### UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



### FORM 10

- K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2012 Commission File No. 0

- 22750



### ROYALE ENERGY, INC.

(Name of registrant in its charter)

California 33

- 0224120

(State or other jurisdiction of

incorporation or organization) (I.R.S. Employer

Identification No.)

7676 Hazard Center Drive, Suite 1500

San Diego, CA 92108

(Address of principal executive offices)

Issuer's telephone number: 619

- 881

- 2800

Securities registered pursuant to Section 12(b) of the Act:

None

Securities to be registered pursuant to Section 12(g) of the Act:

Common Stock, no par value per share

(Title of Class)

Indicate by check mark if the registrant is a well

- known seasoned issuer, as defined in Rule 405 of the

Securities Act. Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the

Ac t. Yes  No 

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 during the past 12 months (or for such shorter period that the registrant

was required to file such reports), and (2) has been subject to such filing requiremen ts for the past 90

days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web

site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of

Regulation S

- T (§232.405 of this chapter) durin g the preceding 12 months (or for such shorter period that

the registrant was required to submit and post such files). Yes  No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S

- B is not

contained herein, and will not be contained, to the best or 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. 

Indicate by check mark whether the registrant i s a large accelerated filer, an accelerated filer, a non

accelerated filer, or a smaller reporting company.

Large accelerated filer  Accelerated filer 

Non

- accelerated filer  Smaller Reporting Company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b

- 2 of the Act). Yes

 No 

At June 30, 2012, the end of the registrant’s most recent ly completed second fiscal quarter; the aggregate

market value of common equity held by non

- affiliates was $30,568,958.

At December 31, 2012, 12,545,465 shares of registrant's Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: The issuer’s proxy statement for its annual meeting

of stockholders, to be filed within 120 days after December 31, 2012, will contain the information required

by Part III, Items 10, 11, 12, 13 and 14, which information is hereby incorporated by reference into this

Form 10

- K.Table of Contents

The sole purpose of this amendment is to add to the annual report the information contained in Part III,

which information is also contained in our preliminary proxy statement to be filed with the SEC on April 30,

2013. No changes have been made in Parts I or II or in the audited financial statements contained in this

Report.

TABLE OF CONTENTS

PART I 1

Item 1 Description of Business 1

Plan of Business 2

Competition, Markets and Regulation 3

Item 1A Risk Factors 4

Item 1B Unresolved Staff Comments 8

Item 2 Description of Property 8

Northern California 9

Developed and Undeveloped Leasehold Acreage 9

Drilling Activities 9

Production 10

Net Proved Oil and Natural Gas Reserves 11

Item 3 Legal Proceedings 11

Item 4 Mine Safety Disclosures 11

PART II 11

Item 5 Market for Common Equity and Related Stockholder Matters 11

Dividends 12

Recent Sales of Unregistered Securities 12

Performance Graph 12

Item 6 Management’s Discussion and Analysis of financial Condition and Results of Operations 13

Critical Accounting Policies 13

Results of Operations for the Twelve Months Ended December 31, 2012, as Compared

to the Twelve Months Ended December 31, 2011 15

Capital Resources and Liquidity 17

Changes in Reserve Estimates 19

Item 7 Qualitative and Quantitative Disclosures About Market Risk 19

Item 8 Financial Statements 19

Item 9 Changes in and Disagreements With Accountants on Accounting and Financial

Disclosure 20

Item 9A Controls and Procedures 20

Disclosure Controls 20

Manageme nt Report on Internal Control over Financial Reporting 20

Changes in Internal Control over Financial Reporting 21

Limitations on Effectiveness of Controls 21

PART III 21

Item 10 Directors and Executive Officers of the Registrant 21

Item 11 Executive Compensation 24

Item 12 Security ownership of Certain Beneficial Owners and Management 27

Item 13 Certain Relationships and Related Transactions 28

Item 14 Principal Accountant Fees and Services 29

PART IV 30

Item 15 Exhibits and Financial Statement Schedules 30

SIGNATURES 32

FINANCIAL STATEMENTS F

- 1Table of Contents

1 ROYALE ENERGY, INC.

PART I

Item 1 Description of Business

Royale Energy, Inc. ("Royale Energy") is an independent oil and natural gas producer. Royale Energy's

principal lines of business are the production and sale of natural gas, acquisition of oil and gas lease interests

and proved reserves, drilling of both exploratory and development wells, and sales of fractional working

interests in wells to be drilled by Royale Energy. Royale Energy was incorporated in California in 1986 and

began operations in 1988. Royale Energy's common stock is traded on the NASDAQ Capital Market

System (symbol ROYL). On December 31, 2012, Royale Energy had 20 full time employees.

Royale Energy owns wells and leases located mainly in the Sacramento Basin and San Joaquin Basin in

California as well as in Utah, Texas, Oklahoma, Louisiana, and Alask a. Royale Energy usually sells a

portion of the working interest in each well it drills or participates in to third party investors and retains a

portion of the prospect for its own account. Selling part of the working interest to others allows Royale

En ergy to reduce its drilling risk by owning a diversified inventory of properties with less of its own funds

invested in each drilling prospect, than if Royale Energy owned the whole working interest and paid all

drilling and development costs of each prosp ect itself. Royale Energy generally sells working interests in its

prospects to accredited investors in exempt securities offerings. The prospects are bundled into multi

- well

investments, which permit the third party investors to diversify their investme nts by investing in several

wells at once instead of investing in single well prospects.

During its fiscal year ended December 31, 2012, Royale Energy continued to explore and develop natural

gas properties with a concentration in California. We also com pleted the acquisition of approximately

91,000 acres of prospective shale oil property in the north slope of Alaska. Additionally we own proved

developed producing and non

- producing reserves of oil and natural gas in Utah, Texas, Oklahoma and

Louisiana. In 2012, Royale Energy drilled two wells in northern California; one was commercially

productive which at year end was in the process of being completed and the other was a dry hole. Royale

Energy's estimated total reserves increased from approximately 4. 6 BCFE (billion cubic feet equivalent) at

December 31, 2011 to approximately 4.9 BCFE at December 31, 2012. According to the reserve reports

furnished to Royale Energy by Netherland, Sewell & Associates, Inc., and Source Energy, LLC, Royale

Energy's indep endent petroleum engineers, the net reserve value of its proved developed and undeveloped

reserves was approximately $7.6 million at December 31, 2012, based on natural gas prices ranging from

$2.59 per MCF to $3.09 per MCF. Source Energy, LLC, supplied reserve value estimates for Royale

Energy’s Utah properties, and Netherland, Sewell & Associates, Inc. provided reserve information for the

Company’s California, Texas, Oklahoma and, Louisiana properties.

Of course, net reserve value does not represent the fair market value of our reserves on that date, and we

cannot be sure what return we will eventually receive on our reserves. Net reserve value of proved

developed and undeveloped reserves was calculated by subtracting estimated future devel opment costs,

future production costs and other operating expenses from estimated net future cash flows from our

developed and undeveloped reserves.

Our standardized measure of discounted future net cash flows at December 31, 2012, was estimated to be

$3, 937,621. This figure was calculated by subtracting our estimated future income tax expense from the net

reserve value of proved developed and undeveloped reserves, and by further applying a 10% annual discount

for estimated timing of cash flows. A detail ed calculation of our standardized measure of discounted future

net cash flow is contained in Supplemental Information about Oil and Gas Producing Activities

– Changes

in Standardized Measure of Discounted Future Net Cash Flow from Proved Reserve Quantitie s, page F

- 26.

Royale Energy reported gross revenues in connection with the drilling of wells on a "turnkey contract" basis

in the amount of $2,028,863 for the year ended December 31, 2012, which represents approximately 46.2%Table of Contents

2 of its total revenues for the year. In 2011, Royale Energy reported $5,794,427 gross revenues from turnkey

drilling operations for the year, representing 50.2% of Royale Energy's total revenues for that year.

These amounts are offset by drilling expenses and development costs of $44 9,536 in 2012, and $3,523,372

in 2011. In addition to Royale Energy's own geological, land, and engineering staff, Royale Energy hires

independent contractors to drill, test, complete and equip the wells that it drills. Approximately 38% of

Royale Energy' s total revenue for the year ended December 31, 2012, came from sales of oil and natural gas

from production of its wells in the amount of $1,673,538, in 2011, this amount was $4,879,397, which

represented 42% of Royale Energy's total revenues.

Plan of B usiness

Royale Energy acquires interests in oil and natural gas reserves and sponsors private joint ventures. Royale

Energy believes that its stockholders are better served by diversification of its investments among individual

drilling prospects. Through its sale of joint ventures, Royale Energy can acquire interests and develop oil

and natural gas properties with greater diversification of risk and still receive an interest in the revenues and

reserves produced from these properties. By selling some of its working interest in most projects, Royale

Energy decreases the amount of its investment in the projects and diversifies its oil and gas property

holdings, to reduce the risk of concentrating a large amount of its capital in a few pro jects that may not be

successful.

After acquiring the leases or lease participation, Royale Energy drills or participates in the drilling of

development and exploratory oil and natural gas wells on its property. Royale Energy pays its proportionate

share of the actual cost of drilling, testing, and completing the project to the extent that it retains all or any

portion of the working interest.

Royale Energy also may sell fractional working interests in undeveloped wells to finance part of the drilling

co st. A drilling contract that calls for a company to drill a well, for a fixed price, to a specified depth or

geological formation is called a "turnkey contract." When Royale Energy sells fractional working interests to

raise capital to drill oil and natura l gas wells, generally it agrees to drill these wells on a turnkey contract

basis, so that the holders of the fractional interests prepay a fixed amount for the drilling and completion of a

specified number of wells. Under a turnkey contract, Royale Energ y recognizes gross revenue for the

amount paid by the purchaser and agrees to pay the expense of drilling and development of the well for the

participants. Sometimes the actual drilling and development costs are less than the fixed amount that Royale

Ener gy received from the fractional interest sale.

The fractional working interests that Royale Energy sells to investors are wellbore interests, in which the

investor acquires the right to participate in drilling and production from a specific well being dri lled on an

oil and gas lease. When a wellbore interest is sold, the investor does not receive an interest in the larger

leased property, which may include other potential drilling locations and additional development

opportunities, but the investor does re ceive the rights in the leasehold as it relates to the wellbore, including

rights and obligations to participate in drilling and production of the particular location in which he

purchased the wellbore interest.

Although Royale Energy’s operating agreemen ts do not usually address whether investors have a right to

participate in subsequent wells in the same area of interest as a proposed well, it is the Company’s policy to

offer to investors in a successful well the right to participate in subsequent wells at the same percentage level

as their working interest investment in the prior successful well.

Our revenue recognition policy is to recognize all pre

- drilling and drilling services we provide under turnkey

drilling agreements at the time drilling of the well is completed. See Note 1 to our Financial Statements, at

page F

- 8.

Once drilling has commenced, it is generally completed within 10

- 30 days. See Note 1 to Royale Energy'sTable of Contents

3 Financial Statements, at page F

- 8. Royale Energy maintains internal records of the expenditure of each

investor's funds for drilling projects.

Royale Energy generally operates the wells it completes. As operator, it receives fees set by industry

standards from the owners of fractional interests in the wells and from expense reim bursements. For the

year ended December 31, 2012, Royale Energy earned gross revenues from operation of the wells in the

amount of $455,396 representing 10.4% of its total revenues for the year. In 2011, the amount was

$385,575, which represented about 3 .3% of total revenues. At December 31, 2012, Royale Energy operated

56 natural gas wells in California. Royale also owns an interest in seven natural gas wells in Utah and has

non

- operating interests in 11 oil and gas wells in Texas, two in Oklahoma, one in California, and one in

Louisiana.

Royale Energy currently sells most of its California natural gas production through PG&E pipelines to

independent customers on a monthly contract basis, while some gas is delivered through privately owned

pipelines to independent customers. Since many users are willing to make such purchase arrangements, the

loss of any one customer would not affect our overall sales operations. All oil and natural gas properties are

depleting assets in which production naturally decre ases over time as the finite amount of existing reserves

are produced and sold. It is Royale Energy’s business as an oil and natural gas exploration and production

company to continually search for new development properties. The company’s success will u ltimately

depend on its ability to continue locating and developing new oil and natural gas resources. Natural gas

demand and the prices paid for gas are seasonal. In recent years, natural gas demand and prices in Northern

California have fluctuated unpre dictably throughout the year.

Royale Energy had no subsidiaries in 2012.

Competition, Markets and Regulation

Competition

The exploration and production of oil and natural gas is an intensely competitive industry. The sale of

interests in oil and gas projects, like those Royale Energy sells, is also very competitive. Royale Energy

encounters competition from other oil and natural gas producers, as well as from other entities which invest

in oil and gas for their own account or for others, and many of these companies are substantially larger than

Royale Energy.

Markets

Market factors affect the quantities of oil and natural gas production and the price Royale Energy can obtain

for the production from its oil and natural gas properties. Such factors include: the extent of domestic

production; the level of imports of foreign oil and natural gas; the general level of market demand on a

regional, national and worldwide basis; domestic and foreign economic conditions that determine levels of

industrial pr oduction; political events in foreign oil

- producing regions; and variations in governmental

regulations including environmental, energy conservation, and tax laws or the imposition of new regulatory

requirements upon the oil and natural gas industry.

Regu lation

Federal and state laws and regulations affect, to some degree, the production, transportation, and sale of oil

and natural gas from Royale Energy’s operations. States in which Royale Energy operates have statutory

provisions regulating the product ion and sale of oil and natural gas, including provisions regarding

deliverability. These statutes, along with the regulations interpreting the statutes, generally are intended to

prevent waste of oil and natural gas, and to protect correlative rights to produce oil and natural gas by

assigning allowable rates of production to each well or proration unit.Table of Contents

4 The exploration, development, production and processing of oil and natural gas are subject to various federal

and state laws and regulations to protect the environment. Various federal and state agencies are

considering, and some have adopted, other laws and regulations regarding environmental controls that could

increase the cost of doing business. These laws and regulations may require: the acquisitio n of a permit by

operators before drilling commences; the prohibition of drilling activities on certain lands lying within

wilderness areas or where pollution arises; and the imposition of substantial liabilities for pollution resulting

from drilling opera tions, particularly operations in offshore waters or on submerged lands. The cost of oil

and natural gas development and production also may increase because of the cost of compliance with such

legislation and regulations, together with any penalties resu lting from failing to comply with the legislation

and regulations. Ultimately, Royale Energy may bear some of these costs.

Presently, Royale Energy does not anticipate that compliance with federal, state and local environmental

regulations will have a material adverse effect on capital expenditures, earnings, or its competitive position

in the oil and natural gas industry; however, changes in the laws, rules or regulations, or the interpretation

thereof, could have a materially adverse effect on Royale Energy’s financial condition or results of

operation.

Royale Energy files quarterly, yearly and other reports with the Securities Exchange Commission. You may

obtain a copy of any materials filed by Royale Energy with the SEC at 450 Fifth Street, N.W., W ashington,

D.C. 20549, by calling 1

- 800

- SEC

- 0300. The SEC also maintains an Internet site that contains reports,

proxy and information statements, and other information regarding issuers that file electronically with the

SEC at http://www.sec.gov. Royale Energy also provides access to its SEC reports and other public

announcements on its website, http://www.royl.com.

Item 1A Risk Factors

In addition to the other information contained in this report, the following risk factors should be considered

in evaluating our business.

We Depend on Market Conditions and Prices in the Oil and Gas Industry.

Our success depends heavily upon our ability to market oil and gas production at favorable prices. In recent

decades, there have bee n both periods of worldwide overproduction and underproduction of hydrocarbons

and periods of increased and relaxed energy conservation efforts. As a result the world has experienced

periods of excess supply of, and reduced demand for, crude oil on a worl dwide basis and for natural gas on a

domestic basis; these periods have been followed by periods of short supply of, and increased demand for,

crude oil and, to a lesser extent, natural gas. The excess or short supply of oil and gas has placed pressures

o n prices and has resulted in dramatic price fluctuations.

Natural gas demand and the prices paid for gas are seasonal. The fluctuations in gas prices and possible new

regulations create uncertainty about whether we can continue to produce gas for a profi t.

Prices for oil and natural gas affect the amount of cash flow available for capital expenditures and our ability

to borrow and raise additional capital. Lower prices may also reduce the amount of oil and natural gas that

we can economically produce. Any substantial and extended decline in the price of oil or natural gas would

decrease our cash flows, as well as the carrying value of our proved reserves, our borrowing capacity and

our ability to obtain additional capital.

The Depressed Price of Natura l Gas Is Reducing Our Revenues and Our Reserves.

Large parts of our established production and reserves in California consist of natural gas. The price of

natural gas has been depressed recently, and for 2012 the average sales price we received for natur al gas wasTable of Contents

5 $2.74 per MCF, compared to $4.08 in 2011. Lower gas prices caused a reduction in our revenues in 2012,

and it also caused us to write down our total reserves, as yearend reserve values became less than book value

of some existing wells. See Management’s Discussion and Analysis of Financial Condition and Results of

Operations

– Results of Operations for the Twelve Months Ended December 31, 2012, as Compared to the

Twelve Months Ended December 31, 2011. If natural gas prices remain low, we may have further reductions

to our production revenue from existing wells and further reductions in reserve values. Low natural gas

prices also make exploration and development opportunities on our undeveloped properties in northern and

central California le ss attractive.

