

ITEM 1. BUSINESS.

Chancellor Group, Inc., a Nevada corporation ("we", "us", "Chancellor" or the
"Company"), was organized under the laws of the state of Utah in 1986 and
subsequently reorganized under the laws of the state of Nevada in 1993. We are
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 Bulletin Board market and trades
under the symbol CHAG.OB. As of December 31, 2011, there were 67,960,030 shares
of our common stock issued and outstanding.

BUSINESS DEVELOPMENTS

On December 13, 2011, Gryphon Production Company, LLC ("Gryphon"), a wholly
owned subsidiary of the "Company", completed the previously announced sale of
substantially all of the assets of Gryphon to LCB Resources, an Oklahoma limited
liability company ("LCB").

Pursuant to the terms of the Purchase and Sale Agreement dated October 18, 2011,
LCB purchased all of Gryphon's right, title and interest in certain leases,
wells, equipment, contracts, data and other designated property. The assets sold
to LCB constituted approximately 82% of the company's consolidated assets as of
September 30, 2011 and contributed approximately 95% and 77%, respectively, of
the Company's consolidated gross revenues and total expenses for the nine months
then ended.

Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000
in cash, subject to certain adjustments as set forth in the Purchase and Sale
Agreement.

The Company has continued to maintain a total of four (4) producing wells and
one (1) water disposal well. Gryphon will also retain an operator's license with
the Texas Railroad Commission and continue to operate the Hood Leases itself.
The proceeds from the asset sale will be used to provide working capital to
Gryphon and for future corporate purposes including, but not limited to,
possible acquisitions and other corporate programs and purposes that have yet to
be identified.

DESCRIPTION OF PROPERTIES

At December 31, 2011, the Company and its wholly-owned subsidiaries, Gryphon and
Gryphon Field Services, LLC, own 5 wells located in Gray County in the Texas
Panhandle, of which 4 are actively producing oil wells and 1 is a water disposal
well.

INDUSTRY AND ECONOMIC FACTORS

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

In addition, the condition of the general economy of the local area is beginning
to show some of the strain from the national economic morass, as is the general
economy in the State of Texas. The national and international economic
environment is unsettled and will present challenges to any form of business
operations.

It is uncertain what structural changes in the industry (mining for oil and gas)
may need to be modified due to political changes in the national government,
availability of financing, and concerns created by expectations that evolve
around the concepts of carbon credits. In general it is a buyer's market if
financing is available. The Company does not anticipate any severe effects upon

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its structure in the short-term due to any of the above-mentioned concerns
because of the size and nature of the Company's 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.

APPROACH TO OUR BUSINESS

Implementation of our business approach relies on our ability to fund ongoing
development projects with cash flow provided by operating activities and
external sources of capital.

MARKETING AND CUSTOMERS

The Company plans to further 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, which primarily all oil and
gas production is sold to, are Plains Marketing and DCP Midstream. Given the
number of readily available purchasers for our products, it is unlikely that the
loss of a single customer in the areas in which we sell our products would
materially affect our sales.

ENVIRONMENTAL REGULATIONS

We are subject to extensive and complex federal, state and local laws and
regulations governing the protection of the environment and of the health and
safety of our employees. These laws and regulations may, among other things:

* require the acquisition of various permits before drilling or
production commences;
* require the installation of expensive pollution control equipment;
* require safety-related procedures and personal protective equipment to
be used during operations;
* restrict the types, quantities and concentrations of various
substances that can be released into the environment in connection
with natural gas and oil drilling production, transportation and
treating activities;
* suspend, limit, prohibit or require approval before construction,
drilling and other activities; and
* require remedial measures to mitigate pollution from historical and
ongoing operations, such as the closure of pits and plugging of
abandoned wells.

These laws, rules and regulations may also restrict the rate of natural gas and
oil production below the rate that would otherwise be possible. The regulatory
burden on the oil and gas industry increases the cost of doing business in the
industry and consequently affects profitability.

Governmental authorities have the power to enforce compliance with environmental
laws, regulations and permits, and violations are subject to injunction, as well
as administrative, civil and potentially criminal penalties. The effects of
these laws and regulations, as well as other laws or regulations that may be
adopted in the future, could have a material adverse impact on our business,
financial condition and results of operations.

The Company did not incur any material environmental costs in 2011, nor has the
Company been notified of any material environmental obligations from any
governmental authorities.

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REGULATION OF THE OIL AND GAS INDUSTRY

The oil and gas industry is extensively regulated by numerous federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion, frequently increasing the regulatory
burden. Also, numerous departments and agencies, both federal and state, are
authorized by statute to issue rules and regulations binding on the oil and gas
industry and its individual members, some of which carry substantial penalties
for noncompliance. Although the regulatory burden on the oil and gas industry
increases our cost of doing business and, consequently, affects our
profitability, these burdens generally do not affect us any differently or to
any greater or lesser extent than they affect other companies in the industry
with similar types, quantities and locations of production.

EMPLOYEES

As of December 31, 2011, we had 6 full-time employees.

ITEM 1A. RISK FACTORS.

CRUDE OIL AND NATURAL GAS PRICES ARE VOLATILE AND A SUBSTANTIAL REDUCTION IN
THESE PRICES COULD ADVERSELY AFFECT OUR RESULTS AND THE PRICE OF OUR COMMON
STOCK.

Our revenues, operating results and future rate of growth depend highly upon the
prices we receive for our crude oil and natural gas production. Historically,
the markets for crude oil and natural gas have been volatile, and these markets
are likely to continue to be volatile in the future. The markets and prices for
crude oil and natural gas depend on factors beyond our control. These factors
include demand for crude oil and natural gas, which fluctuates with changes in
market and economic conditions, and other factors, including:

* worldwide and domestic supplies of crude oil and natural gas;
* actions taken by foreign oil and gas producing nations;
* political conditions and events (including instability or armed
conflict) in crude oil or natural gas producing regions;
* the level of global crude oil and natural gas inventories;
* the price and level of foreign imports;
* the price and availability of alternative fuels;
* the availability of pipeline capacity and infrastructure;
* the availability or crude oil transportation and refining capacity;
* weather conditions;
* electricity dispatch;
* domestic and foreign governmental regulations and taxes; and
* the overall economic environment.

Significant declines in crude oil and natural gas prices for an extended period
may have the following effects on our business:

* limiting our financial condition, liquidity, ability to finance
planned capital expenditures and results of operations;
* reducing the amount of crude oil and natural gas that we can produce
economically;
* causing us to delay or postpone some of our capital projects;
* reducing our revenues, operating income and cash flows;
* reducing the carrying value of our crude oil and natural gas
properties; or
* limiting our access to sources of capital, such as equity and
long-term debt.

THE CURRENT ECONOMIC ENVIRONMENT COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR
FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS.

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The oil and gas industry is cyclical in nature and tends to reflect general
economic conditions. The U.S. and other world economies remain in an economic
downturn which could last well into 2012 and beyond. The current economic
environment may lead to significant fluctuations in demand and pricing for our
crude oil and natural gas production, such as the decline in commodity prices
which occurred during 2008 and into 2009. If commodity prices continue to
fluctuate it could significantly impact our overall financial performance.

OUR BUSINESS INVOLVES MANY OPERATING RISKS THAT MAY RESULT IN SUBSTANTIAL LOSSES
FOR WHICH INSURANCE MAY BE UNAVAILABLE OR INADEQUATE.

Our operations are subject to hazards and risks inherent in operating and
restoring oil and gas wells, such as fires, natural disasters, explosions,
casing collapses, surface cratering, pipeline ruptures or cement failures, and
environmental hazards such as natural gas leaks, oil spills and discharges of
toxic gases. Any of these risks can cause substantial losses resulting from
injury or loss of life, damage to or destruction of property, natural resources
and equipment, pollution and other environmental damages, regulatory
investigations and penalties, suspension of our operations and repair and
remediation costs. In addition, our liability for environmental hazards may
include conditions created by the previous owners of properties that we purchase
or lease.

We maintain insurance coverage against some, but not all, potential losses. We
do not believe that insurance coverage for all environmental damages that could
occur is available at a reasonable cost. Losses could occur for uninsurable or
uninsured risks, or in amounts in excess of existing insurance coverage. The
occurrence of an event that is not fully covered by insurance could harm our
financial condition and results of operations.

OUR PROVED RESERVE ESTIMATES MAY BE INACCURATE AND FUTURE NET CASH FLOWS ARE
UNCERTAIN.
Estimates of proved oil and gas reserves and their associated future net cash
flow necessarily depend on a number of variables and assumptions. Among others,
changes in any of the following factors may cause estimates to vary considerably
from actual results:

* production rates, reservoir pressure and other subsurface information;
* future oil and gas prices;
* assumed effects of governmental regulation;
* future operating costs;
* future property, severance, excise and other taxes incidental to oil
and gas operations;
* capital expenditures; and
* work-over and remedial costs.

OUR BUSINESS DEPENDS ON NATURAL GAS TRANSPORTATION PIPELINES, MOST OF WHICH ARE
OWNED BY OTHERS.