Variance in Estimates of Oil and Gas Reserves could be Material.

The process of estimating oil and gas reserves is complex, requiring significant decisions and assumptions in

the evaluation of available geological, geophysical, engineering and economic data for each reservoir. As a

result, such estimates are inherently imprecise. Actual future production, oil and gas prices, revenues, taxes,

development expenditures, operating expenses and quantities of recoverable oil and gas reserves ma y vary

substantially from those estimated in reserve reports that we periodically obtain from independent reserve

engineers.

You should not construe the standardized measure of proved reserves contained in our annual report as the

current market value of the estimated proved reserves of oil and gas attributable to our properties. In

accordance with Securities and Exchange Commission requirements, we have based the standardized

measure of future net cash flows from the standardized measure of proved reserve s on the average price

during the 12

- month period before the ending date of the period covered by the report, whereas actual future

prices and costs may vary significantly. The following factors may also affect actual future net cash flows:

· the timing of both production and related expenses;

· changes in consumption levels; and

· governmental regulations or taxation.

In addition, the calculation of the standardized measure of the future net cash flows using a 10% discount as

required by the Securities and Exchange Commission is not necessarily the most appropriate discount rate

based on interest rates in effect from time to time and risks associated with our reserves or the oil and gas

industry in general. Furthermore, we may need to revise o ur reserves downward or upward based upon

actual production, results of future development, supply and demand for oil and gas, prevailing oil and gas

prices and other factors.

Any significant variance in these assumptions could materially affect the estim ated quantities and present

value of our reserves. In addition, our standardized measure of proved reserves may be revised downward

or upward, based upon production history, results of future exploration and development, prevailing oil and

gas prices and other factors, many of which are beyond our control. Actual production, revenues, taxes,

development expenditures and operating expenses with respect to our reserves will likely vary from the

estimates used, and such variances may be material.

Future Acq uisitions and Development Activities May Not Result in Additional Proved Reserves, and

We May Not be Able to Drill Productive Wells at Acceptable Costs.

In general, the volume of production from oil and gas properties declines as reserves are depleted. E xcept to

the extent that we acquire properties containing proved reserves or conduct successful development and

exploration activities, or both, our proved reserves will decline as reserves are produced. Our future oil and

gas production is, therefore, hi ghly dependent upon our ability to find or acquire additional reserves.Table of Contents

6 The business of acquiring, enhancing or developing reserves is capital intensive. We require cash flow from

operations as well as outside investments to fund our acquisition and devel opment activities. If our cash

flow from operations is reduced and external sources of capital become limited or unavailable, our ability to

make the necessary capital investment to maintain or expand our asset base of oil and gas reserves would be

impair ed.

The Oil and Gas Industry has Mechanical and Environmental Risks.

Oil and gas drilling and production activities are subject to numerous risks. These risks include the risk that

no commercially productive oil or gas reservoirs will be encountered, that operations may be curtailed,

delayed or canceled, and that title problems, weather conditions, compliance with governmental

requirements, mechanical difficulties or shortages or delays in the delivery of drilling rigs and other

equipment may limit our ability to develop, produce or market our reserves. New wells we drill may not be

productive and we may not recover all or any portion of our investment in the well. Drilling for oil and gas

may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not

produce sufficient net revenues to return a profit after drilling, operating and other costs. In addition, our

properties may be susceptible to hydrocarbon drainage from production by other operators on adjac ent

properties.

Industry operating risks include the risks of fire, explosions, blow outs, pipe failure, abnormally pressured

formations and environmental hazards, such as oil spills, natural gas leaks, ruptures or discharges of toxic

gases, the occurrenc e of any of which could result in substantial losses due to injury or loss of life, severe

damage to or destruction of property, natural resources and equipment, pollution or other environmental

damage, clean up responsibilities, regulatory investigation a nd penalties and suspension of operations. In

accordance with customary industry practice, we maintain insurance for these kinds of risks, but we cannot

be sure that our level of insurance will cover all losses in the event of a drilling or production

cat astrophe. Insurance is not available for all operational risks, such as risks that we will drill a dry hole, fail

in an attempt to complete a well or have problems maintaining production from existing wells.

Drilling is a Speculative Activity Even with Newer Technology.

Assessing drilling prospects is uncertain and risky for many reasons. We have grown in the past several

years by using 3

- D seismic technology to acquire and develop exploratory projects in northern California, as

well as by acquiring p roducing properties for further development. The successful acquisition of such

properties depends on our ability to assess recoverable reserves, future oil and gas prices, operating costs,

potential environmental and other liabilities and other factors.

Nevertheless, exploratory drilling remains a speculative activity. Even when fully utilized and properly

interpreted, 3

- D seismic data and other advanced technologies assist geoscientists in identifying subsurface

structures but do not enable the interpr eter to know whether hydrocarbons are in fact present. In addition, 3

- D seismic and other advanced technologies require greater pre

- drilling expenditures than traditional drilling

strategies, and we could incur losses as a result of these costs.

Therefor e, our assessment of drilling prospects are necessarily inexact and their accuracy inherently

uncertain. In connection with such an assessment, we perform a review of the subject properties that we

believe to be generally consistent with industry practice s. Such a review, however, will not reveal all

existing or potential problems, nor will it permit us to become sufficiently familiar with the properties to

fully assess their deficiencies and capabilities.

Breaches of Contract by Sellers of Properties C ould Adversely Affect Operations.

In most cases, we are not entitled to contractual indemnification for pre closing liabilities, including

environmental liabilities, and we generally acquire interests in the properties on an "as is" basis with limited

rem edies for breaches of representations and warranties. In those circumstances in which we haveTable of Contents

7 contractual indemnification rights for pre

- closing liabilities, the seller may not fulfill those obligations and

leave us with the costs.

We May Not be Able to Acquire Producing Oil and Gas Properties Which Contain Economically

Recoverable Reserves.

Competition for producing oil and gas properties is intense and many of our competitors have substantially

greater financial and other resources than we do. Acquis itions of producing oil and gas properties may be at

prices that are too high to be acceptable.

We Require Substantial Capital for Exploration and Development.

We make substantial capital expenditures for our exploration and development projects. We wil l finance

these capital expenditures with cash flow from operations and sales of direct working interests to third party

investors. We will need additional financing in the future to fund our developmental and exploration

activities. Additional financing that may be required may not be available or continue to be available to

us. If additional capital resources are not available to us, our developmental and other activities may be

curtailed, which would harm our business, financial condition and results of operations.

Profit Depends on the Marketability of Production.

The marketability of our natural gas production depends in part upon the availability, proximity and capacity

of natural gas gathering systems, pipelines and processing facilities. Most of our natural gas is delivered

through natural gas gathering systems and natural gas pipelines that we do not own. Federal, state and local

regulation of oil and gas production and transportation, tax and energy policies, and/or changes in supply

and dem and and general economic conditions could adversely affect our ability to produce and market its oil

and gas. Any dramatic change in market factors could have a material adverse effect on our financial

condition and results of operations.

We Depend on Ke y Personnel.

Our business will depend on the continued services of our co

- presidents and co

- chief executive officers,

Donald H. Hosmer and Stephen M. Hosmer. Stephen Hosmer is also the chief financial officer. We do not

have employment agreements with e ither Donald or Stephen Hosmer. The loss of the services of either of

these individuals would be particularly detrimental to us because of their background and experience in the

oil and gas industry.

The Oil and Gas Industry is Highly Competitive.

The o il and gas industry is highly competitive in all its phases. Competition is particularly intense with

respect to the acquisition of desirable producing properties, the acquisition of oil and gas prospects suitable

for enhanced production efforts, and the h iring of experienced personnel. Our competitors in oil and gas

acquisition, development, and production include the major oil companies in addition to numerous

independent oil and gas companies, individual proprietors and drilling programs.

Many of our c ompetitors possess and employ financial and personnel resources far greater than those which

are available to us. They may be able to pay more for desirable producing properties and prospects and to

define, evaluate, bid for, and purchase a greater number of producing properties and prospects than we can.

We must compete against these larger companies for suitable producing properties and prospects, to

generate future oil and gas reserves.Table of Contents

8 Governmental Regulations Can Hinder Production.

Domestic oil and gas exploration, production and sales are extensively regulated at both the federal and state

levels. Legislation affecting the oil and gas industry is under constant review for amendment or expansion,

frequently increasing the regulatory burden. Als o, numerous departments and agencies, both federal and

state, have legal authority to issue, and have issued, rules and regulations affecting the oil and gas industry

which often are difficult and costly to comply with and which carry substantial penalties for

noncompliance. State statutes and regulations require permits for drilling operations, drilling bonds, and

reports concerning operations. Most states where we operate also have statutes and regulations governing

conservation matters, including the u nitization or pooling of properties. Our operations are also subject to

numerous laws and regulations governing plugging and abandonment, discharging materials into the

environment or otherwise relating to environmental protection. The heavy regulatory b urden on the oil and

gas industry increases its costs of doing business and consequently affects its profitability. Changes in the

laws, rules or regulations, or the interpretation thereof, could have a materially adverse effect on our

financial condition or results of operation.

Minority or Royalty Interest Purchases Do Not Allow Us to Control Production Completely.

We sometimes acquire less than the controlling working interest in oil and gas properties. In such cases, it is

likely that these properti es would not be operated by us. When we do not have controlling interest, the

operator or the other co

- owners might take actions we do not agree with and possibly increase costs or

reduce production income in ways we do not agree with.

Environmental Regu lations Can Hinder Production.

Oil and gas activities can result in liability under federal, state and local environmental regulations for

activities involving, among other things, water pollution and hazardous waste transport, storage, and

disposal. Such liability can attach not only to the operator of record of the well, but also to other parties that

may be deemed to be current or prior operators or owners of the wells or the equipment involved. We have

inspections performed on our prop erties to assure environmental law compliance, but inspections may not

always be performed on every well, and structural and environmental problems are not necessarily

observable even when an inspection is undertaken.

Item 1B Unreso lved Staff Comments

None

Item 2 Description of Property

Since 1993, Royale Energy has concentrated on development of properties in the Sacramento Basin and the

San Joaquin Basin of Northern and Central California. In 2012, Roy ale Energy drilled two wells in northern

California, one of which was a developmental dry hole and the other was waiting completion of the pipeline

at year end. In 2012, Royale Energy completed the acquisition of approximately 91,000 acres on the North

Slo pe in a lease sale by the State of Alaska. Out of 13 companies bidding on 178 tracts, Royale won 56

tracts in the heart of the oil window. The company's 91,040 acre position represents 27% of the 334,969

acres leased in this sale.

Following industry stan dards, Royale Energy generally acquires oil and natural gas acreage without

warranty of title except as to claims made by, though, or under the transferor. In these cases, Royale Energy

attempts to conduct due diligence as to title before the acquisition, but it cannot assure that there will be no

losses resulting from title defects or from defects in the assignment of leasehold rights. Title to property

most often carries encumbrances, such as royalties, overriding royalties, carried and other similar in terests,

and contractual obligations, all of which are customary within the oil and natural gas industry.Table of Contents

9 During 2012, Royale Energy maintained a revolving credit agreement with Texas Capital Bank, N.A. Under

the terms of the agreement, Royale Energy ma y borrow, repay, and reborrow money from Texas Capital

Bank with a total credit line of $14,250,000. The maximum allowable amount of each credit request is

governed by a formula in the agreement. The maximum allowable amount at December 31, 2012, was

$35 0,000. At December 31, 2012, Royale Energy owed $350,000 under this credit line. During January

2013, the $350,000 loan balance was paid in full. In February 2013, the revolving credit agreement

matured.

Following is a discussion of Royale Energy's si gnificant oil and natural gas properties. Reserves at

December 31, 2012, for each property discussed below, have been determined by Netherland, Sewell &

Associates, Inc., and Source Energy, LLC, registered professional petroleum engineers, and in accordance

with reports submitted to Royale Energy on February 12, 2013 and February 15, 2013, respectively.

Northern California

Royale Energy owns lease interests in eleven gas fields with locations ranging from Tehama County in the

north to Kern Coun ty in the south, in the Sacramento and San Joaquin Basins in California. At December

31, 2012, Royale operated 56 wells in California with estimated total proven, developed, and undeveloped

reserves at approximately 4.9 BCF, according to Royale’s independ ently prepared reserve report as of

December 31, 2012.

Developed and Undeveloped Leasehold Acreage

As of December 31, 2012, Royale Energy owned leasehold interests in the following developed and

undeveloped properties in both gross and net acreage.

Developed Undeveloped

Gross

Acres Net Acres Gross

Acres Net Acres

California 15,120.43 10,550.02 9,054.71 8,164.85

Alaska 0 0 91,039.59 91,039.59

All Other States 3,595.30 1,284.83 6,090.08 4,064.49

Total 18,715.73 11,834.85 106,184.38 103,268.93

Gross and Net Productive Wells

As of December 31, 2012, Royale Energy owned interests in the following oil and gas wells in both gross

and net acreage:

Gross Wells Net Wells

Natural Gas 70.00 34.53

Oil 7.00 0.69

Total 77.00 35.22

Drilling Activities

The following table sets forth Royale Energy's drilling activities during the years ended December 31, 2011

and 2012. All wells are located in the Continental U.S., in California, Texas, Louisiana and Utah.Table of Contents

10 Year Type of Well(a) Gross Wells(e) Net Wells(b)

Total Producing(c) Dry(d) Producing(c) Dry(d)

2011 Exploratory 1 0 1 0.0000 0.4965

Developmental 6 4 2 2.5184 0.9533

2012 Exploratory 1 1 0 0.5022 0.0000

Developmental 1 0 1 0.0000 0.4674

a) An exploratory well is one that is drilled in search of new oil and natural gas reservoirs, or to test the

boundary limits of a previously discovered reservoir. A developmental well is one drilled on a

previously known productive area of an oil and natural gas reservoir with the objective of completing

that reservoir.

b) Gross wells represent the number of actual wells in which Royale Energy owns an interest. Royale

Energy's interest in these wells may range from 1% to 100%.

c) A producing well is one that produces oil and/or natural gas that is being purchased on the market.

d) A dry well is a well that is not deemed capable of producing hydrocarbons in paying quantities.

e) One "net well" is deemed to exist when the su m of fractional ownership working interests in gross

wells or acres equals one. The number of net wells is the sum of the fractional working interests

owned in gross wells expressed as a whole number or a fraction.

As of December 31, 2012, Royale Energy was in the process of drilling one well in California and had

recently finished drilling another California well.

Production

The following table summarizes, for the periods indicated, Royale Energy's net share of oil and natural gas

production, average sales price per barrel (BBL), per thousand cubic feet (MCF) of natural gas, and the

MCF equivalent (MCFE) for the barrels of oil based on a 6 to 1 ratio of the price per barrel of oil to the price

per MCF of natural gas. "Net" production is production tha t Royale Energy owns either directly or

indirectly through partnership or joint venture interests produced to its interest after deducting royalty,

limited partner or other similar interests. Royale Energy generally sells its oil and natural gas at prices then

prevailing on the "spot market" and does not have any material long term contracts for the sale of natural gas

at a fixed price.

2012 2011

Net volume

Oil (BBL) 1,558 2,264

Gas (MCF) 559,590 1,144,469

MCFE 568,938 1,158,053

Average sales price

Oil (BBL) $ 90.75 $ 90.48

Gas (MCF) $ 2.74 $ 4.08

Net production costs and taxes $ 1,139,750 $ 1,517,920

Lifting costs (per MCFE) $ 2.00 $ 1.31Table of Contents

11 Net Proved Oil and Natural Gas Reserves

As of December 31, 2012, Royale Energy had proved developed reserves of 3,188 MMCF and total proved

reserves of 4,498 MMCF of natural gas on all of the properties Royale Energy leases. For the same period,

Royale Energy also had proved developed oil reserves of 1 MBBL and total proved oil reserves of 63

MBBL.

Oil and gas reserve estimates and the discounted present value estimates associated with the reserve

estimates are based on numerous engineering, geological and operational assumptions that generally are

derived from limited data.

Item 3 Legal Proceedings

National Fuel Corporation (“NFC”) v. Royale Energy, Inc., No. 080800735, Uintah County, Utah. NFC

filed this lawsuit seeking to remove Royale as operator of the property in which Royale is the 75% record

owner and operator and NFC was a non

- o perator with a 25% ownership. Trial was held on October 18

- 21,

2011, at which Royale defended itself vigorously. On February 2, 2012, the Court issued its ruling, denying

NFC’s request to remove Royale as operator. On April 6, 2012, judgment pursuant to the ruling was

entered, and NFC filed an appeal. Effective February 1, 2013, during the pendency of the appeal, the case

was settled. We anticipate that the appeal will be dismissed shortly, and the litigation concluded. There was

no cash paid out as a result of the ruling.

Douglas Jones v. Royale Energy, Inc., et.al.