The marketability of our natural gas production depends in large part on the
availability, proximity and capacity of pipeline systems owned by third parties.
The unavailability of or lack of available capacity on these systems and
facilities could result in the shut-in of producing wells or the delay or
discontinuance of development plans for properties. The lack of availability of
these facilities for an extended period of time could negatively affect our
revenues. Federal and state regulation of oil and natural gas production and
transportation, tax and energy policies, changes in supply and demand, pipeline
pressures, damage to or destruction of pipelines and general economic conditions
could adversely affect our ability to produce, gather and transport natural gas.

COMPETITION IN OUR INDUSTRY IS INTENSE AND MANY OF OUR COMPETITORS HAVE GREATER
FINANCIAL AND TECHNOLOGICAL RESOURCES.

We operate in the competitive area of oil and gas exploration and production.
Many of our competitors are large, well-established companies that have larger
operating staffs and significantly greater capital resources than we do.

WE ARE SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS THAT
MAY CAUSE US TO INCUR SUBSTANTIAL COSTS.

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From time to time, in varying degrees, political developments and federal and
state laws and regulations affect our operations. In particular, price controls,
taxes and other laws relating to the crude oil and natural gas industry, changes
in these laws and changes in administrative regulations have affected and in the
future could affect crude oil and natural gas production, operations and
economics. We cannot predict how agencies or courts will interpret existing laws
and regulations or the effect these adoptions and interpretations may have on
our business or financial condition.

Our business is subject to laws and regulations promulgated by federal, state
and local authorities relating to the exploration for, and the development,
production and marketing of, crude oil and natural gas, as well as to safety
matters. Legal requirements are frequently changed and subject to
interpretation, and we are unable to predict the ultimate cost of compliance
with these requirements or their effect on our operations. We may be required to
make significant expenditures to comply with governmental laws and regulations.

Our operations are subject to complex federal, state and local environmental
laws and regulations including, for example, in the case of federal laws, the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, the Resource Conservation and Recovery Act, as amended, the Oil
Pollution Act of 1990, the Clean Air Act, the Clean Water Act and the
Occupational Safety and Health Act. Environmental laws and regulations change
frequently and the implementation of new, or the modification of existing, laws
or regulations could negatively impact our operations. The discharge of natural
gas, crude oil, or other pollutants into the air, soil or water may give rise to
significant liabilities on our part to the government and third parties and may
require us to incur substantial costs of remediation. In addition, we may incur
costs and penalties in addressing regulatory agency procedures involving
instances of possible non-compliance.

OUR ACQUISITION ACTIVITIES MAY NOT BE SUCCESSFUL, WHICH MAY HINDER OUR
REPLACEMENT OF RESERVES AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

Under certain circumstances, we may pursue acquisitions of businesses that
complement or expand our current business and acquisition and development of new
prospects that complement or expand our prospect inventory. We may not be
successful in identifying or acquiring any material property interests, which
could hinder us in replacing our reserves and adversely affect our financial
results and rate of growth. Even if we do identify attractive opportunities,
there is no assurance that we will be able to complete the acquisition of the
business or prospect on commercially acceptable terms. If we do complete an
acquisition, we must anticipate difficulties in integrating its operations,
systems, technology, management and other personnel with our own. These
difficulties may disrupt our ongoing operations, distract our management and
employees and increase our expenses.

COMPETITION FOR EXPERIENCED, TECHNICAL PERSONNEL MAY NEGATIVELY IMPACT OUR
OPERATIONS.

Our exploratory and development drilling success depends, in part, on our
ability to attract and retain experienced professional personnel. The loss of
any key executives or other key personnel could have a material adverse effect
on our operations. In particular, the loss of the services of our President,
Maxwell Grant, could adversely affect our business, revenues and results of
operations. As we continue to grow our asset base and the scope of our
operations, our future profitability will depend on our ability to attract and
retain qualified personnel, particularly individuals with a strong background in
geology, geophysics, engineering and operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

DESCRIPTION OF PROPERTIES

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PROVED RESERVES

The following historical estimates of net proved oil and natural gas reserves
are based on reserve reports as of December 31, 2011 and December 31, 2010, both
of which were prepared by independent petroleum engineers. The reserve report as
of December 31, 2011 and 2010 were based on the average price during the
12-month period ended December 31, 2011 and 2010, respectively, using the
first-day-of-the-month price for each month.

The Company maintains internal controls to ensure the reliability of reserve
estimations, including:

* Engaging an independent third-party reservoir engineering and
geo-science professional firm to prepare all of our estimated proved
reserves, and
* Senior management reviewing all reserve studies annually to verify
that accurate production and cost variables are used by the
third-party engineering firm.

GSM, INC., a registered petroleum engineering firm located in Amarillo, Texas,
prepared reports of estimated proved reserves of oil and natural gas for our net
interest in certain oil and natural gas properties comprising 100% of our
estimated proved reserves (by volume) at year-end. A copy of the report issued
by GSM, Inc. is filed with this Annual Report on Form 10-K as Exhibit 99.1. The
qualifications of the technical person of this firm primarily responsible for
overseeing his firm's preparation of the Company's reserve estimates is set
forth below:

* Over 40 years of practical experience in petroleum engineering, with
primarily all of this experience being in the estimation and
evaluation of reserves,
* A registered professional engineer in the state of Texas,
* Bachelor of Science Degree in Petroleum Engineering,
* Bachelor of Science Degree in Geology,
* Master of Science Degree in Geology.

A summary of our proved oil reserves, all of which are located in Gray County,
Texas, is presented below:

December 31,
-------------------------------
Estimated Proved Reserves 2011 2010
-------- --------
Developed
Oil, (Bbl) 17,326 232,954
Natural gas (Mcf) -- 482,730

Undeveloped
Oil, (Bbl) -- --
Natural gas (Mcf) -- --

OIL AND GAS RESERVE QUANTITIES

Proved oil and gas reserves are those quantities of oil and gas, which, by
analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible, based on prices used to estimate
reserves, from a given date forward from known reservoirs, and under existing
economic conditions, operating methods, and government regulation before the
time of which contracts providing the right to operate expire, unless evidence
indicates that renewal is reasonably certain. Proved developed reserves are
proved reserves expected to be recovered through existing wells with existing
equipment and operating methods or in which the cost of the required equipment
is relatively minor compared with the cost of a new well. Proved undeveloped
reserves are reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively large major
expenditure is required for recompletion.

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The table below represents the Company's estimate of proved oil reserves
attributable to the Company's net interest in oil and gas properties, all of
which are located in Gray County in the Texas panhandle, based upon the
evaluation by the Company and its independent petroleum engineers of pertinent
geoscience and engineering data in accordance with the SEC's regulations. The
Company does not have any proved undeveloped reserves and there were no material
changes in the Company's undeveloped reserves during the fiscal years ending
December 31, 2011, and 2010. Estimates of all of the Company's proved reserves
have been prepared by independent reservoir engineers and geoscience
professionals and are reviewed by members of the Company's senior management to
ensure that the Company consistently applies rigorous professional standards and
the reserve definitions prescribed by the SEC. Management has elected not to
include probable and possible reserves in its reserve studies and related
disclosures.

Total Future
Net Oil Net Gas Total Future Severance & Discounted
Reserves Reserves Total Future Projected Ad Valorem Future Net Per Annum
Proved Developed (Barrels) (Mcf) Net Revenue Cost Taxes cash flow as 10%
---------------- --------- ----- ----------- ---- ----- --------- ------

2011
Producing 17,326 -- $ 1,554,791 $ 606,564 $ 133,712 $ 814,515 $ 246,543

2010
Producing 232,954 482,730 $21,290,293 $ 7,129,897 $ 1,936,790 $12,223,607 $ 4,900,562

The Company did not drill any wells or conduct any exploratory activities
(including any implementation of mining methods) during the fiscal years ended
December 31, 2011, 2010 or 2009, although the Company did deepen one of its
existing wells during the fiscal year ended December 31, 2009 (which did not
result in any incremental increase in production). However, the Company did
capitalize $10,498 and $48,560 of development costs related to remedial and
restoration work to its existing proved developed properties for the fiscal
years ended December 31, 2011 and 2010, respectively.

As of March 25, 2012, the Company was not in the process of drilling any wells,
installing any waterfloods or undertaking any pressure maintenance operations or
other related activities of material importance.

As of March 25, 2012, the Company owned an interest in approximately 5 gross
wells and 5 net wells, all of which are located in the brown dolomite and/or
granite wash formations in Gray County, Texas. There is no minimum remaining
term of leases as all acreage is currently held by production or some other
savings clause contained in the respective lease document.

Standardized Measure of Discounted Future Net Cash Flows (Unaudited)

The standardized measure of discounted cash flows and summary of the changes in
the standardized measure computation from year to year are prepared in
accordance with ASC Topic 932. The assumptions that underlie the computation of
the standardized measure of discounted cash flows may be summarized as follows:

* the standardized measure includes the Company's estimate of proved
oil, natural gas and natural gas liquids reserves and projected future
production volumes based upon economic conditions;
* pricing is applied based upon 12-month average market prices at
December 31, 2011 and December 31, 2010. The calculated weighted
average per unit prices for the Company's proved reserves and future
net revenues were as follows:

At December 31,
2011 2010
------- -------
Oil (per barrel) $ 89.74 $ 75.73
Natural gas (per Mcf) $ n/a $ 7.56

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* future development and production costs are determined based upon
actual cost at year-end;
* the standardized measure includes projections of future abandonment
costs based upon actual costs at year-end; and
* a discount factor of 10% per year is applied annually to the future
net cash flows.

PRODUCTION AND PRICE HISTORY

For Year Ended December 31,
----------------------------------------
2011 2010 2009
-------- --------- ---------
Production:
Oil Sales (Bbl) 7,794 9,854 11,600
Natural Gas Sales (Mcf) 6,546 10,199 14,612
Average Sales Price:
Oil, per Bbl $ 88.54 $ 75.64 $ 52.21
Gas, per MMCF $ 6.57 $ 9.06 $ 6.10
Expenses per Bble:
Lease Operating Expenses $ 14.86 $ 23.51 $ 21.58
Production Taxes $ 3.96 $ 3.54 $ 2.59

ITEM 3. LEGAL PROCEEDINGS.

Chancellor is from time to time involved in legal proceedings arising in the
normal course of business. Other than proceedings incidental to Chancellor's
business, and a current proceeding against Gryphon (Cause no. 36433 in the 223rd
District Court in Gray County, Texas) in which Gryphon has made a counterclaim
for declaratory judgment, Chancellor is not a party to, nor is any of their
property the subject of, any material legal proceedings. Although the amount of
any ultimate liability with respect to such matters cannot be determined, in the
opinion of Chancellor's management, any such liability will not have a material
adverse effect upon Chancellor's financial condition, results of operations or
cash flows.

ITEM 4. (REMOVED AND RESERVED).

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

(a) Principal Market or Markets: The Company's common stock trades under the
symbol CHAG.OB on the OTC Bulletin Board. High and low bids for the Company's
common stock on the OTC Bulletin Board for the previous eight quarters are shown
below.

Class Quarter Ended High* Low*
----- ------------- ----- ----
Common Mar. 31, 2011 0.10 0.06
Common June 30, 2011 0.08 0.04
Common Sept. 30, 2011 0.05 0.03
Common Dec. 31, 2011 0.04 0.01

Common Mar. 31, 2010 0.09 0.05
Common June 30, 2010 0.08 0.04
Common Sept. 30, 2010 0.11 0.04
Common Dec. 31, 2010 0.11 0.03

----------

* Quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.

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(b) Common Stock: On December 31, 2011, there were 67,960,030 shares of common
stock issued and outstanding, which were held by more than 400 stockholders of
record excluding individuals holding securities in street name. Our common
shares are issued in registered form. Quicksilver Stock Transfer LLC, 6623 South
Las Vegas Blvd, Suite 255, Las Vegas, NV 89119(Telephone 702.629.1883), is the
registrar and transfer agent for our common shares.

The Company has never paid cash dividends on its common stock and currently
intends to continue its policy of retaining all of its earnings for use in its
business.

(d) 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.

Total
Principal Offering Price/
Date Title and Amount (1) Purchaser Consideration
---- -------------------- --------- -------------
January 15, 2012 200,000 shares of common stock Advisor $ 0 (1)
February 15, 2012 200,000 shares of common stock Advisor $ 0 (1)
March 15, 2012 200,000 shares of common stock Advisor $ 0 (1)

----------

(1) Securities issued in consideration for advisory services. See the
disclosure provided in ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTRACTUAL OBLIGATIONS for
a description of these services.

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.

ITEM 6. SELECTED FINANCIAL DATA.

Not applicable.

ITEM 7. 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.

9
<PAGE>
BACKGROUND

In April 2007 we commenced operations with what were 84 actually producing wells
in Gray and Carson counties, Texas. On July 22, 2008, we had entered into an
Agreement, effective as of June 1, 2008 with Legacy Reserves Operating LP
("Legacy") for the sale of our oil and gas wells in Carson County, Texas,
representing for approximately 84% of our oil and gas production at that time.
In 2010, the Company acquired three additional properties in Hutchinson County
including approximately 16 wells for a purchase price of approximately $150,000.
In 2011, the Company continued our operational and restoration programs and the
production capacity from our 67 actively producing wells in Gray and Hutchinson
counties. Pursuant to the terms of the Purchase and Sale Agreement dated October
18, 2011, LCB purchased all of Gryphon's right, title and interest in certain
leases, wells, equipment, contracts, data and other designated property. The
assets sold to LCB constituted approximately 82% of the company's consolidated
assets as of September 30, 2011 and contributed approximately 95% and 77%,
respectively, of the Company's consolidated gross revenues and total expenses
for the nine months then ended. Under the terms of the Purchase and Sale
Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments
as set forth in the Purchase and Sale Agreement.

Our common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB. As of March 26, 2012, there were 68,560,030 shares of our common
stock issued and outstanding.

RESULTS OF OPERATIONS

Twelve Months Ended December 31, 2011 Compared to Twelve Months Ended December
31, 2010

PRODUCTION: During 2011, we produced and sold 7,794 barrels of oil and produced
and sold 6,546 mcf of gas, generating $733,268 in gross revenues net of
royalties paid, with a one month lag in receipt of revenues for the prior months
sales, as compared with 9,854 barrels of oil and 10,199 mcf of gas, generating
$834,084 in gross revenues net of royalties paid during 2010. We had 4 wells
actually producing oil and none producing gas at December 31, 2011 and had 67
wells actually producing oil and 2 producing gas at December 31, 2010. Pursuant
to the terms of the Purchase and Sale Agreement dated October 18, 2011, LCB
purchased all of Gryphon's right, title and interest in certain leases, wells,
equipment, contracts, data and other designated property. The assets sold to LCB
constituted approximately 82% of the company's consolidated assets as of
September 30, 2011 and contributed approximately 95% and 77%, respectively, of
the Company's consolidated gross revenues and total expenses for the nine months
then ended. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon
$2,050,000 in cash, subject to certain adjustments as set forth in the Purchase
and Sale Agreement. The Company recognized a gain of approximately $414,000
related to the sale of assets to LCB.

The following table summarizes our production volumes and average sales prices
for the years ended December 31:

2011 2010
-------- ---------
Production:
Oil Sales (Bbl) 7,794 9,854
Natural Gas Sales (Mcf) 6,546 10,199

10
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Average Sales Price:
Oil, per Bbl $ 88.54 $ 75.64
Gas, per McF $ 6.57 $ 9.06

The decrease in net sales of both oil and natural gas during the year ended
December 31, 2011 (as compared to the year ended December 31, 2010) resulted in
part from the sale of substantially all of our producing wells effective
December 1, 2011 to LCB. The reduction in our production was offset in part by
higher oil prices in 2011. The decline in natural gas production was the result
of inclement weather in the first quarter of 2011 and down time due to repairs
and maintenance on gas compressor equipment.

DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and
amortization of property and equipment decreased $19,589, or approximately 7% in
2011 from 2010. This decrease was primarily attributable to the sale of
substantially all of our producing wells effective December 1, 2011 to LCB.

GENERAL AND ADMINISTRATIVE EXPENSES: During 2011, our general and administrative
expenses decreased $53,009, or approximately 9% in 2011 from 2010. Significant
components of these expenses include salaries, professional fees, and insurance.
Salaries (included in both administrative expenses and operating costs)
decreased approximately 20% during 2011, primarily the result of staff
reductions beginning in January 2011. Professional fees increased approximately
19% during 2011, primarily the result of increased consultation costs with third
parties. Insurance decreased approximately 16% during 2011.

OVERALL: The majority of the past year we continued with the ongoing production,
maintenance and enhancements of our producing wells in Gray and Hutchinson
counties. As a result of these efforts, along with continued increases in oil
prices during most of 2011, our gross revenues for 2011 are $733,268. Effective
December 1, 2011, pursuant to the terms of the Purchase and Sale Agreement dated
October 18, 2011, LCB purchased all of Gryphon's right, title and interest in
certain leases, wells, equipment, contracts, data and other designated property.
The assets sold to LCB constituted approximately 82% of the company's
consolidated assets as of September 30, 2011 and contributed approximately 95%
and 77%, respectively, of the Company's consolidated gross revenues and total
expenses for the nine months then ended. Under the terms of the Purchase and
Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain
adjustments as set forth in the Purchase and Sale Agreement. The Company
recognized a gain of $414,710 on the sale of these assets to LCB. During 2011 we
were also able to reduce our direct lease and operating costs by approximately
$236,000, or 26% during 2011. However, we again reported a net loss of $341,241
during 2011, compared to a net loss of $943,233 reported for 2010.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW: The following table highlights certain information relation to our
liquidity and capital resources at December 31:

2011 2010
---------- ----------
Working Capital $2,253,170 $ 774,409
Current Assets $2,424,020 $ 922,630
Current Liabilities $ 170,850 $ 148,221
Stockholders' Equity $2,284,463 $2,595,703

Our working capital at December 31, 2011 increased by $1,478,761, or
approximately 190%, from December 31, 2010, primarily from the sale of assets to
LCB. Current assets increased by $1,501,390 or approximately 162%, while current
liabilities increased $22,629, or approximately 15%, primarily as a result of
the timing of cash disbursements.