On July 1, 2010, Douglas Jones filed a lawsuit against the Company in the Circuit Court, 17th Judicial

District, Broward County, Florida. Mr. Jones was an independent contractor handlin g certain aspects of

sales for the Company prior to July 2, 2008. He asserts that he is entitled to an unspecified amount for

commissions and expenses. The Company denies that any money is owed to Mr. Jones, and intends to

defend the lawsuit vigorously. On August 16, 2010, the Company through Florida counsel Adam Hodkin,

filed a motion to dismiss the lawsuit for lack of jurisdiction in the Florida courts. The Court has set the

motion to dismiss for hearing on March 15, 2012, but the hearing was taken off calendar at the request of the

plaintiff, Mr. Jones. The court then reset the motion for hearing on February 27, 2013. At the hearing, the

judge took the matter under submission to consider whether he needed to hold an evidentiary hearing or

whether he could rule on the papers. If the motion to dismiss is denied, Royale intends to answer their

complaint and oppose the lawsuit vigorously.

Item 4 Mine Safety Disclosures

Not Applicable

PART II

Item 5 Market for Common Equity and Related Stockholder Matters

Since 1997 Royale Energy’s Common Stock has been traded on the Nasdaq National Market System under

the symbol “ROYL”. Since July 1, 2009, Royale Energy’s stock has been listed on the NASDAQ Capi tal

Market, and prior to that, our stock was listed on the NASDAQ Global Market. As of December 31, 2012,

12,545,465 shares of Royale Energy’s Common Stock were held by approximately 7,736 stockholders. The

following table reflects the high and low quart erly closing sales prices from January 2011 through December

2012.Table of Contents

12 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

High Low High Low High Low High Low

2012 6.59 4.27 5.21 2.58 4.32 1.93 3.89 2.45

2011 7.83 2.08 5.52 2.56 3.91 2.08 5.36 1.90

Dividends

The Board of Directors did not issue cash or stock dividends in 2012 or 2011.

Recent Sales of Unregistered Securities

In February and March 2012, five directors exercised stock options to purchase a total of 76,346 shares of

common stock in cashless exercises. The stock options had originally been awarded in 2008 at exercise

prices of $3.50 per share. In February and March 2012, one director exercised stock opti ons, which also had

been awarded in 2008 and 2010, to purchase 45,000 and 43,692 shares of common stock for cash at an

exercise price of $3.50 and $3.25 per share, respectively. The options had been issued and the stock was

purchased in reliance on the ex emption from registration requirements of the Securities Act of 1933

contained in Section 4(2) thereof.

In November 2011, ownership of 31,667 shares of restricted common stock which had been awarded to the

seven directors of Royale Energy for services ren dered, vested. The restricted stock originally had been

awarded in 2008 in reliance on the exemption from registration requirements of the Securities Act of 1933

contained in Section 4(2) thereof. In March 2011, one director exercised stock options to pu rchase a total of

18,440 shares of common stock in a cashless exercise. The stock options had originally been awarded in

2008 at an exercise price of $3.50 per share.

Performance Graph

The following stock price performance graph is included in accord ance with the SEC’s executive

compensation disclosure rules and is intended to allow stockholders to review Royale Energy’s executive

compensation policies in light of corresponding stockholder returns, expressed in terms of the appreciation

of Royale Ener gy’s common stock relative to two broad

- based stock performance indices. The information

is included for historical comparative purposes only and should not be considered indicative of future stock

performance. The graph compares total return on $100 val ue of Royale Energy’s common stock on

December 31, 2006, with the cumulative total return of the Standard & Poor’s Composite 500 Stock Index

and the Dow Jones U.S. Oil & Gas Index from December 31, 2007 through December 31, 2012.Table of Contents

13 2007 2008 2009 2010 2011 2012

Royale Energy,

Inc. 100 100 95 80 164 92

S&P 500 Stock

Index 100 62 76 86 86 97

DJ US Oil & Gas

Index 100 63 73 85 87 90

Item 6 Management’s Discussion and Analysis of Financial Condition and Results of

Operations

The following discussion should be read in conjunction with Royale Energy’s Financial Statements and

Notes thereto and other financial information relating to Royale Energy included elsewhere in this

document.

For the past eighteen years, Royale Energy has primarily acquired and developed producing and non

producing natural gas properties in California. In 2004, Royale Energy began deve loping leases in

Utah. The most significant factors affecting the results of operations are (i) changes in oil and natural gas

production levels and reserves, (ii) recording of turnkey drilling revenues and the associated drilling

expense, and (iii) the c hange in commodities price of natural gas and oil reserves owned by Royale Energy.

Critical Accounting Policies

Revenue Recognition

Royale Energy’s financial statements include its pro rata ownership of wells. Royale Energy usually sells a

portion of the working interest in each well it drills or participates in to third party investors and retains a

portion of the prospect for its own account. Royale Energy generally retains about a 50% working

interest. All results, successful or not, are included at its pro rata ownership amounts: revenue, expenses,

assets, and liabilities as defined in FASB ASC 932

- 323

- 25.

Royale Energy has developed two profit

- oriented segments of business: marketing direct working interests

(DWI), and producing and selling oil and gas.

Royale Energy derives DWI revenue from sales of working interests in wells to be drilled to high net worth

individuals. DWI investments relating to pre

- drilling costs are non

- refundable. The company holds all

funds invested as deferred turn key drilling until drilling is complete. Occasionally, drilling is delayed due to

the permitting process or drilling rig availability. At December 31, 2012 and 2011, Royale Energy had

deferred turnkey drilling of $8,693,743 and $6,909,666 respectively.

The primary business segment is oil and gas production. Northern and central California accounted for

approximately 99% of the Company’s successful natural gas production in 2012. Natural gas flows from the

wells into gathering line systems, which are e quipped occasionally with compressor systems, which in turn

flow into metered transportation and customer pipelines. Monthly, price data and daily production are used

to invoice customers for amounts due to Royale Energy and other working interest owners. Royale Energy

operates virtually all of its own wells and receives industry standard operator fees.

Upon the sale or retirement of a complete field of a proved property, the Company eliminates the cost from

its books, and the resultant gain or loss is recorded to Royale Energy’s Statement of Operations. Upon the

sale of an entire interest in an unproved property where the property has been assessed for impairment

individually, a gain or loss is recognized in Royale Energy’s Statement of Operations. I f a partial interest in

an unproved property is sold, any funds received are accounted for as a reduction of the cost in the interest

retained.Table of Contents

14 Oil and Gas Property and Equipment

Royale Energy follows the successful efforts method of accounting for oil and gas properties. Costs are

accumulated on a field

- by

- field basis. These costs include pre

- drilling activities such as leasing rents paid,

drilling costs, and post

- drilling tangible costs. Costs of unproved properties are excluded from amortization

u ntil the properties are evaluated. Royale Energy regularly evaluates its unproved properties on a field

- by

field basis for possible impairment. Due to the unpredictable nature of exploration drilling activities, the

amount and timing of impairment expens es are difficult to predict with any certainty.

Depletion

The units of production method of accounting uses proved reserves in the calculation of depletion,

depreciation and amortization. Proved reserves are estimated quantities of crude oil, natural ga s, and natural

gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable

from known reservoirs under existing economic and operating conditions. Proved reserves cannot be

measured exactly, and the estimation of reserves involves judgment determinations. Independent

engineering reserve estimates must be reviewed and adjusted periodically to reflect additional information

gained from reservoir performance, new geological and geophysical data and economic chang es. The

estimates are based on current technology and economic conditions, and Royale Energy considers such

estimates to be reasonable and consistent with current knowledge of the characteristics and extent of

production. The independent engineering esti mates include only those amounts considered to be proved

reserves and do not include additional amounts which may result from new discoveries in the future, or from

application of secondary and tertiary recovery processes where facilities are not in place or for which

transportation and/or marketing contracts are not in place. Changes in previous estimates of proved reserves

result from new information obtained from production history and changes in economic factors.

Impairment of Assets

Producing property costs are evaluated for impairment and reduced to fair value if the sum of expected

undiscounted future cash flows is less than net book value pursuant to the Extractive Activities Topic of the

Financial Accounting Standard Board’s (FASB) Accounti ng Standards Codification. Impairment of non

producing leasehold costs and undeveloped mineral and royalty interests are assessed periodically on a

property

- by

- property basis and any impairment in value are charged to expense. We periodically review fo r

impairment of proved properties on a field

- by

- field basis. Unamortized capital costs are measured on a field

basis and are reduced to fair value if it is determined that the sum of expected future net cash flows are less

than the net book value. We det ermine if impairment has occurred through either adverse changes or as a

result of its periodic review for impairment. Impairment is measured on a 10% discounted cash flows

basis. We regard impairment costs of undeveloped properties as a component of our turnkey drilling

overhead, since impairment costs amount to a write

- down of previously acquired property inventory that we

were unable to successfully develop as part of our turnkey drilling program.

Estimates

The preparation of financial statements i n conformity with accounting principles generally accepted in the

United States of America requires management to make estimates and assumptions that affect the 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. The most

significant estimates pertain to proved oil, plant products and gas reserve volumes and the future

development costs. Actual r esults could differ from those estimates.Table of Contents

15 Deferred Income Taxes

Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future

deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the

financial statements or income tax returns, and (b) operating loss and tax credit carry forwards. All

available evidence, both positive and negative, shall be considered to determine whether, based on the

weight of that evidence, a valu ation allowance for deferred tax assets is needed. Information about the

company’s financial position and its results of operations for the current and preceding years will be used.

The company shall use judgment in considering the relative impact of negative and positive evidence. The

weight given to the potential effect of negative and positive evidence shall be commensurate with the extent

to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is

necessary and 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. A cumulative loss in recent years is a significant piece of

negative evidence that is difficult to overcome.

Future realization of a tax benefit sometimes will be expected for a portion, but not all of a deferred tax

asset, and the dividing line between the two portions may be unclear. In those circumstances, application of

judgment based on a carefu l assessment of all available evidence is required to determine the portion of a

deferred tax asset for which it is more likely than not a tax benefit will not be realized.

Results of Operations for the Twelve Months Ended December 31, 2012, as Compared to the Restated

Twelve Months Ended December 31, 2011

For the year ended December 31, 2012, we recorded a net loss before taxes of $4,526,117 a $1,394,630

improvement when compared to a net loss before taxes of $5,920,747 during 2011. Total revenues from

operations in 2012 were $4,394,745, a decrease of $7,1 37,665, or 61.9%, from the total revenues of

$11,532,410 in 2011, the result of both lower turnkey drilling revenues and oil and natural gas sales. Total

expenses from operations in 2012 were $8,741,001, a decrease of $9,333,701, or 51.6%, from the total

e xpenses of $18,074,702 in 2011, due mainly to decreases in both drilling and impairment costs in 2012. At

yearend 2012, management reviewed the realizability of the Company’s net deferred tax assets and

concluded that certain conditions were met, as outlin ed above in the Certain Accounting Policy’s Deferred

Income Tax section and in FASB ASC 740

- 10, under which it was appropriate for Royale to record a

valuation allowance against the net deferred tax assets of $10,176,227, resulting in a net loss of $11,961 ,026

in 2012 compared to a net loss of $4,188,241 in 2011.

In 2012, revenues from oil and gas production decreased by 65.7% to $1,673,538 from $4,879,397 in 2011,

due to lower oil and natural gas production. This decrease in production was due to the nat ural declines of

our existing wells and lower commodity prices received in 2012. The net sales volume of natural gas for the

year ended December 31, 2012, was approximately 559,590 MCF with an average price of $2.74 per MCF,

versus 1,144,469 MCF with an a verage price of $4.08 per MCF for 2011. This represents a decrease in net

sales volume of 584,879 MCF or 51.1%. The net sales volume for oil and condensate (natural gas liquids)

production was approximately 1,558 barrels with an average price of $90.75 p er barrel for the year ended

December 31, 2012, compared to 2,264 barrels at an average price of $90.48 per barrel for the year in

2011. This represents a decrease in net sales volume of 706 barrels, or 31.2%. This decrease was mainly

due to the sale of several oil producing wells in the first quarter of 2011.

Oil and gas lease operating expenses decreased by $378,170, or 24.9%, to $1,139,750 for the year ended

December 31, 2012, from $1,517,920 for the year in 2011. This decrease was mainly due to lowe r

transportation costs due to the decrease in production volumes and lower plugging costs during 2012. When

measuring lease operating costs on a production or lifting cost basis, in 2012, the $1,139,750 equates to a

$2.00 per MCFE lifting cost versus a $1 .31 per MCFE lifting cost in 2011, a 52.7% increase, due to the

lower production volumes in 2012.Table of Contents

16 For the year ended December 31, 2012, turnkey drilling revenues decreased $3,765,564 to $2,028,863 from

$5,794,427 in 2011, or 65.0%. We also had a $3,073, 836 or 87.2% decrease in turnkey drilling and

development costs to $449,536 in 2012 from $3,523,372 in 2011. These decreases in both turnkey revenues

and costs were due to the drilling of two wells in 2012, one developmental and one exploratory well versu s

the drilling of seven wells in 2011, six developmental and one exploratory well. Our gross margins, or

profits, on drilling depend on our ability to accurately estimate the costs associated with the development of

projects in which we sell working inter ests and to acquire viable properties that can be successfully

developed. Costs associated with contract drilling depend on location, well depth, weather, and availability

of drilling contractors and equipment. Our gross margin on drilling increased to 7 7.8% from 39.2% for the

years ended December 31, 2012 and 2011, respectively. Gross margin is calculated as the difference

between turnkey drilling revenue and turnkey drilling expense. However, management believes that a

portion of its impairment losses should also be considered as a cost of drilling in determining the

profitability of this segment, because impairment costs are incurred in the selection of higher quality

prospects for ultimate development.

Impairment losses of $200,778 and $4,529,058 we re recorded in 2012 and 2011, respectively. In both years,

we recorded impairments in wells or fields where year

- end reserve values were less than the net book values

of wells or where lease and land costs were no longer viable. In 2012, one Utah well an d two California

wells were impaired by $ 11,276 and $60, 789 respectively. Also in 2012, we recorded lease impairments of

$119,322 on various capitalized lease and land costs that were no longer viable. In 2011, two California

fields, the Lonestar and Bo werbank fields were impaired $3,776,385 and $28,566, respectively, while our Utah field was also impaired by $710,124. These impairments were due to lower proved developed reserves

than current book values primarily due to a substantial drop in the price of natural gas. Additionally in

2011, we recorded lease impairments of $12,959 on various capitalized lease and land costs that were no

longer viable.

Bad debt expense for 2012 and 2011 were $263,767 and $86,294, respectively. These expenses arose from

identified uncollectable receivables relating to our oil and natural gas properties either plugged and

abandoned or scheduled for plugging and abandonment. We periodically review our accounts receivable

from working interest owners to determine whether co llection of any of these charges where doubtful. By

contract, the Company may not collect some charges from its Direct Working Interest owners for certain

wells that ceased production or had been sold during the year, to the extent that these charges exce ed

production revenue

The aggregate of supervisory fees and other income was $692,344 for the year ended December 31, 2012, a

decrease of $166,242 (19.4%) from $858,586 during the year in 2011. This decrease was mainly due to

lower pipeline and compresso r revenues generated from the decrease in natural gas production. Supervisory

fees are charged in accordance with the Council for Petroleum Accountants Societies (COPAS) policy for

reimbursement of expenses associated with the joint accounting for billing , revenue disbursement, and

payment of taxes and royalties. These charges are reevaluated each year and adjusted up or down as deemed

appropriate by a published report to the industry by Ernst & Young, LLP, Certified Public

Accountants. Supervisory fees increased $69,821 or 18.1%, to $455,396 in 2012 from $385,575 in 2011.

Depreciation, depletion and amortization expense decreased to $1,448,002 from $2,362,065 a decrease of

$914,063 (38.7%) for the year ended December 31, 2012, as compared to 2011. The depletion rate is

calculated using production as a percentage of reserves. This increase in depletion expense was due to the

lower natural gas production during 2012 and a lower oil and gas asset base due to our 2011 impairments,

resulting in a decreased depletion of our oil and natural gas properties.

General and administrative expenses decreased by $398,873 or 9.9%, from $4,039,209 for the year ended

December 31, 2011, to $3,640,336 for the year in 2012. This decrease was primarily due to lower employe e

related costs. Legal and accounting expense decreased to $518,511 for the year, compared to $933,856 forTable of Contents

17 2011, a $415,345 or 44.5% decrease. This decrease was the result of lower legal fees in 2012 primarily

related to the conclusion of the Mountain We st and National Fuel litigation in 2011.

Marketing expense for the year ended December 31, 2012, decreased $119,377 or 16.7%, to $594,118,

compared to $713,495 for the year in 2011. Marketing expense usually varies from period to period

according to the number of marketing events attended by personnel and their associated costs. During 2012,

in an effort to control costs, we attended fewer marketing conferences and attempted to negotiate lower

conference fees.

During the years in 2012 and 2011, we inc urred $423,459 and $111,390, respectively, in geological and

geophysical costs in order to increase our oil and natural gas prospect base. These costs were incurred at the

same seismic survey in Northern California. Additionally during 2012, we had a wri te down of $62,744 on

certain oil and gas inventory to its estimated current market value. In 2011, we also had a write down of

$258,043 on certain oil and gas pipeline inventory to its estimated current market value. In 2011, we sold

our working interes t in two separate non

- core properties and other equipment resulting in a gain of

$759,763. The properties were located in Kern County, California and Gaines County, Texas.