Our capital resources consist primarily of cash from operations and permanent
financing, in the form of capital contributions from our stockholders. As of
December 31, 2011 the Company had $2,336,776 of cash on hand, which includes

11
<PAGE>
restricted cash of $250,000 held as collateral for a letter of credit issued to
the Railroad Commission of Texas as required for its oil and gas activities.

CASH FLOW: Net cash generated during 2011 was $1,526,678, compared to net cash
used of $594,597 during 2010. The most significant factor causing the increase
in net cash flow during 2011 was the sale of assets to LCB on December 1, 2011,
which generated a net cash flow of $1,923,085.

Cash used for operations decreased by $6,559, or approximately 2% during 2011,
compared to 2010.

Cash used for investing activities increased by $2,163,466, or approximately
840% during 2011, compared to 2010, primarily due to the sale of assets to LCB
which generated a net cash flow of 1,923,085.

Cash provided by financing activities decreased by $48,750, or approximately
100% during 2011, compared to 2010, as there were not any issuances of common
stock for cash in 2011 compared to 2010.

EQUITY FINANCING: As of December 31, 2011, our stockholders have contributed
$3,566,013 in equity financing. We do not anticipate that significant equity
financing will take place in the foreseeable future.

CONTRACTUAL OBLIGATIONS

On October 13, 2011, the Company entered into a consulting agreement for 500,000
shares of stock and $3,000. The agreement is for six months with an additional
200,000 shares and $3,000 payable monthly. The company recognized $18,000 in
consulting fee expense in relation to the stock issued pursuant to this
agreement in 2011.

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 its business and financial reporting requirements. FRR 60
considers an accounting policy to be critical if it is important to the
Company's financial condition and results of operations, and requires
significant judgment and estimates on the part of management in the application
of the policy. For a summary of the Company's significant accounting policies,
including the critical accounting policies discussed below, please refer to the
accompanying notes to the financial statements provided in this Annual Report on
Form 10-K.

NATURAL GAS AND OIL PROPERTIES

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

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

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<PAGE>
As of December 31, 2010, we had proved reserves of 1.888 bcfe at 2010 12-month
average prices of $7.56 per mcf and $75.73 per barrel before price differential
adjustments. As of December 31, 2011, we had proved reserves of .103 bcfe at
2011 12-month average prices of $89.74 per barrel before price differential
adjustments. This decrease in reserves is due primarily to sale of assets to LCB
for a gross sales price of $2,050,000.

INCOME TAXES

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

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

* taxable income projections in future years;
* whether the carry-forward period is so brief that it would limit
realization of tax benefit;

* future sales and operating cost projections that will produce more
than enough taxable income to realize
the deferred tax asset based on existing sales prices and cost
structures; and
* our earnings history exclusive of the loss that created the future
deductible amount coupled with evidence indicating that the loss is an
aberration rather than a continuing condition.

If (i) oil and natural gas prices were to decrease significantly below present
levels (and if such decreases were considered other than temporary), (ii)
exploration, drilling and operating costs were to increase significantly beyond
current levels, or (iii) we were confronted with any other significantly
negative evidence pertaining to our ability to realize our NOL carry-forwards
prior to their expiration, we may be required to provide a valuation allowance
against our deferred tax assets. As of December 31, 2011, a deferred tax asset
of $314,000 has been recognized but partially offset by a valuation allowance of
approximately $310,000 due to federal NOL carry-back and carry-forward
limitations.

OFF-BALANCE SHEET ARRANGEMENTS:

There are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations), or other relationships of the Company with
unconsolidated entities or other persons that have, or may have, a material
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.

ITEM 7A. 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

13
<PAGE>
maturities of three months or less. Our interest income is sensitive to changes
in the general level of U.S. interest rates. Due to the short-term nature of our
investments, we believe that there is not a material risk exposure.

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.

The prices of the commodities that the Company produces are unsettled at this
time. At times the prices seem to be drift down and then either increase or
stabilize for a few days. Current price movement seems to be slightly up but
with the prices of the traditionally marketed products (gasoline, diesel, and
natural gas as feed stocks for various industries, power generation, and
heating) are not showing material increases. Although prices are difficult to
predict in the current environment, the Company maintains the expectation that
demand for its products will continue to increase for the foreseeable future due
to the underlying factors that oil and natural gas based commodities are both
sources of raw energy and are fuels that are easily portable.

14
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

CHANCELLOR GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010
Consolidated Financial Statements

TABLE OF CONTENTS

Page
----

Report of Independent Registered Public Accounting Firm 16

Consolidated Balance Sheets 17

Consolidated Statements of Operations 18

Consolidated Statements of Stockholders' Equity 19

Consolidated Statements of Cash Flows 20

Notes to Consolidated Financial Statements 21

15
<PAGE>
[LETTERHEAD OF STARKSCHENKEIN, LLP]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Chancellor Group, Inc.

We have audited the accompanying consolidated balance sheets of Chancellor
Group, Inc. as of December 31, 2011 and 2010, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the two-year period ended December 31, 2011. Chancellor Group, Inc's
management is responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chancellor Group, Inc. as of
December 31, 2011 and 2010, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 2011 in
conformity with accounting principles generally accepted in the United States of
America.

/s/ StarkSchenkein, LLP
--------------------------------
StarkSchenkein, LLP
March 19, 2012

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<PAGE>

CHANCELLOR GROUP, INC.
Consolidated Balance Sheets
December 31, 2011 and 2010

2011 2010
------------ ------------

ASSETS

Current Assets:
Cash in Bank $ 2,086,776 $ 560,098
Restricted Cash 250,000 250,000
Revenue Receivable 73,848 91,053
Prepaid Insurance 13,396 21,479
------------ ------------
Total Current Assets 2,424,020 922,630
------------ ------------
Property and Equipment:
Leasehold Costs - Developed 47,740 1,773,749
Office Building & Equipment -- 134,630
Fleet - Road -- 178,929
Heavy Field Equipment & Tools -- 455,128
Accumulated Depreciation and Amortization (18,815) (773,487)
------------ ------------
Total Property and Equipment, net 28,925 1,768,949
------------ ------------
Other Assets:
Investment in Unconsolidated Subsidiary -- 50,000
Unamortized Letter of Credit 2,118 2,095
Deposits 250 250
------------ ------------
Total Other Assets 2,368 52,345
------------ ------------

Total Assets $ 2,455,313 $ 2,743,924
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts Payable $ 112,405 $ 88,415
Accrued Expenses 58,445 59,806
------------ ------------
Total Current Liabilities 170,850 148,221
------------ ------------
Stockholders' Equity
Series B Preferred Stock: $1,000 Par Value
250,000 shares authorized, none outstanding -- --
Common Stock; $.001 par value, 250,000,000 shares authorized,
67,960,030 and 66,640,030 shares issued and outstanding, respectively 67,960 66,640
Paid-in Capital 3,498,053 3,458,273
Retained Earnings (Deficit) (1,281,550) (929,210)
------------ ------------
Total Stockholders' Equity 2,284,463 2,595,703
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,455,313 $ 2,743,924
============ ============

See Notes to Consolidated Financial Statements

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CHANCELLOR GROUP, INC.
Consolidated Statements of Operations
Years Ended December 31, 2011 and 2010

2011 2010
------------ ------------

Sales - Net of Royalties Paid:
Oil $ 690,042 $ 745,288
Natural Gas 43,226 88,796
------------ ------------
Gross Revenue 733,268 834,084
------------ ------------
Operating Expenses:
Lease Operating Expenses 171,736 271,631
Severance Taxes 35,210 40,950
Other Operating Expenses 461,276 591,766
Administrative Expenses 545,366 598,375
Depreciation and Amortization 248,267 267,856
------------ ------------
Total Operating Expenses 1,461,855 1,770,578
------------ ------------

(Loss) From Operations (728,587) (936,494)
------------ ------------
Other Income (Expense):
Interest Income 2,174 10,122
Other Income (Expense) (20,119) --
Gain (Loss) on Sales of Assets, net of selling costs 414,710 (7,755)
------------ ------------
Total Other Income 396,765 2,367
------------ ------------
Financing Charges:
Interest Expense 1,406 776
Bank Fees Amortization 8,193 8,330
------------ ------------
Total Financing Charges 9,599 9,106
------------ ------------

(Loss) Before Provision for Income Taxes (341,421) (943,233)

Provision for Income Taxes (Benefit) 10,917 --
------------ ------------

Net (Loss) $ (352,338) $ (943,233)
============ ============
Net (Loss) per Share
(Basic and Fully Diluted) $ (0.01) $ (0.01)
============ ============

Weighted Average Number of Common Shares Outstanding 67,011,867 65,424,414
============ ============