During 2012, interest expense increased to $195,009 from $138,218 in 2011, a $56,791 or 41.1%

increase. This increase was mainly due to the interest on a new convertible note payable obtained during the

fourth quarter of 2012. Further details concerning Royale’s notes payable and line of credit usage can be

found in the Capital R esources and Liquidity section below.

In 2012, we had income tax expense of $ 7,434,909 due to the valuation allowance recognized against our

net deferred tax assets. In 2011, we had an income tax benefit of $ 1,732,506 due to our net loss before

taxes of $ 5,920,747. For 2012, the use of a percentage depletion carryover valuation allowance created

from the current and past operations results in an effective tax rate less than the normal federal rate of 34%

plus the relevant state rates (mostly Californ ia, 9.3%).

Capital Resources and Liquidity

At December 31, 2012, Royale Energy had current assets totaling $6,540,592 and current liabilities totaling

$ 15,886,654, a $6,978,713 working capital deficit. We had cash and cash equivalents at December 31,

2012 of $1,489,930 compared to $2,946,131 at December 31, 2011.

Our capital expenditure commitments occur as we decide to drill wells to develop our prospects. We

generally do not decide to drill any prospect until we have sold a portion of the working interest in a

prospect to third parties to diversify our risk and receive a portion of the funds to drill each prospect. We

place funds that we receive from third party investors into a separate cash account until they are required for

expenditures on eac h well.

The Company has traditionally relied on available credit and cash flows from operation for capital

expenditures for oil and gas drilling and development, in addition to the cash generated from selling a

portion of the working interest in prospec ts to third parties. As discussed in Results of Operations, page 14,

the Company’s revenues both from oil and gas sales and from sales of working interests declined in

2012. As a result of the decline in natural gas prices, we curtailed our drilling effo rts in 2012, drilling only

two wells in 2012, compared to seven wells in 2011. The decline in revenue also led the Company to seek

alternative financing sources for its drilling activities.

To finance development of reserves, the Company took the followi ng actions:

· In October 2012, the Company obtained $3 million from sale of a convertible note. See,

The Company’s Prospectus Supplement filed pursuant to Rule 424(b) on October 29,

2012, and the Company’s Form 8

- K filed on October 29, 2012. The Comp any used theseTable of Contents

18 proceeds for general corporate purposes, including the reduction of outstanding bank debt

and for capital expenditures on oil and gas development. The note may, at the

Company’s option, be repaid by converting the interest and principal amo unts due to

common stock, thus reducing the Company’s cash needs to service its debt.

· In February 2012, the Company entered into a sales agreement with C. K. Cooper &

Company, Inc., to sell up to $10 million of common stock in an “at the market” offe ring

as defined in Rule 415. In 2012, the Company sold approximately $4.6 million of

common stock pursuant to the sales agreement. The Company expects to sell additional

common stock pursuant to the sales agreement in 2013.

· Beginning in January 201 2, the Company began extensive cost cutting measures in

General and Administrative, Legal and Accounting, and Marketing expense. These

measures enabled us to reduce our operating expenses by approximately $1 million for

2012, compared to 2011, and expect that these measures will carry forward into 2013.

We expect that these measures will be sufficient to meet our liquidity demands for the foreseeable future.

At the end of 2012, our accounts receivable totaled $3,969,160 compared to $1,872,067 at December 31,

2011, a $2,097,093 or 112.02% increase. This was primarily due to an approximately $2,500,000

receivable, as part of the sale of common stock discussed above, due at December 31, 2012. This common

stock receivable was collected on January 4, 2013. At December 31, 2012, our accounts payable and

accrued expenses totaled $4,932,469, an increase of $389,728 or 8.6% over the accounts payable at the end

of 2011 of $4,542,741. This increase was mainly due to increased drilling activity at year end 2012 when

compared to year end 2011.

In February 2009, we entered into an agreement with Texas Capital Bank, N.A. for a new revolving line of

credit and letter of credit facility, also secured by our oil and gas properties, of up to $14,250,000 and

sepa rate letter of credit facility of up to $750,000, for the purposes of refinancing Royale’s existing debt and

to fund development, exploration and acquisition activities as well as other general corporate purposes. The

scheduled maturity date for the loan was February 13, 2013. At December 31, 2012, we had a current

borrowing base and outstanding indebtedness on this loan of $350,000. During January 2013, the balance of

$350,000 on this credit facility was paid in full. In February 2013, the revolving cr edit agreement matured.

We do not engage in hedging activities or use derivative instruments to manage market risks.

The following schedule summarizes our known contractual cash obligations at December 31, 2012, and the

effect such obligations are expe cted to have on our liquidity and cash flow in future periods.

Total

Obligations 2013 2014

- 2015 2016 Beyond

Office lease $ 1,066,614 $ 403,873 $ 662,741 $

- $

- Revolving Line of Credit 350,000 350,000

- - -

Convertible Note 3,333,333 3,333,333

Total $ 4,749,947 $ 4,087,206 $ 662,741 $

- $

-

Operating Activities. For the years ended December 31, 2012 and 2011, cash prov ided by operating

activities totaled $226,193 and $1,578,482, respectively. This difference in cash was from our lower oil and

natural gas sales due to lower production volumes and price received during the year in 2012.Table of Contents

19 Investing Activities. For t he year ended December 31, 2012, cash used by investing activities was

$4,486,093 compared to $3,948,464 used by investing activities in 2011, an increase of $537,629 or

13.6%. This increase in cash used was mainly due to finalizing and funding our agreem ent with the State of

Alaska to obtain approximately 90,000 lease acres, in addition to the drilling two wells during 2012. In

2011, we drilled or participated in the drilling of seven wells and received proceeds of $806,353 relating to

the sale of certai n oil and gas properties in Kern County, California and Gaines County, Texas. As part of

the sale, we retained an overriding royalty interest in the acreage.

Financing Activities. Net cash provided by financing activities totaled $2,803,699 and $601, 488 for the

years ended December 31, 2012 and 2011, respectively. The increase in cash provided was due to the

obtaining of a new note payable and the sales of common stock during the year in 2012. In 2012, options

were exercised by one director for a to tal of 88,692 shares of the Company’s common stock in exchange for

proceeds of $299,500. Additionally during the year, Royale received proceeds, net of fees, of $2,119,510

and issued 528,996 shares of its common stock relating to its market equity offerin g program. As discussed

above, the Company received approximately $2.8 million from a convertible note payable during the year in

2012. These proceeds were added to working capital and used for ordinary operating expense. Also during

the period in 2012, five directors exchanged 195,000 options in a cashless exercise for 76,346 common

shares. In 2011 several warrants were exchanged for shares of Royale’s common stock. Royale received

$1,051,488 and issued 468,928 shares of its common stock relating to th ese exercises. Additionally during

the period in 2011, we issued 18,440 shares of common stock to a member of the board of directors in a

cashless stock options exercise.

Changes in Reserve Estimates

During 2012, our overall proved developed and undeveloped reserves decreased by 1.6% and our previously

estimated proved developed and undeveloped reserve quantities were revised downward by approximately

0.4 million cubic feet of natural gas. This downward revision was primarily due to two Californi a wells,

drilled in 2011, which had lower than previously estimated proved producing and non

- producing natural gas

reserves. See Supplemental Information about Oil and Gas Producing Activities (Unaudited), page F

- 30.

During 2011, our overall proved devel oped and undeveloped reserves decreased by 25.5% and our

previously estimated proved developed and undeveloped reserve quantities were revised downward by

approximately 1 million cubic feet of natural gas. This downward revision was primarily due four

Cal ifornia wells in our Lonestar field, one of which was drilled in 2009 and the other three drilled in 2010,

which had lower than previously estimated proved producing and non

- producing gas reserves.

Item 7 Qualitative and Quantitat ive Disclosures about Market Risk

Royale Energy is exposed to market risk from changes in commodity prices and in interest rates. In 2012,

we sold a majority of our natural gas at the daily market rate through the Pacific Gas & Electric pipeline. In

20 12, our natural gas revenues were approximately $1.5 million with an average price of $2.74 per

MCF. At current production levels, a 10% per MCF increase or decrease in our average price received

could potentially increase or decrease our natural gas reve nues by approximately $150,000. At our current

production levels of oil and natural gas condensate, a 10% increase or decrease in our average price per

barrel could potentially increase or decrease our oil and natural gas revenues by approximately $14,100 . We

currently do not sell any of our natural gas or oil through hedging contracts.

Item 8 Financial Statements and Supplementary Data

See pages F

- 1, et seq., included herein.Table of Contents

20 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial

Disclosure

None

Item 9A Controls and Procedures

Disclosure Controls

Disclosure controls are controls and other procedures that are designed to ensure that information required to

be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded,

processed, summarized and reported within the time periods specified in the SEC’s rules an d forms. Our

disclosure controls and procedures are designed to insure that the information required to be filed is

accumulated and communicated to our management in a manner designed to enable them to make timely

decisions regarding required disclosure.

Our co

- chief executive officers, Donald H. Hosmer and Stephen M. Hosmer (who is also our chief financial

officer), evaluated the effectiveness or our disclosure controls and procedures as of the end of the 2012 fiscal

year. Based on their evaluation, the y concluded that our disclosure controls are effective as of December 31,

2012.

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial

reporting to provide reasonable assurance regarding the reliability of our financial reporting and the

preparation of financial statements for external purposes in accordance with generally accepted accounting

principles. Internal control over financial re porting includes those policies and procedures that (i) pertain to

the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and

dispositions of the assets of the company, (ii) provide reasonable assurance that tra nsactions are recorded as

necessary to permit preparation of financial statements in accordance with generally accepted accounting

principles, and that receipts and expenditures of the Company are being made only in accordance with

authorizations of manage ment and directors of the Company; and (iii) provide reasonable assurance

regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s

assets that could have a material effect on the financial statements. Manag ement assessed our internal

control over financial reporting as of December 31, 2012, which was the end of our fiscal year. Management

based its assessment on criteria established in the SEC Commission Guidance Regarding Management’s

Report on Internal Con trol Over Financial Reporting Under Section 13(a) or 15(d) of the Securities

Exchange Act of 1934. The guidance sets forth an approach by which management can conduct a top

- down,

risk

- based evaluation of internal control over financial reporting. Managemen t’s assessment included an

evaluation of risks to reliable financial reporting, whether controls exist to address those risks and evaluated

evidence about the operation of the controls included in the evaluation based on its assessment of risk.

Based on o ur assessment, management has concluded that our internal control over financial reporting was

effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial

reporting and the preparation of financial stat ements for external reporting purposes in accordance with

generally accepted accounting principles. We reviewed the results of management’s assessment with the

Audit Committee of our Board of Directors.

This annual report does not include an attestation report of the company's registered public accounting firm

regarding internal control over financial reporting. Management's report was not subject to attestation by the

company's registered public accounting firm pursuant to temporary rules of the Securiti es and Exchange

Commission that permit the company to provide only management's report in this annual report.Table of Contents

21 Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the last fisca l quarter of 2012

that have materially affected, or are reasonably likely to materially affect, our internal control over financial

reporting.

Limitations on Effectiveness of Controls

Our management, including our CEO’s and CFO, does not expect that our disclosure controls or internal

controls over financial reporting will prevent all error or fraud. A control system, no matter how well

conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a

control syst em are met. Any control system contains limitations imposed by resources and relevant cost

considerations. Because of the inherent limitations in all control systems, no evaluation of controls can

provide absolute assurance that all control issues have b een addressed. These inherent limitations include

the realities that judgments can be faulty and that breakdowns can occur because of simple error or

mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of

two or more people, or by management override of a control. Our control system design is also based on

assumptions about the likelihood of future events, and we cannot be sure that we have considered all

possible future circumstances and events.

PART III

Item 10 Directors and Executive Officers of the Registrant

All of our directors serve one year terms from the time of their election to the time their successor is elected

and qualified. The following information is furnishe d with respect to each director and executive officer

who served as such during the fiscal year ended December 31, 2012:

Name Age First

Became

Director or

Executive

Officer Positions Held

Harry E. Hosmer 82 1986 Chairman of the Board

Donald H. Hosmer 59 1987 Co

- President, Co

- Chief Executive Officer

and Director

Stephen M. Hosmer 46 1996 Co

- President, Co

- Chief Executive Officer,

Chief Financial Officer, Secretary, and

Director

Oscar A. Hildebrandt (1) (2) (3) 77 1995 Director

George M. Watters (1) (2) 93 1991 Director

Gary Grinsfelder (1), (3) 64 2007 Director

Tony Hall (2) (3) 71 2007 Director

(1) Member of the audit committee.

(2) Member of the compensation committee.

(3) Member of the nominations committee.

The board has determined that directors Gary Grinsfelder, Tony Hall, Oscar Hildebrandt, and George M.

Watters qualify as independent directors under NASDAQ rules.Table of Contents

22 The following summarizes the business experience of each director and executive officer for the past five

years.

Harry E. Hosmer

– Chairman of the Board

Harry E. Hosmer has served as chairman since Royale Energy began in 1986, and from inception in 1986

until June 1995, he also served as president and chief executive officer.

Donald H. Hosmer

– Co

- President, Co

- Chief Executive Officer and Director

Donald H. Hosmer has served as an executive officer and director of Royale Energy since its inception in

1986. In June 1995 he be came president and chief executive officer. In October 2008 he became co

president and co

- chief executive officer, with primary responsibility for marketing and investor/shareholder

relations for the company. Donald H. Hosmer is the son of Harry E. Hosme r and brother of Stephen M.

Hosmer.

Stephen M. Hosmer

– Co

- President, Co

- Chief Executive Officer, Chief Financial Officer, Secretary,

and Director

Stephen M. Hosmer joined Royale Energy as the management information systems manager in May 1988,

respons ible for developing and maintaining Royale Energy’s computer software. Mr. Hosmer developed

programs and software systems used by Royale Energy. From 1991 to 1995, he served as president of

Royale Operating Company, Royale Energy’s operating subsidiary. In 1995, he became chief financial

officer of Royale Energy. In 1996, he was elected to the board of directors of Royale Energy. In 2003, he

was elected executive vice president. In October 2008, he became co

- president and co

- chief executive

officer wi th primary responsibility for oil and gas exploration operations. Mr. Hosmer served seven years

on the board of directors of Youth for Christ, a charitable organization in San Diego, California. Stephen M.

Hosmer is the son of Harry E. Hosmer and brother of Donald H. Hosmer. Mr. Hosmer holds a Bachelor of

Science degree in Business Administration from Oral Roberts University in Tulsa, Oklahoma, as well as

earning his MBA degree via the prestigious President/Key Executive program at Pepperdine University in

Malibu, California.

Oscar Hildebrandt, D.V.M.

– Director

Dr. Hildebrandt served as an advisory member of Royale Energy’s board of directors from 1994 to 1995 and

became a director in 1995. He serves as chairman of Royale Energy’s audit committee. Dr. Hildebrandt

practiced veterinary medicine as President of Medford Veterinary Clinic, Medford, Wisconsin, from 1960 to

1990. Since 1990, Dr. Hildebrandt has engaged independently in veterinary practice consulting

services. He has served on the board of directors of Fidelity National Bank

- Medford, Wisconsin, and its

predecessor bank from 1965 to the present and is past chairman of the board of the Bank. From 1990 to the

present he has acted as a financial advisor engaged in private busine ss interests. Dr. Hildebrandt received a

Bachelor of Science degree from the University of Wisconsin in 1954 and a Doctor of Veterinary Medicine

degree from the University of Minnesota in 1958.

Gary Grinsfelder

– Director

Mr. Grinsfelder is a geologis t and manager with 38 years’ experience in oil and gas exploration, exploitation

and property evaluation. Currently Mr. Grinsfelder is Vice President

– Exploration of LeFrak

Energy. Previously he was President of TXCO Resources. He has also served in ge ologic and management

roles for Output Exploration, LLC, Araxas Exploration, Inc., Triad Energy Corporation, Spartan Petroleum

Corporation, American Petrofina Company of Texas, Union Oil Company of California and Degolyer and

MacNaughton. He received a Ba chelor of Science degree in 1972 from Southern Methodist University andTable of Contents

23 has performed graduate studies at the University of Puerto Rico Department of Marine Science and

University of Houston Department of Geology.

Tony Hall

– Director

Ambassador Hall s erved as a member of the United States House of Representatives, representing the people

of the Third District of Ohio, for almost twenty

- four years, from 1979 to 2002. In 2002 he was appointed

U.S. Ambassador to the United Nations Agencies for Food and A griculture. He served as chief of the U.S.

Mission to the U.N. Agencies in Rome

– the Work Food Program, Food and Agriculture Organization and

International Fund for Agricultural Development. He has been nominated for the Nobel Peace Prize on

three occas ions for his humanitarian and hunger

- related work. He received his A. B. degree from

Denison University , Granville, Ohio, in 1964.

George M. Watters

– Director

Mr. Watters has been a Director of Royale Energy, Inc. since 1991. He has many years of sen ior

management experience, including 23 years with Amoco, in all phases of downstream petroleum operations

- marketing, refining, trading and commercial development. As CEO, he was instrumental in the conception

and development of two successful grass root s refining and marketing projects in Australia and Singapore.