See Notes to Consolidated Financial Statements

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CHANCELLOR GROUP, INC.
Consolidated Statements of Stockholders' Equity
For The Twenty Four Months Ended December 31, 2011

Retained
COMMON STOCK PERFERRED Earnings/ Total
Par Value $.001 Series B Paid in TREASURY TREASURY (Accumulated Stockholders'
Shares Amount Amount Capital Shares Amount Deficit) Equity
------ ------ ------ ------- ------ ------ -------- ------

Balance at
December 31, 2009 65,125,030 $65,125 $ -- $ 3,308,713 -- $ -- $ 14,023 $ 3,387,861

Compensatory Stock
Issuances 1,765,000 1,765 -- 100,560 -- -- -- 102,325

Stock issued for cash 750,000 750 -- 48,000 -- -- -- 48,750

Stock cancelled for
no consideration (1,000,000) (1,000) -- 1,000 -- -- -- --

Net (Loss) for
the Year -- -- -- -- -- -- (943,233) (943,233)
---------- ------- -------- ----------- -------- -------- ----------- -----------
Balance at
December 31, 2010 66,640,030 66,640 -- 3,458,273 -- -- (929,210) 2,595,703

Compensatory Stock
Issuances 1,320,000 1,320 -- 39,780 -- -- -- 41,100

Net (Loss) for
the Year -- -- -- -- -- -- (352,338) (352,338)
---------- ------- -------- ----------- -------- -------- ----------- -----------
Balance at
December 31, 2011 67,960,030 $67,960 $ -- $ 3,498,053 -- $ -- $(1,281,548) $ 2,284,465
========== ======= ======== =========== ======== ======== =========== ===========

See Notes to Consolidated Financial Statements

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<PAGE>

CHANCELLOR GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2011 and 2010

2011 2010
------------ ------------

Cash Flows From Operating Activities:
Net (Loss) $ (352,338) $ (943,233)
Adjustments to Reconcile Net (Loss) to Net
Cash (Used for) Operating Activities:
Depreciation and Amortization 248,267 267,856
Non-Cash Stock Compensation 41,100 102,325
(Gain) Loss on Sales of Assets (414,710) 7,755
Decrease in Operating Assets 75,265 66,967
Increase in Operating Liabilities 22,629 111,984
------------ ------------
Net Cash (Used for) Operating Activities (379,787) (386,346)
------------ ------------
Cash Flows From Investing Activities:
Proceeds from Sales of Assets, Net of Selling Costs 1,935,306 2,000
Investment in Unconsolidated Subsidiary -- (50,000)
Other Capital Expenditures (28,841) (209,001)
------------ ------------
Net Cash Provided by (Used for) Investing Activities 1,906,465 (257,001)
------------ ------------
Cash Flows From Financing Activities:
Issuance of Common Stock -- 48,750
------------ ------------
Net Cash Provided by Financing Activities -- 48,750
------------ ------------

Net Increase (Decrease) in Cash 1,526,678 (594,597)

Cash and restricted cash at the Beginning of the Year 810,098 1,404,695
------------ ------------

Cash and restricted cash at the End of the Year $ 2,336,776 $ 810,098
============ ============
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 1,406 $ 776
============ ============
Income Taxes Paid $ -- $ --
============ ============

See Notes to Consolidated Financial Statements

20
<PAGE>
CHANCELLOR GROUP, INC.

Notes to Consolidated Financial Statements
December 31, 2011 and 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
acquisition, exploration and development of oil and gas production. On March 26,
1996, the Company's corporate name was changed from Nighthawk Capital, Inc. to
Chancellor Group, Inc. The Company's corporate office was moved to Amarillo,
Texas in early 2012.

Operations

The Company is licensed by the Texas Railroad Commission as an oil and gas
producer and operator. The Company and its wholly-owned subsidiaries, Gryphon
Production Company, LLC and Gryphon Field Services, LLC, own 5 wells in Gray
County, Texas, of which 1 is a water disposal well. As of December 31, 2011,
approximately 4 oil wells are actively producing.

We produced a total of 7,794 barrels of oil and 6,546 mcf of gas in the year
ended December 31, 2011. 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 principles.

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 operateits domestic oil and gas properties, located in Gray
County in 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.

21
<PAGE>
Net Loss per share

The net loss per share is computed by dividing the net 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.

CONCENTRATION OF CREDIT RISK.

Some of the Company's operating cash balances are maintained in accounts that
currently exceed federally insured limits. The Company believes that the
financial strength of depositing institutions mitigates the underlying risk of
loss. To date, these concentrations of credit risk have not had a significant
impact on the Company's financial position or results of operations.

Restricted Cash

Included in restricted cash at December 31, 2011 are deposits totaling $250,000,
which are 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,
establishes an allowance for doubtful accounts and records bad debt expense when
deemed necessary. An allowance for doubtful accounts was not considered
necessary or recorded at December 31, 2011, and 2010.

Property and Equipment

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

Oil and Gas Properties

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

Depletion

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

Long-Lived Assets

The Company assesses potential impairment of its long-lived assets, which
include its property and equipment and its identifiable intangibles such as
deferred charges, under the guidance Topic 360 "PROPERTY, PLANT AND EQUIPMENT"
in the Accounting Standards Codification (the "ASC"). The Company must

22
<PAGE>
continually determine if a permanent impairment of its long-lived assets has
occurred and write down the assets to their fair values and charge current
operations for the measured impairment.

Asset Retirement Obligations

The Company has not recorded an asset retirement obligation (ARO) in accordance
with ASC 410. Under ASC 410, a liability should be recorded for the fair value
of an asset retirement obligation when there is a legal obligation associated
with the retirement of a tangible long-lived asset, and the liability can be
reasonably estimated. The associated asset retirement costs should also be
capitalized and recorded as part of the carrying amount of the related oil and
gas properties. Management believes that not recording an ARO liability and
asset under ASC 410 is immaterial to the consolidated financial statements.

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 FASB
ASC Topic 820 "FAIR VALUE MEASUREMENTS". There is no material impact on the 2011
and 2010 consolidated financial statements related to fair value measurements
and disclosures. Fair value measurements include the following levels:

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

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

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

Fair Value of Financial Instruments

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

23
<PAGE>
Employee Stock-Based Compensation

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

Business Combinations

The Company accounts for business combinations in accordance with FASB ASC Topic
805 "BUSINESS COMBINATIONS". This standard modifies certain aspects of how the
acquiring entity recognizes and measures the identifiable assets, the
liabilities assumed and the goodwill acquired in a business combination. The
Company did not enter into any business combinations during 2011 and 2010.

The Company complies with the accounting guidance related to consolidation of
variable interest entities ("VIEs") that requires a reporting entity to
determine if a primary beneficiary that would consolidate the VIE from a
quantitative risk and rewards approach, to a qualitative approach based on which
variable interest holder has the power to direct the economic performance
related activities of the VIE as well as the obligation to absorb losses or
right to receive benefits that could potentially be significant to the VIE. This
guidance requires the primary beneficiary assessment to be performed on an
ongoing basis and also requires enhanced disclosures that will provide more
transparency about a company's involvement in a VIE. The Company did not have
any VIEs that required consolidation in these financial statements during 2011
and 2010.

Subsequent Events

Events occurring after December 31, 2011 were evaluated through the date this
Annual Report was issued, in compliance FASB ASC Topic 855 "SUBSEQUENT EVENTS",
to ensure that any subsequent events that met the criteria for recognition
and/or disclosure in this report have been included.

Recent Accounting Pronouncements

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

In January 2010, the FASB issued ASU 2010-6, "IMPROVING DISCLOSURES ABOUT FAIR
VALUE MEASUREMENTS.". This update requires additional disclosure within the roll
forward of activity for assets and liabilities measured at fair value on a
recurring basis, including transfers of assets and liabilities between Level 1
and Level 2 of the fair value hierarchy and the separate presentation of
purchases, sales, issuances and settlements of assets and liabilities within
Level 3 of the fair value hierarchy. In addition, the update requires enhanced
disclosures of the valuation techniques and inputs used in the fair value
measurements within Levels 2 and 3. The new disclosure requirements are
effective for interim and annual periods beginning after December 15, 2009,
except for the disclosure of purchases, sales, issuances and settlements of
Level 3 measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010. As ASU 2010-6 only requires enhanced disclosures, the
adoption of this update did not have a material effect on its financial
position, cash flows and results of operations.

There were various other updates recently issued, most of which represented
technical corrections to the accounting literature or application to specific
industries, and are not expected to have a material impact on the Company's
financial position, results of operations or cash flows.

24
<PAGE>

NOTE 2. INCOME TAXES

Income Tax Expense is comprised of the following:

Fiscal Year
-------------------------------------------
2011 2010 2009
---------- ---------- ----------

Current federal $ -- $ -- $ --
Current state and local 10,917 -- --
---------- ---------- ----------
Deferred federal, state and local $ -- $ -- $ --
========== ========== ==========

The difference between expected income tax expense (benefit) (computed by
applying the statutory rate of 35% to income before income taxes) and actual
income tax expense (benefit) is as follow:

Fiscal Year
-------------------------------------------
2011 2010 2009
---------- ---------- ----------

Computed "expected" Tax (Benefit) $ (119,497) $ (330,132) $ (382,231)

State and local income taxes, net of federal effect 10,917 -- --

Changes in Valuation Allowance and other adjustments 119,497 330,132 205,927
---------- ---------- ----------
$ 10,917 $ -- $ (176,304)
========== ========== ==========

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below.

Fiscal Year
---------------------------
2011 2010
---------- ----------

Deferred tax assets:
Net operation loss carry-forward $ 313,409 $ 424,496
--------- ---------
Total deferred tax assets 313,409 424,496

Valuation allowance against deferred tax assets (309,553) (246,397)

Deferred tax assets net of valuation allowance 3,856 178,099

Deferred tax liabilities:
Property and equipment 3,856 178,099
--------- ---------
Total deferred tax liabilities 3,856 178,099
--------- ---------
Net deferred tax assets $ -- $ --
========= =========

Deferred income taxes are recorded for temporary differences between financial
statement and income tax basis. Temporary differences are differences between
the amounts of assets and liabilities reported for financial statement purposes
and their tax basis. Deferred tax assets are recognized for temporary
differences that will be deductible in future years' tax returns and for
operating loss and tax credit carryforwards. Deferred tax assets are reduced by

25
<PAGE>
a valuation allowance if it is deemed more likely than not that some or all of
the deferred tax assets will not be realized. Deferred tax liabilities are
recognized for temporary differences that will be taxable in future years' tax
returns.

At December 31, 2011, the Company has approximately $4,000 in long-term deferred
income tax liability attributable to timing differences between federal income
tax depreciation, depletion and book depreciation.

At December 31, 2010, the Company had approximately $178,000 in long-term
deferred income tax liability attributable to timing differences between federal
income tax depreciation, depletion and book depreciation.

During 2011, the Company reported approximately $551,000 in taxable income,
which was offset in full by federal net operating loss carry-forwards from prior
years. A long-term deferred tax asset of approximately $314,000 has been
recognized for the remaining net operating loss carry-forward but partially
offset by a valuation allowance of approximately $310,000 due to federal NOL
carry-back and carry-forward limitations.

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

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 stockholder, 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 67,960,030 shares issued and outstanding as of December 31, 2011.

Stock based Compensation

During 2010, the Company recognized $2,750 in stock-based compensation expense
related to stock issued to key employees for employment services performed.

During 2010, the Company recognized $99,576 in professional fees expense related
to stock issued to unrelated parties for business development services
performed.

During 2010, the company issued 750,000 common shares for cash at $.065 per
share.

During 2010, the Company cancelled 1,000,000 common shares for no consideration.

During 2011, the Company recognized $41,100 in professional fees expense related
to stock issued to unrelated parties for business development services
performed.

Non-employee Stock Options and Warrants

The Company accounts for non-employee stock options under FASB ASC Topic 505
"EQUITY-BASED PAYMENTS TO NON-EMPLOYEES", whereby options costs are recorded
based on the fair value of the consideration received or the fair value of the

26
<PAGE>
equity instruments issued, whichever is more reliably measurable. During 2011
and 2010, no options were issued, exercised or cancelled.

The Company currently has outstanding warrants expiring December 31, 2014 to
purchase an aggregate of 6,000,000 shares of common stock; these warrants
consist of warrants to purchase 2,000,000 shares at an exercise price of $.025
per share, and warrants to purchase 4,000,000 shares at an exercise price of
$0.02 per share. In July 2009, the Company issued additional warrants expiring
June 30, 2014 to purchase an aggregate of 500,000 shares of common stock at an
exercise price of $0.125 per share. In June 2010, the Company issued additional
warrants expiring June 30, 2015 to purchase an aggregate of 168,000 shares of
common stock at an exercise price of $0.125 per share.

On December 31, 2011, the Company had the following outstanding warrants:

Weighted
Remaining Average
Exercise Number of Contractual Life Exercise Price times Exercise
Price Shares (in years) Number of Shares Price
----- ------ ---------- ---------------- -----

$0.025 2,000,000 3 $ 50,000
$0.020 4,000,000 3 $ 80,000
$0.125 500,000 2.5 $ 62,500
$0.125 168,000 3.5 $ 21,000
--------- --------
6,668,000 $213,500 $ 0.032
========= ========

Remaining
Number of Weighted Average Contractual Life
Warrants Shares Exercise Price (in years)
-------- ------ -------------- ----------

Outstanding at January 1, 2010 6,500,000 $0.044
--------- ------
Issued 168,000 0.125
Exercised -- --
Expired/Cancelled -- --
--------- ------
Outstanding at January 1, 2011 6,668,000 $0.032
--------- ------
Issued
Exercised -- --
Expired/Cancelled -- --
--------- ------

Outstanding at December 31, 2011 6,668,000 $0.032 3.0
--------- ------ ---

Exercisable at December 31, 2011 6,668,000 $0.032 3.0
========= ====== ===

27
<PAGE>
Employee Stock Options

The Company accounts for employee stock options under FASB ASC Topic 718
"COMPENSATION-STOCK COMPENSATION". The Company issued no employee stock options
and had none outstanding as of the close of the year ending December 31, 2011.
There were no stock options issued for the year ended December 31, 2010.

NOTE 4. PROPERTY AND EQUIPMENT

A summary of fixed assets at:

Balance Balance
December 31, December 31,
2010 Additions Deletions 2011
---------- ---------- ---------- ----------

Auto/Transportation Equipment $ 178,929 $ -- $ 178,929 $ --
Buildings & Improvements 125,280 -- 125,280 --
Leases & Lease Equipment 1,773,749 16,544 1,742,553 47,740
Furniture, Fixtures & Office Equipment 9,350 -- 9,350 --
Machinery & Equipment 455,128 18,343 473,471 --
---------- ---------- ---------- ----------
$2,542,436 $ 34,887 $2,529,583 $ 47,740
========== ========== ========== ==========

Less: Accumulated Depreciation 773,487 248,267 1,002,939 18,815
---------- ---------- ---------- ----------
$1,768,949 $ 248,267 $1,002,939 $ 28,925
========== ========== ========== ==========

NOTE 5. CONTINGENT LIABILITY

NOTE 6. LONG-TERM DEBT

The Company had no long-term debt as of December 31, 2011 and 2010.

At December 31, 2011, the Company has an irrevocable blanket letter of credit
totaling $250,000 issued to the Railroad Commission of Texas as required for its
oil and gas activities, which is secured by certain bank deposits totaling
$250,000. The Company has recognized approximately $5,300 in amortization
expense related to bank fees associated with this letter of credit in the twelve
months ending December 31, 2011, and currently has approximately $2,100 in
unamortized bank fees as of December 31, 2011.

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 $96,000 annually for those services during
the years ending December 31, 2011 and December 31, 2010. The Company has paid
directors fees to a company owned by the chairman of the board in the amounts of

28
<PAGE>
$13,000 and $12,000 during the years ending December 31, 2011 and December 31,
2010, respectively, and to two other directors in the amounts of $21,000 and
$24,000 in total annually, during the years ending December 31, 2011 and
December 31, 2010, respectively.

NOTE 9. SUBSEQUENT EVENTS

Events occurring after December 31, 2011 were evaluated through the date this
Annual Report was issued, in compliance FASB ASC Topic 855 "Subsequent Events",
to ensure that any subsequent events that met the criteria for recognition
and/or disclosure in this report have been included.

NOTE 10. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)

The Supplementary Information on Oil and Gas Producing Activities is presented
as required by ASC Topic 932, "EXTRACTIVE ACTIVITIES -- OIL AND GAS".
Supplemental information is provided for the estimated quantities of proved oil
and gas reserves, future cash flows and the standardized measure of discounted
future net cash flows associated with proved oil and gas reserves.

Oil and Gas Reserve Quantities

The table below represents the Company's estimate of proved oil and natural gas
reserves attributable to the Company's net interest in oil and gas properties,
all of which are located in Gray and Hutchinson counties in the Texas panhandle,
based upon the evaluation by the Company and its independent petroleum engineers
of pertinent geoscience and engineering data in accordance with the SEC's
regulations. Estimates of all of the Company's proved reserves have been
prepared by independent reservoir engineers and geoscience professionals and are
reviewed by members of the Company's senior management to ensure that the
Company consistently applies rigorous professional standards and the reserve
definitions prescribed by the SEC. Management has elected not to include
probable and possible reserves in its reserve studies and related disclosures.

GSM, INC., a registered Petroleum engineering firm in Amarillo, Texas, prepared
reports of estimated proved reserves of natural gas and oil for our net interest
in certain oil and natural gas properties located in Gray and Hutchinson
counties in Texas.