His last assignment was Chief Executive of Amoco Shipping and Trading Company, residing in London.

Prior to his affiliation with Amoco, he held various senior management positions with the forme r Standard

Vacuum Oil Company, jointly owned by Exxon and Mobil. He is a graduate of MIT and also attended their

Management Program for Senior Executives. During World War II, Mr. Watters served four years as an

officer in the U.S. Navy Civil Engineering C orps.

Audit Committee

The board has appointed an audit committee to assist the board of directors in carrying out its responsibility

as to the independence and competence of the Company’s independent public accountants. In accordance

with the rules of N ASDAQ for listed companies, all members of the audit committee are independent

members of the board of directors. The audit committee operates pursuant to an audit committee charger

which has been adopted by the board of directors to define the committee’ s responsibilities. A copy of the

audit committee charter is posted on our website, www.royl.com

. The board has determined that Oscar A.

Hildebrandt qualifies as an “audit committee financial expert” as defined in Item 407(d ) ( 5) of the Securities

and Exchange Commission.

In 2012, the members of the audit committee were Oscar A. Hildebrandt, chair, George M. Watters and

Gary Grinsfelder.

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics for our directors and executive officers. The code is

posted on our website, www.royl.com

.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 and S ecurities and Exchange Commission regulations

require that Royale Energy's directors, certain officers, and greater than 10 percent shareholders file reports

of ownership and changes in ownership with the SEC and the NASD and furnish Royale Energy with cop ies

of all such reports they file. Based solely upon a review of the copies of the forms furnished to Royale

Energy, or representations from certain reporting persons that no reports were required, Royale Energy

believes that no persons failed to file req uired reports on a timely basis for 2012.Table of Contents

24 Item 11 Executive Compensation

The following table summarizes the compensation of the chief executive officer, chief financial officer and

the two other most highly non

- executive employee s (the “named executives and employees”) of Royale

Energy and its subsidiaries during the past year. No stock options, stock awards or other plan based

compensation were made during 2012.

Name and

Principal Position Year Salary Bonus Stock

Awards

(1) Option

Awards

(2) All Other

Compens

ation (3) Total

($) ($) ($) ($) ($) ($)

Donald H. Hosmer 2012 $ 230,192 $ 6,906 $ 237,098

Co

- President and

Co

- CEO 2011 $ 230,192 $ 50,000 $ 16,550 $ 5,285 $ 8,406 $ 310,864

2010 $ 230,192 $ 50,000 $ 16,550 $ 9,344 $ 7,350 $ 313,436

Stephen M. Hosmer 2012 $ 230,192 $ 19,110 $ 249,302

Co

- President, Co

CEO & CFO 2011 $ 230,192 $ 50,000 $ 16,550 $ 5,285 $ 20,766 $ 323,224

2010 $ 231,205 $ 50,000 $ 16,550 $ 9,344 $ 19,350 $ 326,449

Mohamed Abdel

Rahmen (4) 2012 $ 204,615 $ 12,496 $ 217,085

VP Exploration 2011 $ 204,615 $ 6,138 $ 210,753

2010 $ 198,365 $ 5,951 $ 204,316

Charles Tiano (4) 2012 $ 56,269 $ 138,450 $ 9,736 $ 204,455

Director of

Investor Relations 2011 $ 56,058 $ 225,348 $ 8,442 $ 289,848

2010 $ 55,635 $ 168,858 $ 224,493

(1) On November 6, 2008, Donald H. Hosmer and Stephen M. Hosmer were each awarded 15,000 shares of

common stock for services rendered during 2008. The closing price of Royale Energy’s common stock on

that date was $3.31 per share. One third of the shares vested on November 6, 2009, 2010 and 2011.

(2) On March 23, 2008, Donald Hosmer and Stephen Hosmer (together with the other members of the board

of directors) were each granted 45,000 options to purchase common stock at an exercise or base price of

$3.50 per share. These options vested in three parts on March 31, 2008, 2009, and 2010. The options were

granted for a legal life of four years with a service period of three years.

On December 10, 2010, Donald Hosmer and Stephen Hosmer (together with the other members of the board

of directors) were each granted 50,000 options to purchase common stock at an exercise or base price of

$3.25 per share. These options vested in two par ts on January 1, 2011 and 2012. The options were granted

for a legal life of five years with a service period of two years.

Amounts represent grant date fair value. See Note 12 of the financial statements contained in our annual

report to shareholders on Form 10

- K for the year ended December 31, 2011, regarding assumptions

underlying the valuation of stock options. The fair value of the options was calculated using the Black

Scholes option pricing method.

(3) All other compensation consists of ma tching contributions to the Company’s simple IRA plan, except

for Stephen M. Hosmer, who also received a $12,000 car allowance.Table of Contents

25 (4) Mr. Abdel

- Rahmen and Mr. Tiano are highly compensated employees under SEC rules who did not

serve as executive officer s during 2011.

Stock Options and Equity Compensation; Outstanding Equity Awards at Fiscal Year End

The following table presents the number of unexercised options at the 2012 year end for each named

executive officer. No unvested stock awards were outstanding at the end of 2012.

Options

Name Number of

securities

underlying

unexercised

options

(#)

exercisable Number of

securities

underlying

unexercised

options

(#)

unexercisable Option

exercise

price

($) Option

expiration

date

Donald H. Hosmer 50,000 (1)

- $ 3.25 12/31/2015

Stephen M. Hosmer 50,000 (1)

- $ 3.25 12/31/2015

(1) In December 2010, the directors and executive officers of Royale Energy were each granted 50,000

options to purchase common stock at an exercise or base price of $3.25 per share, in consideration of

their past service on the board. These options vested and became exercisable over two years, on

Januar y 1, 2011 and 2012. They were granted for a period of five years with a service period of two

years.

Compensation Committee Report

Our executive compensation committee has reviewed and discussed the following Compensation Discussion

and Analysis with management and, based on its discussion and review, has recommended that the

Compensation Discussion and Analysis be included in this proxy statement.

Members of the Compensation Committee:

Oscar A. Hildebrandt, Chair

Tony P. Hall

George M. Watters

In accordance with the rules of NASDAQ for listed companies, all members of the compensation committee

are independent members of the board of directors.

Compensation Discussion and Analysis

Our executive compensation policy is designed to motivate, reward and retain the key executive talent

necessary to achieve our business objectives and contribute to our long

- term success. Our compensation

policy for our executive officers focuses primarily on determining appropriate salary levels and

performance

- based cash bonuses.Table of Contents

26 The elements of executive compensation at Royale Energy consist mainly of cash salary and, if appropriate,

a cash bonus at yearend. The compensation committee makes recommendations to the board of directors

annually on the compensat ion of the two top executives: Co

- Presidents and the Co

- Chief Executive Officers

Donald H. Hosmer and Stephen M. Hosmer

. We do not have employment contracts with either of our

executive officers.

Royale Energy also does not provide extensive personal b enefits to its executives beyond those benefits,

such as health insurance, that are provided to all employees. Each executive does receive an annual car

allowance.

Policy

The compensation committee’s primary responsibility is making recommendations to the board of directors

relating to compensation of our officers. The committee also makes recommendations to the board of

directors regarding employee benefits, our defined benefit plans, defined contribution plans, and stock based

plans.

Determination

To determine executive compensation, the committee, in December each year, meets with our officers to

review our compensation programs, discuss the performance of the company, the duties and responsibilities

of each of the officers pay levels and busine ss results compared to others similarly situated within the

industry. The committee then makes recommendations to the board of directors for any adjustment to the

officers’ compensation levels. The committee does not employ compensation consultants to ma ke

recommendations on executive compensation.

Compensation Elements

Base. Base salaries for our executive officers are established based on the scope of their responsibilities,

taking into account competitive market compensation paid by our peers. Bas e salaries are reviewed

annually. The salaries we paid to our most highly paid executive officers for the last three years are set forth

in the Summary Compensation Table included under Executive Compensation

.

Bonus

. The compensation committee meets annually to determine the quantity, if any, of the cash bonuses

of executive officers. The amount granted is based, subjectively, upon the company’s stock price

performance, earnings, revenue, reserves and production. The committee does not use quantifia ble metrics

for these criteria; but rather uses each in balance to assess the strength of the company’s performance. The

committee believes that formulaic approaches to cash incentives can foster an unhealthy balance between

short

- term and long

- term goals

. In 2012, the compensation committee did not award bonuses to the

company’s executive officers.

Compensation of Directors

In 2012, none of the board members or committee member received fees for attendance at board meetings or

committee meetings duri ng the year. Royale Energy did reimburse directors for the expenses incurred for

their services.

In addition, Royale Energy's Chairman of the Board and former President, Harry E. Hosmer, renders and

receives compensation for management consulting servic es to Royale Energy on an ongoing basis. See

Certain Relationships and Related Transactions, page 10.

The following table describes the compensation paid to our directors who are not also named executives for

their services in 2012.Table of Contents

27

Name Fees earned

or paid in

cash Stock

awards Option

awards All Other

Compensati

on (1) Total

($) ($) ($) ($) ($)

Harry E. Hosmer $ 138,050 $ 0 $ 0 $ 13,264 $ 151,314

Oscar A. Hildebrandt $ 0 $ 0 $ 0 $ 0

George M. Watters $ 0 $ 0 $ 0 $ 0

Gary Grinsfelder $ 0 $ 0 $ 0 $ 0

Tony P. Hall $ 0 $ 0 $ 0 $ 0

(1) Other compensation paid to Harry E. Hosmer in 2012 consisted of payments for medical and dental

insurance coverage.

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters

Commo n Stock

On March 31, 2013, 13,045,465 shares of Royale Energy’s common stock were outstanding.

The following table contains information regarding the ownership of Royale Energy’s common stock as of

March 31, 2013, by:

i) each person who is known by Royale Energy to own beneficially more than 5% of the outstanding

shares of each class of equity securities;

ii) each director of Royale Energy, and

iii) all directors and officers of Royale Energy as a group. Except pursuant to applicable community

property laws and except as otherwise indicated, each shareholder identified in the table possesses

sole voting and investment power with respect to its or his shares. The holdings reported are based

on reports filed with the Securities and Exchange Commi ssion and the Company by the officers,

directors and 5% shareholders pursuant to Section 16 of the Securities Exchange Act of 1934.

Stockholder (1) Number (2) Percent

Harry E. Hosmer, (3) 663,692 5.07 %

Donald H. Hosmer, (3) 935,302 7.14 %

Stephen M. Hosmer, (3) (4) 1,260,235 9.62 %

Oscar A. Hildebrandt (2), (5) 153,936 1.15 %

Gary Grinsfelder 45,440 *

Tony P. Hall 68,749 *

George M. Watters, (6) 154,477 1.17 %

All officers and directors as a group 3,311,031 24.61 %

* Less than 1%Table of Contents

28 (1) The mailing address of each listed stockholder is 7676 Hazard Center Drive, Suite 1500, San Diego,

California 92108.

(2) Includes options to purchase the following number of shares of common stock which were vested and

exercisable on March 31, 2012: Harry E. Hosmer 50,000, Donald H. Hosmer 50,000; Stephen M. Hosmer

50,000; Gary Grinsfelder 40,000; Tony Hall 50,000; Oscar A. Hildebrandt 6,308; George Watters 50,000.

(3) Donald H. Hosmer and Stephen M. Hosmer are sons of Harry E. Hosmer, Chairman of the Board.

(4) Includes 24,000 shares owned by Stephen M. Hosmer’s minor children.

(5) Includes 48,936 shares held by a trust.

(6) Includes 65,481 shares held by a trust.

Preferred Stock

Holders Series AA convertible preferr ed stock have voting rights equal to the number of shares into which

they are convertible. On March 31, 2012, 52,784 shares of Series AA convertible preferred stock were

outstanding. The shares of each series of preferred shares are convertible into share s of Royale Energy's

common stock at the option of the security holder, at the rate of two shares of convertible preferred stock for

each share of common stock. The preferred stock is not registered under the Securities Exchange Act of

1934, and no market exists for the preferred stock. The total number of shares of common stock issuable on

conversion of all outstanding shares of preferred stock equals less than 1% of the outstanding common stock

of Royale Energy. To Royale Energy's knowledge, none of th e preferred shareholders would own more than

1% of Royale Energy's common stock, if their preferred shares were converted to common shares.

Item 13 Certain Relationships and Related Transactions

In 1989, the board of directors ad opted a policy (the “1989 policy”) that permits each director and officer of

Royale Energy to purchase from Royale Energy, at its cost, up to one percent (1%) fractional interest in any

well to be drilled by Royale Energy. When an officer or director elec ts to make such a purchase, the amount

charged per each percentage working interest is equal to Royale Energy's actual pro rata cost of drilling and

completion, rather than the higher amount that Royale Energy charges to working interest holders for the

pu rchase of a percentage working interest in a well. Of the current officers and directors, Donald Hosmer,

Stephen Hosmer, Harry E. Hosmer, George Watters, Oscar Hildebrandt and Tony Hall at various times have

elected under the 1989 policy to purchase inter ests in certain wells Royale Energy has drilled.

Under the 1989 policy, officers and directors may elect to participate in wells at any time up until drilling of

the prospect begins. Participants are required to pay all direct costs and expenses through completion of a

well, whether or not the well drilling and completion expenses exceed Royale Energy's cost estimates,

instead of paying a set, turnkey price (as do outside investors who purchase undivided working interests

from Royale Energy). Thus, they participate on terms similar to other oil and gas industry participants or

joint ventures

. Participants are invoiced in advance for their share of estimated direct costs of drilling and

completion and later actual costs are reconciled, as Royale Energy i ncurs expenses and participants make

further payments as necessary.

Officer and director participants under this program do not pay some expenses paid by outside, retail

investors in working interests, such as sales commissions, if any, or marketing expe nses. The outside,

turnkey drilling agreement investors, on the other hand, are not obligated to pay additional costs if a drilling

project experiences cost overruns or unanticipated expenses in the drilling and completion

stage. Accordingly, Royale Ener gy's management believes that its officers and directors who participate inTable of Contents

29 wells under the Board of Directors' policy do so on terms the same as could be obtained by unaffiliated oil

and gas industry participants in arms

- length transactions, albeit those terms are different than the turnkey

agreement under which outside investors purchase fractional undivided working interests from Royale

Energy.

Donald and Stephen Hosmer each have participated individually in 166 and 165 wells respectively under the

1989 policy. The Hosmer Trust, a trust for the benefit of family members of Harry E. Hosmer, has

participated in 164 wells.

Investments in wells under the 1989 policy for the three years ended December 31, 2012, 2011, and 2010

are as follows:

Year # of fractional

interests Amount

Donald Hosmer 2012 2 $ 4,186

2011 7 $ 42,636

2010 8 $ 37,841

Stephen Hosmer 2012 2 $ 2,537

2011 7 $ 37,885

2010 8 $ 23,941

Hosmer Trust 2012 2 $ 2,537

2011 7 $ 34,033

2010 8 $ 25,093

Current officers and directors were billed 3,451, $23,010 and $15,387 for their interests for the three years

ended December 31, 2012, 2011, and 2010, respectively.

Royale Energy's Chairman of the Board and former President, Harry E. Hosmer, renders management

consulting services to Royale Energy on an ongoing basis. Royale Energy compensated Mr. Hosmer

$138,050, $168,882 and $169,824 for his consulti ng services in 2012, 2011, and 2010, respectively, and

pays his medical insurance costs. Mr. Hosmer's consulting services are in conjunction with his service on

the board of directors, for which he receives reimbursement of expenses to attend meetings.

I tem 14 Principal Accountant Fees and Services

Padgett Stratemann LLP served as the independent auditors to audit the Company’s financial statements for

the fiscal year ended December 31, 2012. The aggregate fees billed by them for the years ended December

31, 2012 and 2011 are as follows:

2012 2011

Audit fees (1) $ 110,299 $ 113,650

Tax fees (2)

- - All other fees (3) $ 31,350 $ 1,400

Total $ 141,649 $ 115,050

(1) Audit fees are fees for professional services rendered for the audit of Royale Energy’s annual financial

statements, reviews of financial statements included in the company’s Forms 10

- Q, and reviews of

documents filed with the U.S. Securities and Exchange Commission.

(2) Tax fees consist of tax planning, consulting and tax return reviews.

(3) Other fees consist of work on registration statements under the Securities Act of 1933.Table of Contents

30 The audit committee of Royale Energy has adopted policies for the pre

- approval of all audit and non

- audit

services provided by the company’s independent auditor. The policy requires pre

- approval by the audit

committee of specifically defined audit and non

- audit services. Unless the specific service has been

previously pre

- approved with r espect to that year, the audit committee must approve the permitted service

before the independent auditor is engaged to perform it.

No representatives of Padgett Stratemann LLP are expected to be present at the annual meeting. Although

the audit committ ee has the sole responsibility to appoint the auditors as required under the Securities

Exchange Act of 1934, the committee welcomes any comments from shareholders on auditor selection or

performance. Comments may be sent to the audit committee chair, Dr. Oscar A. Hildebrandt, care of Royale

Energy’s executive office, 7676 Hazard Center Drive, Suite 1500, San Diego, California 92108.

PART IV

Item 15 Exhibits and Financial Statement Schedules

The agreements included as exhibits t o this report are included to provide information about their terms and

not to provide any other factual or disclosure information about Royale Energy or the other parties to the

agreements. The agreements contain representations and warranties by each of the parties to the applicable

agreement that were made solely for the benefit of the other agreement parties and:

 should not be treated as categorical statements of fact, but rather as a way of allocating the risk

among the parties if those statements prove to be inaccurate;

 have been qualified by disclosures that were made to the other party in connection with the

negotiation of the applicable agreement, which disclosures are not necessarily reflected in the

agreement;

 may apply standards of materiality in a way that is different from the way investors may view

materiality; and

 were made only as of the date of the applicable agreement or such other date or dates as may be

specified in the agreement and are subject to mor e recent developments.

1. Financial Statements. See Index to Financial Statements, page F

- 1

2. Schedules. Supplemental Information About Oil and Gas Producing Activities (Unaudited) begins

on page F

- 26.

3. Exhibits. Certain of the exhibits listed in the following index are incorporated by reference.

1.1 Placement Agent Agreement between the Company and C.K. Cooper & Company, Inc., dated

October 25, 2012, incorporated by reference to Exhibit 10.2 of the Company’s Form 8

- K filed

October 29, 2012.

3.1 Restated Articles of Incorporation of Royale Energy, Inc., incorporated by reference to Exhibit 3.1

of Royale Energy’s Form 10

- Q filed August 14, 2009.

3.2 Amended and Restated Bylaws of Royale Energy, Inc., incorporated by reference to Exhibit 3.2 of

Royale Energy’s Form 10

- K filed March 27, 2009.

4.1 Series A

- 1 Warrant issued to Cranshire Capital, L.P., incorporated by reference to Exhibit 4.2 of the

Company’s Form 8

- K filed August 6, 2009.

4.2 Series C Warrant issued to Cranshire Capital, L .P., incorporated by reference to Exhibit 4.4 of the

Company’s Form 8

- K filed August 6, 2009.Table of Contents

31 4.3 Series D Warrant issued to Cranshire Capital, L.P., incorporated by reference to Exhibit 4.1 of the

Company’s Form 8

- K filed October 21, 2009.

4.4 Series E Warrant issued to certain affiliates of Cranshire Capital, L.P., incorporated by reference to

Exhibit 4.2 of the Company’s Form 8

- K filed October 29, 2012.

4.5 Certificate of Determination of the Series AA Convertible Preferred Stock, incorporated by

ref erence to Exhibit 4.2 of Royale Energy's Form 10

- SB Registration Statement.

10.1 Form of Indemnification Agreement, incorporated by reference to Exhibit 10.3 of Royale Energy's

Form 10

- SB Registration Statement.

10.2 Amended and Restated Credit Agreement between Royale Energy and Texas Capital Bank, N.A.

(February 13, 2009), incorporated by reference to Exhibit 310.2 of Royale Energy’s Form 10

- K

filed March 27, 2009.

10.3 Form of Promissory Note between Royale Energy and Texas Capital Bank, N.A., incorpo rated by

reference to Exhibit 10.3 of Royale Energy’s Form 10

- K filed March 27, 2009.

10.4 Securities Purchase Agreement between the Company and Cranshire Capital, L.P., dated as of

August 4, 2009, incorporated by reference to Exhibit 10.1 of the Company’ s Form 8

- K filed August

6, 2009.

10.5 Registration Rights Agreement between the Company and Cranshire Capital, L.P., dated as of

August 5, 2009, incorporated by reference to Exhibit 10.2 of the Company’s Form 8

- K filed August

6, 2009.

10.6 Securities Pur chase Agreement between the Company and Cranshire Capital, L.P., dated as of

October 16, 2009, incorporated by reference to Exhibit 10.1 of the Company’s Form 8

- K filed

October 21, 2009.

10.7 Registration Rights Agreement between the Company and Cranshire Capital, L.P., dated as of

October 16, 2009, incorporated by reference to Exhibit 10.2 of the Company’s Form 8

- K filed

October 21, 2009.

10.8 Sales Agreement between the Company and C.K. Cooper & Company, Inc., dated February 17,

2012, incorporated by reference to Exhibit 10.1 of the Company’s Form 8

- K filed February 17,

2012.

10.9 Securities Purchase Agreement between the Company and certain buyers dated as of October 28,

2012, incorporated by reference to Exhibit 4.3 of the Company’s Form 8

- K filed October 29,

2012.

10.10 Convertible Note issued to certain affiliates of Cranshire Capital, L.P., incorporated by reference

to Exhibit 4.1 of the Company’s Form 8

- K filed October 29, 2012.

23.1 Consent of Padgett, Stratemann & Co., L.L.P., filed herewith.

23.2 Consent of Netherland, Sewell & Associates, Inc., filed herewith.

23.3 Consent of Source Energy, LLC, filed herewith.

31.1 Rule 13a

- 14(a), 115d

- 14(a) Certification, filed herewith.

31.2 Rule 13a

- 14(a), 115d

- 14(a) Certification, filed herewith.

32.1 Section 1350 Certification, filed herewith.

32.2 Section 1350 Certification, filed herewith.

99.1 Report of Netherland Sewell & A ssociates, Inc., filed herewith.

99.2 Report of Source Energy, LLC, filed herewith.

99.3 Waiver Letter from Cranshire Capital, L.P. to the Company dated October 28, 2012, incorporated

by reference to Exhibit 99.1 of the Company’s Form 8

- K filed October 29, 2012.

101.INS* XBRL Instance Document

101.SCH* XBRL Taxonomy Extension Schema

101.CAL* XBRL Taxonomy Ext ension Calculation Linkbase

101.DEF* XBRL Taxonomy Extension Definition Linkbase

101.LAB* XBRL Taxonomy Extension Label Linkbase

101.PRE* XBRL Taxonomy Extension Presentation LinkbaseTable of Contents

32 * Pursuant to Rule 406T of Regulation S

- T, these interactive data files are deemed not filed or part of a

registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or

Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

SIGNATURES

Pu rsuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant

has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Royale Energy, Inc.

Date: April 30, 2013 /s/ Donald H. Hosmer

Donald H. Hosmer

Co

- President and Co

- Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the

following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: April 30, 2013 /s/ Harry E. Hosmer

Harry E. Hosmer

Chairman of the Board of Directors

Date: April 30, 2013 /s/ Donald H. Hosmer

Donald H. Hosmer

Director, Co

- President, Co

- Chief Executive Officer

Date: April 30, 2013 /s/ Stephen M. Hosmer

Stephen M. Hosmer

Director, Co

- President, Co

- Chief Executive Officer, Chief Financial

Officer and Secretary

Date: April 30, 2013 /s/ Tony Hall

Tony Hall

Director

Date: April 30, 2013 /s/ Oscar A. Hildebrandt

Oscar A. Hildebrandt

Director

Date: April 30, 2013 /s/ Gary Grinsfelder

Gary Grinsfelder

Director

Date: April 30, 2013 /s/ George M. Watters

George M. Watters

DirectorTable of Contents

F

- 1 ROYALE ENERGY, INC.

INDEX TO FINANCIAL STATEMENTS

AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

REPORT OF PADGETT, STRATEMANN & CO., LLP, INDEPENDENT AUDITORS F

- 2

BALANCE SHEETS F

- 3

STATEMENTS OF COMPREHENSIVE LOSS F

- 5

STATEMENTS OF STOCKHOLDERS’ EQUITY F

- 6

STATEMENTS OF CASH FLOWS F

- 9

NOTES TO FINANCIAL STATEMENTS F

- 11Table of Contents

F

- 2 Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of Royale Energy, Inc.

We have audited the accompanying balance sheets of Royale Energy, Inc. (the “Company”) as of December

31, 2012 and 2011, and the related statements of comprehensive loss, stockholders' equity, and cash flows

for the years then ended. These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in acco rdance 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 audits 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 aud its

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 Royale Energy, Inc. as of December 31, 2012 and 2011, and the results of its ope rations and its

cash flows for the years then ended in conformity with accounting principles generally accepted in the

United States of America.

As disclosed in Note 19 to the financial statements, the 2011 financial statements have been restated to

refle ct the correction of an error related to revenue recognition.

Padgett, Stratemann & Co., L.L.P.

San Antonio, Texas

April 15, 2013Table of Contents

F

- 3 ROYALE ENERGY, INC

BALANCE SHEETS

DECEMBER 31, 2012 AND 2011

ASSETS

2012 2011

-

Restated

Current Assets

Cash and Cash Equivalents $ 1,489,930 $ 2,946,131

Accounts Receivable, net 3,969,160 1,872,067

Prepaid Expenses 469,038 432,168

Deferred Tax Asset 0 661,645

Available for Sale Securities 0 31,027

Inventory 612,464 664,458

Total Current Assets 6,540,592 6,607,496

Other Assets 6,946 6,946

Deferred Tax Asset

- Noncurrent 0 6,771,474

Oil And Gas Properties (Successful Efforts Basis) and

Equipment and Fixtures 10,955,797 8,075,344

Total Assets $ 17,503,335 $ 21,461,260

The accompanying notes are an integral part of these financial statements.Table of Contents

F

- 4 ROYALE ENERGY, INC.

BALANCE SHEETS

DECEMBER 31, 2012 AND 2011

LIABILITIES AND STOCKHOLDERS' EQUITY

2012 2011

-

Restated

Current Liabilities:

Accounts Payable and Accrued Expenses $ 4,932,468 $ 4,542,741

Current Portion of Long

- Term Debt, Net 2,258,668 0

Current Portion of Deferred Tax Liability 1,775 1,240

Deferred Revenue from Turnkey Drilling 8,693,743 6,909,666

Total Current Liabilities 15,886,654 11,453,647

Noncurrent Liabilities:

Asset Retirement Obligation 954,088 575,612

Long

- Term Debt 0 2,750,000

Total Noncurrent Liabilities 954,088 3,325,612

Total Liabilities 16,840,742 14,779,259

Stockholders' Equity

Common Stock, No Par Value, 20,000,000 Shares Authorized; 12,545,465

and 10,823,050 Shares Issued, 12,545,465 and 10,790,431 Shares

Outstanding, Respectively 33,247,571 28,298,228

Convertible Preferred Stock, Series AA, No Par Value, 147,500 Shares

Authorized; 52,784 Shares Issued and Outstanding, Respectively 154,014 154,014

Accumulated (Deficit) (34,186,930 ) (22,225,904 )

Paid in Capital 1,447,938 632,004

Accumulated Other Comprehensive Income 0 3,035

Total Paid in Capital and Accumulated

Deficit 662,593 6,861,377

Less Cost of Treasury Stock, 0 and 32,619 Shares, respectively 0 (179,376 )

Total Stockholders' Equity 662,593 6,682,001

Total Liabilities and Stockholders' Equity $ 17,503,335 $ 21,461,260

The accompanying notes are an integral part of these financial statements.Table of Contents

F

- 5 ROYALE ENERGY, INC.

STATEMENTS OF COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2012, AND 2011

2012 2011

-

Restated

Revenues:

Sale of Oil and Gas $ 1,673,538 $ 4,879,397

Turnkey Drilling 2,028,863 5,794,427

Supervisory Fees and Other 692,344 858,586

Total Revenues $ 4,394,745 $ 11,532,410

Costs and Expenses:

General and Administrative 3,640,336 4,039,209

Turnkey Drilling & Development 449,536 3,523,372

Lease Operating 1,139,750 1,517,920

Lease Impairment 200,778 4,529,058

Geological and Geophysical 423,459 111,390

Inventory Write Down 62,744 258,043

Bad Debt Expense 263,767 86,294

Legal and Accounting 518,511 933,856

Marketing 594,118 713,495

Depreciation, Depletion and Amortization 1,448,002 2,362,065

Total Costs and Expenses $ 8,741,001 $ 18,074,702

Gain on Sale of Assets 8,100 759,763

Loss from Operations (4,338,156 ) (5,782,529 )

Other Income (Expense):

Interest Expense (195,009 ) (138,218 )

Gain on sale of Marketable Securities 7,048 0

Income (Loss) Before Income Tax Expense (4,526,117 ) (5,920,747 )

Income Tax Expense (Benefit) 7,434,909 (1,732,506 )

Net Loss $ (11,961,026 ) $ (4,188,241 )

Basic Earnings Per Share:

Net Loss Available To Common Stock $ (1.07 ) $ (0.39 )

Diluted Loss Per Share $ (1.07 ) $ (0.39 )

Other Comprehensive Income

Unrealized Gain on Equity Securities $ 0 $ 4,275

Less: Reclassification Adjustment for Gains Included in Net Income (3,035) 0

Other Comprehensive Income , before tax (3,035) 4,275

Income Tax Expense Related to Items of Other Comprehensive Income 0 1,240

Other Comprehensive Income (Loss), net of tax (3,035) 3,035

Comprehensive Loss $ (11,964,061 ) $ (4,185,206 )

The accompanying notes are an integral par t of these financial statements.Table of Contents

F

- 6 ROYALE ENERGY, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, and 2011

Common Stock Preferred Stock Series AA

Shares

Issued Amount Shares

Outstanding Amount

Balance, December 31, 2010,

as previously reported 10,307,350 $ 27,246,740 52,784 $ 154,014

Prior period adjustment

Balance, December 31, 2010,

as restated 10,307,350 27,246,740 52,784 154,014

Common Stock Warrant

Exercise 468,928 $ 1,051,488

- -

Directors’ Stock Option Grant 18,440

- - -

Directors’ Stock Grant 28,332

- - -

Available for Sale Securities

– Unrealized Gain (Loss), net of

tax - - - -

Net Loss (Restated)

Balance, December 31, 2011

-

Restated 10,823,050 $ 28,298,228 52,784 $ 154,014

Common Stock Options

Exercise 165,038 $ 299,500

- -

Directors’ Stock Options

Grant - - - -

Common Stock Private

Placement Sale 1,562,352 $ 4,649,843

- -

Treasury Stock Retirement (4,975 )

- - -

Discount on Warrant Value

- - - -

Treasury Stock Donation

- - - -

Available for Sale Securities

– Realized Gain, net of tax - - - -

Net Loss

- - - -

Balance, December 31, 2012 12,545,465 $ 33,247,571 52,784 $ 154,014

The accompanying notes are an integral par t of these financial statements.Table of Contents

F

- 7 ROYALE ENERGY, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, and 2011

Treasury Stock

Shares

Acquired Amount Paid in

Capital Accumulated

Deficit

Balance, December 31, 2010,

as previously reported 32,619 $ (179,376 ) $ 524,406 $ (16,807,424 )

Prior perio d adjustment (1,230,239 )

Balance, De cember 31, 2010,

as restated 32,619 (179,376 ) 524,406 (18,037,663 )

Common Stoc k Warrant

Exercise - - - -

Directors’ Stock Option Grant

- - 40,015

-

Directors’ Stock Grant

- - 67,583

-

Available f

or Sale Securities

– Unrealized Gain (Loss), net of

tax - - - -

Net Loss (Restated) (4,188,241 )

Balance, De cember 31, 2011

-

Restated 32,619 $ (179,376 ) $ 632,004 $ (22,225,904 )

Common Stoc k Options

Exercise - - - -

Directors’ Stock Options

Grant - - 39,260

-

Common Stoc k Private

Placement Sale (26,644 ) $ 146,515 (174,451 )

-

Treasury St ock Retirement (4,975 ) $ 27,361 (173,876 )

-

Discount on Warrant Value

- - 1,127,111

-

Treasury St ock Donation (1,000 ) $ 5,500 (2,110 )

-

Available for Sale Securities

– Realized Gain, net of tax - - - -

Net Loss (11,961,026 )

Balance, De cember 31, 2012 0 $ 0 $ 1,447,938 $ (34,186,930 )

The accompanying notes are an integral par t of these financial statements.Table of Contents

F

- 8 ROYALE ENERGY, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2012, and 2011

Accumulated

Other

Comprehensive

Income (Loss) Total

Balance, December 31, 2010, as

previously reported $ 0 $ 10,938,360

Prior period adjustment (1,230,239 )

Balance, December 31, 2010, as

restated 0 9,708,121

Common Stock Warrant

Exercise - 1,051,488

Directors’ Stock Option Grant

- 40,015

Directors’ Stock Grant

- 67,583

Available for Sale Securities

– Unrealized Gain (Loss), net of

tax 3,035 3,035

Net Loss (Restated) (4,188,241 )

Balance, December 31, 2011

-

Restated $ 3,035 $ 6,682,001

Common Stock Options

Exercise - 299,500

Directors’ Stock Options Grant

- 39,260

Common Stock Private

Placement Sale - 4,621,907

Treasury Stock Retirement

- (146,515 )

Discount on Warrant Value

- 1,127,111

Treasury Stock Donation

- 3,390

Available for Sale Securities

– Realized Gain, net of tax (3,035 ) (3,035 )

Net Loss (11,961,026 )

Balance, December 31, 2012 $ 0 $ 662,593

The accompanying notes are an integral part of these financial statements.Table of Contents

F

- 9 ROYALE ENERGY, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012, and 2011

2012 2011

-

Restated

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Loss $ (11,961,026 ) $ (4,188,241 )

Adjustments to Reconcile Net Loss to Net Cash Provided by Operating

Activities:

Depreciation, Depletion, and Amortization 1,448,002 2,362,065

Lease Impairment 200,778 4,529,058

(Gain) Loss on Sale of Assets (8,100 ) (759,763 )

Realized (Gain) Loss on Equity Securities (7,048 ) 0

Bad Debt Expense 263,767 86,294

Stock

- Based Compensation 39,260 107,598

Debt Discount Amortization, 100,779 0

Inventory Write Down 62,744 258,043

Treasury Stock Donation 3,390 0

(Increase) Decrease in:

Deferred Income Taxes 7,433,654 (1,735,594)

Accounts Receivable 145,333 492,686

Prepaid Expenses and Other Assets (47,620 ) 82,202

Increase (Decrease) in:

Accounts Payable and Accrued Expenses 768,203 (724,133 )

Deferred Revenues

- DWI 1,784,077 1,152,170

Net Cash Provided by Operating Activities 226,193 1,662,385

CASH FLOWS FROM INVESTING ACTIVITIES:

Expenditures For Oil And Gas Properties and

Other Capital Expenditures (4,536,358 ) (4,754,817 )

Proceeds from Sale of Assets 14,690 806,353

Sale of Equity Securities 35,575 0

Net Cash Used in Investing Activities (4,486,093 ) (3,948,464 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Long

- Term Debt 2,784,689 700,000

Principal Payments on Long

- Term Debt (2,400,000 ) (1,150,000 )

Proceeds from Stock Options and Warrant Exercises 299,500 1,051,488

Proceeds from Sale of Common Stock 2,119,510 0

Net Cash Provided by Financing Activities 2,803,699 601,488

Net Decrease in Cash and Cash Equivalents (1,456,201 ) (1,684,591)

Cash & Cash Equivalents at Beginning of Year 2,946,131 4,630,722

Cash & Cash Equivalents at End of Year $ 1,489,930 $ 2,946,131Table of Contents

F

- 10 Cash Paid for Interest $ 94,229 138,793

Cash Paid for Taxes $ 800 3,180

Receivable from sale of common stock $ 2,506,023 0

Unrealized Gain on Available

- for

- Sale Securities, net of tax effect $ 0 $ 3,035

The accompanying notes are an integral part of these financial statements.Table of Contents

F

- 11 ROYALE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1

- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Royale Energy, Inc. (“Royale Energy” or the

“Company”) is presented to assist in understanding Royale Energy's financial statements. The financial

statements and notes are representations of Royale Energy's management, which is responsible for their

integrity and objectivit y. These accounting policies conform to accounting principles generally accepted in

the United States of America and have been consistently applied in the preparation of the financial

statements.