2011
Producing 17,326 -- $ 1,554,791 $ 606,564 $ 133,712 $ 814,515 $ 246,543

2010
Producing 232,954 482,730 $21,290,293 $ 7,129,897 $ 1,936,790 $12,223,607 $ 4,900,562

29
<PAGE>
Presented below is a summary of changes in estimated reserves of the Company
during the periods ending December 31, 2011 and 2010:

Gas Oil Total
(mmscf) (mmbbl) (bcfe)
-------- -------- --------

December 31. 2011
Proved reserves, beginning of period 482.730 232.954 1.888
Extensions, discoveries and other additions -- -- --
Revisions of previous estimates -- -- --
Production (6.546) (7.794) (0.053)
Sale of reserves-in-place (476.180) (207.830) (1.736)
Purchase of reserves-in-place -- -- --
-------- -------- --------
Proved reserves, end of period -- 17.330 0.099
======== ======== ========
Proved developed reserves:
Beginning of period 482.730 232.954 1.888
======== ======== ========
End of period -- 17.330 0.099
======== ======== ========
DECEMBER 31. 2010
Proved reserves, beginning of period 244.725 147.761 1.131
Extensions, discoveries and other additions -- -- --
Revisions of previous estimates (39.442) 17.494 0.074
Production (10.199) (9.854) (0.069)
Sale of reserves-in-place -- -- --
Purchase of reserves-in-place 287.646 -- 0.752
-------- -------- --------
Proved reserves, end of period 482.730 155.401 1.888
======== ======== ========
Proved developed reserves:
Beginning of period 244.725 147.761 1.131
======== ======== ========
End of period 482.730 155.401 1.888
======== ======== ========

During 2011, Chancellor sold .053 bcfe of our proved reserves for approximately
$733,000 in gross revenues. Effective December 1, 2011 we sold approximately
1.736 bcfe of our reserves to LCB pursuant to the terms of the Purchase and Sale
Agreement dated October 18, 2011. LCB purchased all of Gryphon's right, title
and interest in certain leases, wells, equipment, contracts, data and other
designated property. Under the terms of the Purchase and Sale Agreement, LCB
paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in
the Purchase and Sale Agreement.

During 2010, Chancellor recorded upward revisions of .752 bcfe of proved
reserves resulting from the cash purchase of reserves which were restored back
into production through the Company's restoration efforts during the third
quarter 2010. We sold .069 bcfe of our proved reserves for approximately
$835,000 in gross revenues.

The aggregate amounts of capitalized costs relating to our oil and gas producing
activities and the aggregate amounts of related accumulated depletion,
depreciation, and amortization as of December 31, 2011 and 2010 are as follows.

Years Ended December 31,
-------------------------------
2011 2010
---------- ----------
Unproved oil and gas properties $ -- $ --
Proved oil and gas properties 47,740 1,773,749
Accumulated depreciation, depletion, and
amortization, and valuation allowances (18,815) (466,952)
---------- ----------
Net capitalized costs $ 28,925 $1,306,797
========== ==========

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<PAGE>
The costs incurred by the Company in oil and natural gas property exploration,
development and acquisition activities are summarized as follows:

Years Ended December 31,
-------------------------------
2011 2010
---------- ----------
Acquisition of properties
Proved $ -- $ 150,000
Unproved -- --
Exploration costs -- --
Development costs $ 10,848 $ 48,560

The Company's results of operations from oil and natural gas producing
activities are presented below for the years ended December 31, 2011 and 2010.
The following table includes revenues and expenses associated directly with the
Company's oil and natural gas producing activities. It does not include any
interest costs or general and administrative costs and, therefore, is not
necessarily indicative of the contribution to consolidated net operating results
of the Company's oil and natural gas operations.

Years Ended December 31,
------------------------------
2011 2010
---------- ----------
Revenues
Sales, net of royalties paid $ 733,268 $ 834,084
Transfers -- --
---------- ----------
Total Revenues 733,268 834,084
Production costs (668,222) (904,347)
Exploration expenses -- --
Depreciation, depletion and
amortization and valuation provisions (170,943) (163,304)
Income tax expenses (benefits) -- --
---------- ----------
Results of operations from producing
activities (excluding corporate
overhead and interest costs) $ (105,897) $ (233,567)
========== ==========

The principal sources of change in the standardized measure of discounted future
net cash flows for the years ended December 31, 2011 and 2010 are as follows:

Years Ended December 31,
------------------------------
2011 2010
---------- ----------

Net change in sales and transfer prices and
in production (lifting) costs related to
future production $ 10,848 $ 1,968,287
Changes in estimated future development
costs -- --
Sales and transfers of oil and gas produced
during the period, net of production taxes (698,058) (793,134)
Net change of due to purchase of minerals
in place -- 1,698,349
Net change due to revisions in quantity
estimates 96,230 (26,728)
Previously estimated development costs
incurred during the period -- --
Accretion of discount -- --
Net change of due to sale of minerals
in place (4,063,039) --
Net change in income taxes -- --
----------- -----------
Aggregate change in the standardized
measure of discounted future net cash
flows for the year $(4,654,019) $ 2,846,774
=========== ===========

31
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows

* the standardized measure includes the Company's estimate of proved
oil, natural gas and natural gas liquids reserves and projected future
production volumes based upon economic conditions;

* pricing is applied based upon 12-month average market prices at
December 31, 2011 and December 31, 2010. The calculated weighted
average per unit prices for the Company's proved reserves and future
net revenues were as follows:

At December 31,
2011 2010
------- -------
Oil (per barrel) $ 89.74 $ 75.73
Natural gas (per Mcf) $ n/a $ 7.56

* future development and production costs are determined based upon
actual cost at year-end;

* the standardized measure includes projections of future abandonment
costs based upon actual costs at year-end; and

* a discount factor of 10% per year is applied annually to the future
net cash flows.

32
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 9A (T). CONTROLS AND PROCEDURES.

As supervised by our Board of Directors and our principal executive and
principal financial officer, management has established a system of disclosure
controls and procedures and has evaluated the effectiveness of that system. The
system and its evaluation are reported on in the below Management's Annual
Report on Internal Control over Financial Reporting. Based on the evaluation of
our controls and procedures (as defined in Rule 13a-15(e) under the 1934
Securities Exchange Act, as amended (the "Exchange Act")) required by paragraph
(b) of Rule 13a-15, our principal executive and financial officer has concluded
that our disclosure controls and procedures as of December 31, 2011, are
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is (x) accumulated and
communicated to management, including our principal executive and financial
officer, as appropriate to show timely decisions regarding required disclosure
and (y) recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms.

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING:

Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) of
the Exchange Act. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.

Management assessed the effectiveness of internal control over financial
reporting as of December 31, 2011. Management carried out this assessment using
the criteria of the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control--Integrated Framework.

This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm, pursuant to rules of the Securities and Exchange Commission
that permit us to provide only management's report in this annual report.
Management concluded in this assessment that as of December 31, 2011, our
internal control over financial reporting is effective.

There have been no significant changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fourth quarter of the year ended December 31, 2011 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Company held a Special Meeting of Stockholders on December 12, 2011, in
Beverly Hills, California. At the Special Meeting the stockholders of the
Company approved (1) a purchase and sale agreement providing for the sale of
substantially all of the assets of Gryphon Production Company, LLC, a
wholly-owned subsidiary of the Company, and (2) an amendment to the Company's
Bylaws reducing the amount of shares of common stock needed for a quorum.

(b) At the Special Meeting, a total of 37,036,437 shares were present in person
or by proxy out of 67,560,030 shares outstanding. The following is the result of
stockholder voting on the proposals before the meeting:

33
<PAGE>

Abstentions/
Proposal Votes in Favor Votes Against Broker Nonvotes
-------- -------------- ------------- ---------------
Sale of Substantially
All of the Assets of
Gryphon Production
Company 37,036,437 -0- -0-

Amendment to
Company's Bylaws 37,036,437 -0- -0-

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

The Directors of the Registrant as of the date of this annual report on Form
10-K are as follows:

Served as a
Name Age Position Director since
---- --- -------- --------------
Maxwell Grant 74 Chairman and Director May 23, 2007

Dudley Muth 72 Director March 31, 2009

All Directors of the Company hold office until successors are elected according
to the Company's by-laws.

The Officers of the Registrant as of the date of this annual report on Form 10-K
are as follows:

Served as a
Name Age Position Officer since
---- --- -------- -------------
Maxwell Grant 74 Chief Executive Officer and May 23, 2007
Principal Financial Officer

Officers of the Company are elected by the Board of Directors according to the
Company's by-laws and hold office until their death, resignation, or removal
from office.

Maxwell Grant whose company, Koala Pictures, is Chancellor's largest
stockholder, has a business degree and a journalism diploma in 1960 from
Melbourne University. A former international journalist and university lecturer
in the early 1960's in labor relations at Monash University, Melbourne, his New
York-published novels have been translated into several languages. His wide
range of interests include TV and film production, film financing and more
recently oil and gas. For the last three years, Mr. Grant has primarily
concentrated on locating a suitable acquisition for the Company and worked on
several other film and investment projects. He co-founded in the late 1990's and
was a 19% shareholder of Majestic Film Management Limited, Melbourne, Australia,
which raised several million dollars for international feature films for Village
Roadshow Pictures. The film JOEY, which he conceived and on which he was
Associate Producer, was sold internationally to MGM. Mr. Grant devoted his time
and efforts to locate for Chancellor its producing oil and gas properties in
Texas. He participated in negotiations on behalf of the Company for the purchase
of the property and identified the sources of financing for the Company to
complete the acquisitions.