Description of Business

Royale Energy is an independent o il and gas producer which also has operations in the area of turnkey

drilling. Royale Energy owns wells and leases in major geological basins located primarily in California,

Texas, and Utah. Royale Energy offers fractional working interests and seeks to minimize the risks of oil

and gas drilling by selling multiple well drilling projects which do not include the use of debt financing.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the

United States of America requires management to make estimates and assumptions that affect the reported

amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

statements and the reported amoun ts of revenues and expenses during the reporting period. Actual results

could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the estimate of Company

oil and gas reserves prepared by an independent engineering consultant. Such estimates are subject to

numerous uncertainties inherent in the estimation of quantities of proven reserves. Estimated reserves are

used in the calculation of depletion, depreciation and amortization, unevaluated p roperty costs, impairment

of oil and natural gas properties, estimated future net cash flows, taxes, and contingencies.

Joint Ventures

The accompanying financial statements as of December 31, 2012 and 2011 include the accounts of Royale

Energy and its pr oportionate share of the assets, liabilities and results of operations as described in FASB

ASC 932

- 323. Royale Energy generally retains an ownership interest of approximately 50% in wells it

drills with its joint venture projects. Royale Energy is the o perator of the majority of properties in which it

has an ownership interest. In connection with the drilling and operation of wells, the Company receives

industry standard COPAS fees, which are recorded as supervisory fee income.

Revenue Recognition

Roya le Energy recognizes revenues from the sales of oil and natural gas upon transfer of title, net of

royalties, in the period of delivery. Settlements for oil and natural gas sales can occur up to two months

after the end of the month in which the oil and n atural gas were produced. We estimate and accrue for the

value of these sales using information available to us at the time our financial statements are generated.

Royale Energy recognizes revenues from the sale of natural gas in which the Company has an interest with

other producers using the entitlements method of accounting. Under this method we recognize revenue

based on our entitled ownership percentage of sales of natural gas delivered to purchasers. Gas imbalances

occur when we sell more or less than our entitled ownership percentage of total natural gasTable of Contents

F

- 12 production. When we receive more than our entitled share, a liability is recorded. Gas imbalances on our

production at December 31, 2012 and 2011 were not significant.

Upon the sale or retireme nt of a complete field of a proved property, the Company eliminates the cost from

its books, and the resultant gain or loss is recorded to Royale Energy’s Statement of Operations. Upon the

sale of an entire interest in an unproved property where the prope rty has been assessed for impairment

individually, a gain or loss is recognized in Royale Energy’s Statement of Operations. If a partial interest in

an unproved property is sold, any funds received are accounted for as a reduction of the cost in the inter est

retained. Royale Energy enters into turnkey drilling agreements with investors to develop leasehold acreage

it has acquired. In these arrangements, Royale Energy acquires a working interest in a prospect pursuant to

an oil and gas lease, and then sell s a portion of a well’s working interest on the acquired lease to investors

with a turnkey drilling agreement. Title to the lease property is not conveyed to the investor. The investor

purchases a working interest directly in the well bore. The working interest purchased in the turnkey drilling

agreements is an ownership interest in which the working interest holder is responsible to bear the cost of

drilling, testing completing, equipping and operating the well. Royale Energy typically retains 50% of t he

working interest and acts as operator of the projects in which it sells working interests to investors.

In a turnkey drilling agreement, Royale Energy agrees to sell a percentage of the well’s working interest to

investors and to pay for all costs of i dentifying, acquiring mineral rights to, drilling, testing, completing and

equipping the well for initial production at a fixed price. If the actual costs of these activities exceed the

turnkey price Royale charged to the investors, Royale is responsible to pay the excess cost. If the actual

costs are less than the turnkey price, Royale retains the excess of the turnkey price over actual costs. Royale

bears 100% of the risk should actual costs exceed estimated costs of a project for both Royale’s working

interest and the working interest sold to investors in a well. When the well is completed as a commercially

productive well, Royale Energy and the investors bear the cost of operating the well according to each

party’s proportionate working interest perc entage.

When Royale Energy sponsors a turnkey drilling project for sale, investors enter into a signed contract with

Royale Energy. In this agreement, the investor agrees to share in the pre

- drilling costs, which are non

refundable, and drilling costs. P re

- drilling costs include geophysical & geographical costs, selling costs,

spoilage costs, third party broker commission fees, and other costs as required so the drilling of the project

can proceed. Drilling costs are those costs to lease the mineral righ ts, build the drilling location, drill, and

log the well, and if the wells is successful, to complete and test the well. The investment is held and

reported by Royale Energy as deferred revenue from turnkey drilling. Once drilling begins, it is generally

completed within 10

- 30 days.

Royale Energy bases the price at which it sells working interests under the turnkey drilling agreement on its

estimates of the costs, described above, and is based upon the historical cost to complete those

activities. Reven ues covering the pre

- drilling and drilling costs are recognized in the period in which a well

is drilled and logged.

Since the investor’s interest in the prospect is limited to the well, and not the lease, the investor does not

have a legal right to parti cipate in additional wells drilled within the same lease. However, it is the

Company’s policy to offer to investors in a successful well the right to participate in subsequent wells at the

same percentage level as their working interest investment in the prior successful well with similar turnkey

drilling agreement terms.

If Royale Energy is unable to drill the wells, and a suitable replacement well is not found, Royale would

retain the non

- refundable portion of the contact and return the remaining funds to the investors. Included in

cash and cash equivalents are amounts for use in completion of turnkey drilling programs in progress.Table of Contents

F

- 13 Oil and Gas Property and Equipment (Successful Efforts)

Royale Energy accounts for its oil and gas exploration and development costs using the successful efforts

method. Leasehold acquisition costs are capitalized. If proved reserves are found on an undeveloped

property, leasehold cost is transferred to proved properties. Significant undeveloped leases are reviewed

per iodically and a valuation allowance is provided for any estimated decline in value. Cost of other

undeveloped leases is expensed over the estimated average life of the leases. Cost of exploratory drilling is

initially capitalized. In the absence of a deter mination that proved reserves are found, the costs of drilling

such exploratory wells are charged to expense. Royale Energy makes this determination within one year

following the completion of drilling. Other exploratory costs are charged to expense as inc urred.

Development costs, including unsuccessful development wells, are capitalized. Depletion, depreciation and

amortization of oil and gas producing properties are computed on an aggregate basis using the units

- of

production method.

As required by the Extractive Activities Topic of the Financial Accounting Standards Board (FASB), long

lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the

carrying amount of an asset may not be recoverable. It establishes g uidelines for determining recoverability

based on future net cash flows from the use of the asset and for the measurement of the impairment loss.

Impairment loss under the Topic is calculated as the difference between the carrying amount of the asset and

i ts fair value. Any impairment loss is recorded in the current period in which the recognition criteria are first

applied and met. Under the successful efforts method of accounting for oil and gas operations, Royale

Energy periodically assessed its proved p roperties for impairments by comparing the aggregate net book

carrying amount of all proved properties with their aggregate future net cash flows. The statement requires

that the impairment review be performed on the lowest level of asset groupings for whi ch there are

identifiable cash flows.

Royale Energy performs a periodic review for impairment of proved properties on a field

- by

- field basis.

Unamortized capital costs are measured on a field basis and are reduced to fair value if it is determined that

the sum of expected future net cash flows are less than the net book value. Royale Energy determines if

impairment has occurred through either adverse changes or as a result of its periodic review for impairment.

Impairment is measured on a 10% discounted cash flows basis. Impairment losses of $200,778, and

$4,529,058, were recorded in 2012 and 2011, respectively.

Upon the sale of oil and gas reserves in place, costs and accumulated amortization of such property are

removed from the accounts and resulting gain or loss on sale is reflected in operations. Impairment of

unproved properties is assessed periodically on a property

- by

- property basis, and any impairment in value is

currently charged to expense. In addition, capitalized costs of unproved properties are assessed periodically

to determine whether their value has been impaired below the capitalized costs. Loss is recognized to the

extent that such impairment is indicated. In making these assessments, factors such as exploratory drilling

results, future drilling plans, and lease expiration terms are considered. When an entire interest in an

unproved property is sold, gain or loss is recognized, taking into consideration any recorded impairment.

When a partial interest in an unproved property is sold, fund s received are accounted for as a reduction of

the costs in the interest retained. Upon abandonment of properties, the reserves are deemed fully depleted

and any unamortized costs are recorded in the statement of operations under impairment expense.

Duri ng 2012, impairment losses of $200,778 were recorded in wells or fields where year

- end reserve values

were less than the net book values of wells or where lease and land costs were no longer viable. In 2012,

one Utah well and two California wells were imp aired by $ 11,276 and $ 60,789, respectively. These

impairments were due to lower proved developed reserves than current book values due to the natural

declines of the wells. Also in 2012, we recorded lease impairments of $119,322 on various capitalized lease

and land costs that were no longer viable.Table of Contents

F

- 14 In 2011, Royale Energy recorded an impairment of $4,516,098 in fields where year

- end reserve values no

longer supported net book values of the related wells in those fields. Royale had impairments in it s Lone

Star and Bowerbank fields in the amounts of $3,776,385, and $28,566, respectively. The impairments were

the result of natural declines and lower natural gas prices. Additionally, an impairment of $710,124 was

recognized for our Moon Ridge field in Utah, where recently reduced gas prices and a reevaluation of the

reservoir significantly lowered proved reserves than originally estimated. Moreover, 2011 impairments also

include impairments of nonviable geological lease and land costs of $12,959.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and on deposit, and highly liquid debt instruments with

maturities of three months or less.

Inventory

Inventory consists of well supplies, pipeline and spare parts and is carried at lo wer of cost or market. During

2012, we had a write down of $62,744 on certain oil and gas inventory and in 2011 we had a write down of

$258,043 on certain oil and gas pipeline inventory to its estimated current market value.

Accounts Receivable

The Company provides for uncollectible accounts receivable using the allowance method of accounting for

bad debts. Under this method of accounting, a provision for uncollectible accounts is charged to

earnings. The allowance account is increased or decreased based on past collection history and

management’s evaluation of accounts receivable. All amounts considered uncollectible are charged against

the allowance account and recoveries of previously charged off accounts are added to the allowance. At

December 31, 2012 and 2011, net accounts receivable was $3,969,160 and $1,872,067 respectively.

Approximately $2,500,000 of the receivable reported for the year ended 2012 related to the sale of Royale’s

common stock. The receivable was collected on January 4, 20 13. At December 31, 2012 and 2011, the

Company established an allowance for uncollectable accounts of $934,876 and $671,109, respectively for

receivables from direct working interest investors whose expenses on non

- producing wells were unlikely to

be coll ected from revenue.

Equipment and Fixtures

Equipment and fixtures are stated at cost and depreciated over the estimated useful lives of the assets, which

range from three to seven years, using the straight

- line method. Repairs and maintenance are charged to

expense as incurred. When assets are sold or retired, the cost and related accumulated depreciation are

removed from the accounts and any resulting gain or loss is included in income. Maintenance and repairs,

which neither materially add to the value o f the property nor appreciably prolong its life, are charged to

expense as incurred. Gains or losses on dispositions of property and equipment, other than oil and gas, are

reflected in operations.Table of Contents

F

- 15 Loss Per Share

Basic and diluted losses per sha re are calculated as follows:

For the Year Ended December 31, 2012

Income

(Numerator) Shares

(Denominator) Per

Share

Amount

Basic Loss Per Share:

Net loss available to common stock $ (11,961,026 ) 11,133,377 $ (1.07 )

Cumulative effect of accounting change

- - -

Diluted Loss Per Share:

Effect of dilutive securities and stock

options

Net loss available to common stock $ (11,961,026 ) 11,133,377 $ (1.07 )

For the Year Ended December 31, 2011

Income

(Numerator) Shares

(Denominator) Per

Share

Amount

Basic Loss Per Share:

Net loss available to common stock $ (4,188,241 ) 10,655,258 $ (0.39 )

Cumulative effect of accounting change

- - -

Diluted Loss Per Share:

Effect of dilutive securities and stock

options

- - -

Net loss available to common stock $ (4,188,241 ) 10,655,258 $ (0.39 )

For the years ended December 31, 2012 and 2011, Royale Energy had dilutive securities of 1,104,314 and

842,859 respectively. These securities were not included in the dilutive earnings per share due to their anti

di lutive nature.

Stock Based Compensation

Royale Energy has a stock

- based employee compensation plan, which is more fully described in Note

13. Effective January 1, 2006, the Company adopted the Compensation

– Stock Compensation Topic of the

FASB Accounting Standards Codification, which addresses the accounting for stock

- based payment

transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the

enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may

be settled by the issuance of such equity instruments. The Company uses the Black

- Scholes option

- pricing

model to determine the fair value of stock

- based awards, consistent with that used for pro for ma disclosures

under the Topic

.

During the year ended December 31, 2008, the Board of Directors authorized approximately 550,000 shares

to be issued for equity awards through a stock grant plan adopted in November 2008 and stock option grant

plan adopted in March 2008.Table of Contents

F

- 16 Income Taxes

Royale utilizes the asset and liability approach to measure deferred tax assets and liabilities based on

temporary differences existing at each balance sheet date using currently enacted tax rates in accordance

with the Income Taxes Topic of the FASB Accounting Standards Codification. Deferred tax assets and

liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Under the

Topic, deferred tax assets are reduced by a valuation al lowance 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.

The provision for income taxes is based on pretax financial accounting income. Deferred tax assets and

liabili ties are recognized for the expected tax consequences of temporary differences between the tax basis

of assets and liabilities and their reported net amounts.

Fair Values of Financial Instruments

Disclosure of the estimated fair value of financial instruments is required under the Fair Value

Measurements and Disclosures Topic of the FASB Accounting Standards Codification. The fair value

estimates are made at discrete points in time based on relevant market information and information about the

fina ncial instruments. These estimates may be subjective in nature and involve uncertainties and significant

judgment and therefore cannot be determined with precision.

Royale Energy includes fair value in the notes to financial statements when the fair value of its financial

instruments is different from the book value. Royale Energy assumes that the book value of financial

instruments that are classified as current approximate fair value because of the short maturity of these

instruments. For noncurrent fina ncial instruments, Royale Energy uses quoted market prices or, to the extent

that there are no available quoted market prices, market prices for similar instruments.

Fair Value Measurements

According to Fair Value Measurements and Disclosures Topic of t he FASB Accounting Standards

Codification, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in

period subsequent to initial recognition, the reporting entity shall disclose information that enable users of its

fi nancial statements to assess the inputs used to develop those measurements and for recurring fair value

measurements using significant unobservable inputs, the effect of the measurements on earnings for the

period.