Mr. Dudley Muth is a Los Angeles attorney and a broker-dealer compliance
officer. From January 2009 to the present, Mr. Muth has been the Compliance
Director/Counsel for BMA Securities, Rolling Hills Estates, California, and
prior thereto from March to December 2008, he was the Compliance
Director/Consultant for Financial West Group, Los Angeles, California. From

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October 2002 to February, 2008, Mr. Muth was the Director of Compliance for the
Shemano Group, Los Angeles, California. Mr. Muth received a BA in Economics from
Pomona College in 1961, an MBA in Accounting and Industrial Relations from the
University of California Los Angeles in 1963, and a JD from the University of
Southern California School of Law in 1966. Mr. Muth began his career with Arthur
Andersen & Co. in their tax department specializing in oil and gas taxation in
Los Angeles. He has worked in the securities industry since the early 1970's, as
an attorney and compliance director. From 1977 to 1979 he served as a compliance
officer with the Pacific Stock Exchange. He has served as president of two
listed REIT's and since 1975 as a Director of Ojai Oil Company, a small oil and
gas and real estate company in Camarrilo, California. Mr. Muth was previously a
member of our Board of Directors, and had resigned from our Board in November,
2008. In connection with the preparation of our Annual Report on Form 10-K for
our fiscal year ended December 31, 2007, filed on April 7, 2008, he informed the
Company that, he had inadvertently neglected to advise the Company as to a
Financial Industry Regulatory Authority ("FINRA") regulatory disciplinary action
within the past several years in which he was fined $2,500 by reason of a
temporary net capital violation of a broker dealer for which he was the
regulatory operative contact with FINRA, such fine having been paid by the
company with which he was then associated.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

No person who at any time during the fiscal year ended December 31, 2011 was a
director, officer or beneficial owner of more than ten percent (10%) of our
common stock failed to file on a timely basis the reports required by Section
16(a) of the Exchange Act during the fiscal year ended December 31, 2011.

CODE OF CONDUCT

Our board of directors has adopted a Code of Ethics that is applicable to our
principal executive and financial officer, our principal accounting officer and
our controller or to persons performing similar functions for the Company. The
Company will provide, free of charge, a copy of its Code of Ethics to any person
who submits a written request for a copy of the Code of Ethics, such request to
be submitted via first class or certified mail addressed to the Company at P.O.
Box 509, Amarillo, TX 79105-0509.

ITEM 11. EXECUTIVE COMPENSATION.

Compensation paid to Officers is set forth in the Summary Compensation Table
below. The Company may reimburse its Officers for any and all out-of-pocket
expenses incurred relating to the business of the Company.

SUMMARY COMPENSATION TABLE

Non-Equity Nonqualified
Name and Incentive Deferred
Principal Stock Option Plan Compensation All Other

Position Year Salary($) Bonus($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Totals($)
-------- ---- --------- -------- --------- --------- --------------- ----------- --------------- ---------

Maxwell Grant, 2010 -- -- -- -- -- -- $108,000 $108,000
Chairman of 2010 -- -- -- -- -- -- $109,000 $109,000
the Board of
Directors (1)

----------
(1) Mr. Grant owns 100% of the equity interests in Koala Pictures Proprietary
Ltd. ("Koala") and Axis Network Proprietary Ltd. In 2010 and 2011, Koala
was paid $96,000 annually in consulting fees.

In addition, Mr. Grant was paid $12,000 in cash, in 2010 in director's fees. Mr.
Grant was paid $13,000, in cash, in 2011 in director's fees.

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Compensation paid to Directors is set forth in the Director Compensation Table
below. The Company may reimburse its Directors for any and all out-of-pocket
expenses incurred relating to the business of the Company.

DIRECTOR COMPENSATION

Fees Non-Equity Nonqualified
Earned Incentive Deferred
Paid in Stock Option Plan Compensation All Other
Name Cash($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Total($)
---- ------- --------- --------- --------------- ----------- --------------- --------

Maxwell Grant $13,000 -- -- -- -- -- $13,000
Robert Gordon $ 3,000 -- -- -- -- -- $ 3,000
Dudley Muth $18,000 -- -- -- -- -- $18,000

The Board of Directors has discussed and analyzed risks associated with the
Company's compensation policies and practices for executive officers and all
employees generally including, but not limited to, eligibility, effects on
retention, balance of objectives, alignment with stockholders, affordability,
possible unintended consequences and governance. The Board of Directors did not
identify any risks arising from these policies or practices reasonably likely to
have a material adverse effect on the Company.

As previously disclosed in our form 8-K filing dated April 11, 2011, Robert
Gordon retired from his position on the Board of Directors effective April 6,
2011.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

The following table sets forth, as of March 25, 2012, on which date 68,560,030
shares of common stock were outstanding, the ownership of each person known by
the Registrant to be the beneficial owner of five percent or more of the
Company's common stock, each Officer and Director individually and all Directors
and Officers of the Registrant as a group.

No. of % of
Name Shares Class(1)
---- ------ --------

Maxwell Grant (2) Chairman and Director 24,303,800 34.20%
Dudley Muth Director 2,775,000 3.99%
Directors and Executive
Officers as a Group 27,078,800 38.19%

----------

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock that
are currently exercisable or exercisable within 60 days of December 31,
2011, are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Mr. Grant owns 100% of the equity interests in Koala Pictures Proprietary
Ltd. ("Koala") which owns 21,803,800 shares of common stock. Mr. Grant's
address is c/o the Company, P.O. Box 509, Amarillo, TX 79105-0509. As
previously reported, Koala holds warrants expiring December, 2014, to
purchase 2,500,000 shares of common stock at an exercise price of $.02 per
share.

36
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.

In 2011, a private company controlled by Maxwell Grant, a major stockholder (who
became our Chairman of the Board of Directors in May 2007) was paid consultancy
fees of $96,000 in consulting fees.

DIRECTOR INDEPENDENCE

As noted above, the Company's stock is not listed on a national securities
exchange or in an inter-dealer quotation system which has requirements that a
majority of the board of directors be independent. The Board of Directors has
determined, using the independence requirements established by the NASDAQ Stock
Market and the SEC, that all of the current members of the Board of Directors
other than Maxwell Grant are independent. The Board of Directors has considered
and applied all facts and circumstances relating to a director in making this
determination.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

(1) Audit Fees.
The aggregate fees billed by our current independent auditors, StarkSchenkein,
LLP., for professional services rendered for the audit of our financial
statements for the years ending December 31, 2011, filed as part of our 2011
Form 10-K filing and for review of our interim financial statements filed as
part of our first, second and third quarter reports on Form 10-Q filed for the
fiscal year of 2011 are approximately $36,000.

The aggregate fees billed by our current independent auditors, StarkSchenkein,
LLP., for professional services rendered for the audit of our financial
statements for the years ending December 31, 2009 and 2010, filed as part of our
2010 Form 10-K filing for the fiscal year of 2010 are $25,000.

(2) Audit-Related Fees.
There have been no audit-related fees billed by our auditors in each of the last
two fiscal years of our Company.

(3) Tax Fees.
There have been no tax fees billed by our auditors in each of the last two
fiscal years of our Company.

(4) All Other Fees.
There have been no other fees billed by our auditors in each of the last two
fiscal years of our Company.

(5) It is the policy of our Board of Directors that before the accountant is
engaged to render audit or non audit services, the engagement is approved by the
Board of Directors that is at present acting as the Audit Committee. All of the
services described above under the caption "Audit Fees" were approved by the
Board of Directors.

(6) Not applicable.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(3) 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.

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).

37
<PAGE>
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).

3.5 Amendments to the Articles of Incorporation of Nighthawk Capital, Inc.,
dated as of March 26, 1996.

3.6 Certificate of Amendment of Articles of Incorporation of Chancellor
Group, Inc., dated as of February 25, 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).

23.1 Consent of GSM, Inc.

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

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. Filed herewith.

99.1 Evaluation of Oil and Gas Reserves as of December 31, 2011, prepared by
GSM, INC., a registered petroleum engineering firm located in Amarillo,
Texas.

99.2 Evaluation of Oil and Gas Reserves as of December 31, 2010, prepared by
GSM, INC., a registered petroleum engineering firm located in Amarillo,
Texas (incorporated by reference to Exhibit 99.1 to the Annual Report
on Form 10-K filed by the Company on March 25, 2011 with the Securities
and Exchange Commission).

101 Interactive Data Files pursuant to Rule 405 of Regulation S-T.

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<PAGE>

SIGNATURES

Pursuant to the requirements of Section 12(g) 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, on March 26, 2012.

CHANCELLOR GROUP, INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated, on March 26, 2012.

/s/ Maxwell Grant
-----------------------------------------
Maxwell Grant
Chief Executive Officer and Director

/s/ Dudley Muth
-----------------------------------------
Dudley Muth
Director

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