At December 31, 2011, Royale Energy repo rted the fair value of $31,027 in available for sale

securities. The fair value was determined using the number of shares owned as of December 31, 2011,

multiplied by the market price of those securities on December 31, 2011. These securities were sold d uring

the fourth quarter in 2012.

The table below summarizes Royale’s fair value measurements and the level within the fair value hierarchy

in which the fair value measurements fall. At December 31, 2011, Royale Energy quoted prices in active

markets for identical assets when determining the fair value measurements at the reporting date.

Description 12/31/2012 Level 1 12/31/2011 Level 1

Available for Sale

Securities $ 0 $ 0 $ 31,027 $ 31,027

Treasury Stock

The Company records acquisition of its capital stock for treasury at cost. Differences between proceeds for

reissuance of treasury stock and average cost are charged to retained earnings or credited thereto to the

extent of prior charges and thereafter to capital in excess of par value.Table of Contents

F

- 17 Recently Issued Accounting Pronouncements

The Company has reviewed the up dates issued by the Financial Accounting Standards Board (FASB) during

the year ended December 31, 2012, and have determined that the updates are not applicable to the Company.

NOTE 2

- OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

Oil and gas propert ies, equipment and fixtures consist of the following at December 31:

2012 2011

Oil and Gas

Producing properties, including intangible

drilling costs $ 24,327,806 $ 23,684,048

Undeveloped properties 4,034,292 994,687

Lease and well equipment 9,724,602 10,284,315

38,086,700 34,963,050

Accumulated depletion, depreciation and

amortization (27,756,493 ) (27,553,222 )

10,330,207 $ 7,409,828

2012 2011

Commercial and Other

Real estate, including furniture and

fixtures $ 502,344 $ 502,344

Vehicles 151,669 151,669

Furniture and equipment 1,299,300 1,307,299

1,953,313 1,961,312

Accumulated depreciation (1,327,723 ) (1,295,796 )

625,590 665,516

$ 10,955,797 8,075,344

The following sets forth costs incurred for oil and gas property acquisition and development activities,

whether capitalized or expensed:

2012 2011

Acquisition

- Proved $ 24,298 145,746

Acquisition

- Unproved $ 24,606 33,749

Development $ 577,708 6,493,013

Exploration $ 1,077,001 538,247

The guidance set forth in the Continued Capitalization of Exploratory Well Costs paragraph of the

Extractive Activities Topic of the FASB Accounting Standards Codification requires that we evaluate all

existing capitalized exploratory well costs and disclo se the extent to which any such capitalized costs have

become impaired and are expensed or reclassified during a fiscal period. We did not make any additions to

capitalized exploratory well costs pending a determination of proved reserves during 2012 or 2 011. We did

not charge any previously capitalized exploratory well costs to expense upon adoption of Topic.Table of Contents

F

- 18 12 Months Ended

December 31,

2012 2011

Beginning balance at January 1 $ 0 $ 0

Additions to capitalized exploratory well

costs pending the determination of proved

reserves $ 556,446 $ 0

Reclassifications to wells, facilities, and

equipment based on the determination of proved

reserves $ (556,446 ) $ 0

Ending balance at December 31 $ 0 $ 0

Results of Operations from Oil and Gas Producing and Exploration Activities

The results of operations from oil and gas producing and exploration activities (excluding corporate

overhead and interest costs) for the two years ended December 31, are as follows:

2012 2011

Oil and gas sales $ 1,673,538 4,879,397

Production related costs (1,139,750 ) (1,517,920 )

Lease Impairment (200,778 ) (4,529,058 )

Depreciation, depletion and

amortization (1,448,002 ) (2,362,065 )

Results of operations from producing

and

exploration activities $ (1,114,992 ) (3,529,646 )

Income Taxes (Benefit) 1,831,562 (1,032,831 )

Net Results $ (2,946,554 ) (2,496,815 )

NOTE 3

– ASSET RETIREMENT OBLIGATION

The Asset Retirement and Environmental Obligations Topic of the FASB Accounting Standards

Codification requires that an asset retirement obligation (ARO) associated with the retirement of a tangible

long

- lived asset be recognized as a liability in the period in which it is incurre d or becomes determinable (as

defined by the standard), with an associated increase in the carrying amount of the related long

- lived

asset. The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated

over the u seful life of the asset. The ARO is recorded at fair value, and accretion expense will be recognized

over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO

is measured using expected future cash outf lows discounted at the Company’s credit

- adjusted risk

- free

interest rate. The provisions of this Topic apply to legal obligations associated with the retirement of long

lived assets that result from the acquisition, development, and operation of a long

- li ved asset.

2012 2011

Asset retirement obligation Beginning of

the year $ 575,612 $ 580,568

Liabilities incurred during the period 347,947 21,173Table of Contents

F

- 19

Settlements 0 (24,690 )

Accretion expense 6,741 9,266

Revisions in estimated cash flow 23,788 (10,705 )

Asset retirement obligation End of year $ 954,088 $ 575,612

NOTE 4

- TURNKEY DRILLING CONTRACTS

Royale Energy receives funds under turnkey drilling contracts, which require Royale Energy to drill oil and

gas wells within a reasonable time period from the date of receipt of the funds. As of December 31, 2012

and 2011 Roya le Energy had recorded deferred turnkey drilling associated with undrilled wells of

$8,693,743 and $6,909,666, respectively, as a current liability.

NOTE 5

- FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS

Royale Energy identifies reportable segment s by product and country, although Royale Energy currently

does not have foreign country segments. Royale Energy includes revenues from both external customers and

revenues from transactions with other operating segments in its measure of segment profit or loss. Royale

Energy also includes interest revenue and expense, DD&A, and other operating expenses in its measure of

segment profit or loss.

The accounting policies of the reportable segments are the same as those described in the Summary of

Significant Accounting Principles (see Note 1).Table of Contents

F

- 20 Royale Energy's operations are classified into two principal industry segments. Following is a summary of

segmente d information for 2012 and 2011 :

Oil and Gas

Producing

and

Exploration Turnkey

Drilling

Services Total

Year Ended December 31, 2012

Revenues from External Customers $ 1,673,538 $ 2,028,863 $ 3,702,401

Supervisory Fees 686,261 0 686,261

Interest Revenue 0 6,083 6,083

Interest Expense 97,505 97,504 195,009

Operating Expenses for Segment Assets 4,079,672 3,012,549 7,092,221

Depreciation, Depletion, and Amortization 1,375,602 72,400 1,448,002

Lease Impairment 100,389 100,389 200,778

Gain on Sale of Assets 0 8,100 8,100

Gain on Marketable Securities 7,048 0 7,048

Income Tax Expense 5,398,335 2,036,574 7,434,909

Total Assets 16,628,168 875,167 17,503,335

Net Loss $ (8,684,656 ) (3,276,370 ) (11,961,026 )

Year Ended December 31, 2011

( ( restated)

Revenues from External Customers $ 4,879,397 $ 5,794,427 $ 10,673,824

Supervisory Fees 834,372

- 834,372

Interest Revenue

- 24,214 24,214

Interest Expense 69,109 69,109 138,218

Operating Expenses for Segment Assets 4,821,462 6,362,117 11,183,579

Depreciation, Depletion, and Amortization 2,243,962 118,103 2, 362,065

Lease Impairment 4,522,578 6,480 4,529,058

Gain on Sale of Assets 759,763

- 759,763

Income Tax (Benefit) (1,516,799 ) (215,707 ) (1,732,506 )

Total Assets 20,388,197 1,073,063 21,461,260

Net Loss $ (3,666,780 ) $ (521,461 ) $ (4,188,241 )Table of Contents

F

- 21 NOTE 6

- LONG

- TERM DEBT

2012 2011

Revolving line of credit secured by oil and gas properties, with a maximum

available of $14,250,000 at December 31, 2011, issued by Texas Capital

Bank, N.A. for the purposes of refinancing Royale’s existing debt and to fund

development, exploration and acquisition activities as well as other general

corporate purposes. The agreement was entered into on February 13,

2009. Interest is at Texas Capital Bank’s “Base Rate” plus 1 .00% with an

“Adjusted Base Rate” of 5.00%, resulting in a rate of 5.00% at December 31,

2012 and 2011, payable monthly with borrowing base reductions of $100,000

commencing on January 1, 2011. As part of this agreement, Texas Capital

Bank has issued lett ers of credit in the amount of $750,000 on behalf of the

Company to various agencies. At December 31, 2012, Royale’s borrowing

base with Texas Capital Bank was $350,000. The revolving line of credit

matured in February 2013. $ 350,000 $ 2,750, 000

Note Payable convertible into shares of Royale’s Common stock and a

Warrant Agreement with certain institutional investors. The Note has a face

value of $3,333,333.33 and issued with an original issue discount of 10% for

an aggregate purchase price of $3 million. The Note is not interest bearing

unless Royale is in default of the Note, in which case the Note carries an

interest rate of 18% per annum. During each calendar quarter from January 1,

2013 through December 31, 2013, the holder of the Note intends to require

Royale to redeem 25% of the original principal amount each

quarter. Accordingly, the note has been classified as current. Once

notification is received, Royale, in its sole discretion, may satisfy its

o bligation either in cash or in shares of its common stock. However, at the

Note’s maturity on December 31, 2014, any outstanding balance on the Note

is required to be repaid in cash. Note is net of the Discount of Warrant Value

in the amount of $1,229,354

. 1,908,668

-

Total Long Term Debt $ 2,258,668 $ 2,750,000

Less Current Maturity 2,258,668 $

-

Long Term Debt Less Current Portion $

- $ 2,750,000

Significant covenants under the terms of the Texas Capital Bank, Inc. line of credit agreement include that

the Company will have a tangible net worth not less than $5,424,014 as of December 31, 2008, plus 75% of

positive quarterly net income thereafter, an interest coverage ratio not less than 3.00:1, and a bank defined

current ratio not less than 1:1. The Company was not in compliance with the terms of this agreement at

December 31, 2012, but has obtained a w aiver from Texas Capital Bank, Inc. In June 2009, a joint and

several guarantee of the $750,000 Letter of Credit Facility by and between Stephen Hosmer and Harry

Hosmer was added the loan agreement. Guarantors will be required to collectively maintain un encumbered

liquidity in the form of cash or marketable securities equal to 150% of the line amount.

The Warrant Agreement entitles the holder to purchase, in whole or in part, an aggregate of 500,000 shares

of Royale’s Common stock at an initial exercise price of $3.00 per share. The warrant has a three year term

and becomes exercisable on April 29, 2013. The value of the warrant was determined using the Black

Scholes pricing method utilizing a strike price of $3.00, 3 year maturity, a risk free interes t of 0.8805%, and

expected volatility of 107.7%. Based upon these inputs, the value of each warrant share was calculated to be

$1.9536.Table of Contents

F

- 22 In addition to the Note and Warrant Agreement, Royale also agreed to (i) not issue any securities for each

period com mencing on the date of receipt of an optional redemption notice and ending 20 trading days

following the redemption required by such optional redemption notice, subject to certain limited exceptions,

(ii) not to enter into a variable rate transaction at an y time until the earlier of two years from the closing date

or the date on which none of the Notes or Warrants are outstanding, and (iii) to allow the investors to

participate in future issuances of securities, subject to certain exceptions, for a period of one year from the

date hereof. In addition, we have agreed to hold a shareholders’ meeting no later than June 30, 2013, to

approve: (A) an amendment of our Articles of Incorporation to increase the Company’s authorized capital

stock to 51,000,000 share s, including 50,000,000 shares of common stock and 1,000,000 shares of preferred

stock; and (B) making the exchange cap in the Notes and the floor price on the exercise price of the

Warrants inapplicable with respect to issuances of common stock in excess of the exchange cap in the Notes

and below the floor price in the Warrants in accordance with Nasdaq rules.

NOTE 7

- INCOME TAXES

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying

amount of ass ets and liabilities for financial reporting purposes and amounts used for income tax

purposes. 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.

Significant components of the Company’s deferred assets and liabilities at December 31, 2012 and 2011,

respectively, are as follows:

2012 2011

Deferred Tax Assets (Liabilities):

Statutory Depletion Carry Forward $ 776,534 $ 839,572

Net Operating Loss 4,951,344 2,860,706

Other 212,798 375,881

Share

- Based Compensation 58,558 42,321

Mark to Market Securities

- (1,240 )

Capital Loss / AMT Credit Carry

Forward 76,410 76,410

Charitable Contributions Carry

Forward 16,022 14,416

Allowance for Doubtful Accounts 372,772 263,966

Oil and Gas Properties and Fixed

Assets 3,711,789 3,799,419

$ 10,176,227 $ 8,271,451

Valuation Allowance (10,176,227 ) (839,572 )

Net Deferred Tax Asset $

- $ 7,431,879

Deferred Tax Assets:

Current $ 107,563 $ 661,645

Non

- current (107,563 ) 6,771,474

Deferred Tax Liabilities:

Current (1,240 )

Non

- current

-

Net Deferred Tax Asset $

- $ 7,431,879Table of Contents

F

- 23 At the end of 2012, management reviewed the realizability of the Company’s net deferred tax assets. Due

to the Company’s cumulative losses in recent years, and its inability to conclude a transaction concerning its

Alaska acreage by the end of 2012, Royale and its m anagement concluded that it is not “more

- likely

- than

not” its deferred tax assets will be realized. As a result, the Company recorded a full valuation allowance

against the net deferred tax assets in 2012. The Company will assess the realizability of the deferred tax

assets at least yearly and make appropriate updates as needed. The Company had statutory percentage

depletion carry forwards of approximately $1,900,000 at December 31, 2012. The depletion has no

expiration date. The Company also has a net operating loss carry forward of approximately $10,900,000 at

December 31, 2012, which will begin to expire in 2027.

A reconciliation of Royale Energy's provision for income taxes and the amount computed by applying the

statutory income tax rates at December 31, 2012 and 2011, respectively, to pretax income is as follows:

2012 2011

Tax (benefit) computed at statutory rate

of 34% $ (1,538,880 ) $ (2,013,054 )

Increase (decrease) in taxes resulting

from:

State tax / percentage depletion / other 1,128,788 (263,772 )

Other non

- deductible expenses 2,888 2,942

Change in valuation allowance 7,842,113 541,378

Provision (benefit) $ 7,434,909 $ (1,732,506 )

The components of the Company’s tax provision are as follows:

2012 2011

Current tax provision (benefit)

– federal $

- - Current tax provision (benefit)

– state 1,790 3,090

Deferred tax provision (benefit)

–

federal 6,265,479 (1,409,034 )

Deferred tax provision (benefit)

– state 1,167,640 (326,562 )

Total provision (benefit) $ 7,434,909 (1,732,506 )

In January 2007, Royale adopted additional provisions from the Income Taxes Topic of the FASB

Accounting Standards Codification, which clarified the accounting for uncertainty in income taxes

recognized in an entity’s financial statements and prescribes a recognition threshold and measurement

attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. As

a result of our implementation of the Topic at the time of adoption and at December 31, 2012, the Company

did not recognize a liability for uncertain tax positions. Currently, the only differences between our

financial statements and our income tax returns relate to normal timing differences such as depreciation

, depletion and amortization, which are recorded as deferred taxes on our consolidated balance sheets. We do

not expect our unrecognized tax benefits to change significantly over the next 12 months. The tax years

2009 through 2011 remain open to examinatio n by the taxing jurisdictions in which we file income tax

returns.

NOTE 8

- SERIES AA PREFERRED STOCK

In April 1992, Royale Energy's Board of Directors authorized the sale of Series AA Convertible Preferred

Stock. Holders of Series AA Convertible Preferred Stock have dividend, conversion and preference rights

identical to Series A Convertible Preferred S tockholders. The Series AA Convertible Preferred Stock doesTable of Contents

F

- 24 not have the right of redemption at the stockholders' option. During the years ending December 31, 2012,

and 2011, there were no conversions of Series AA Preferred stock, and as of December 3 1, 2012, and 2011

there were 52,784 shares of Series AA Preferred stock issued and outstanding.

NOTE 9

- COMMON STOCK

In February 2012, Royale Energy entered into a Sales Agreement with C. K. Cooper & Company, Inc.

(“CKCC”), under which the Company may issue and sell shares of its common stock for consideration of up

to $10,000,000, from time to time in an at the market equity offering program with CKCC acting as the

Company’s sales agent (the “Offering”). Sales of common stock if any, under the progra m will depend

upon market conditions and other factors to be determined by the Company and may be made in negotiated

transactions or transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the

Securities Act of 1933, as am ended, including sales made directly on the NASDAQ Capital Market, on any

other existing trading market for the common stock or through a market maker. The Company has no

obligation to sell any common shares in the program and may at any time suspend solic itation and offers

under the program or terminate the program. The Company will pay CKCC a commission equal to 3.5% of

the gross sales price of any such shares sold, through it as sales agent, as set forth in the Sales Agreement.

The Company has also agree d to reimburse CKCC for certain expenses incurred in connection with entering

into the Sales Agreement and has provided CKCC with customary indemnification rights.

In June 2008, Royale Energy entered into a Securities Purchase Agreement with Cranshire Cap ital, L.P. to

issue and sell 547,945 shares of its common stock in exchange for approximately $4,000,000 (i.e. $7.30 per

share). As part of the agreement, Cranshire was also issued a warrant to acquire additional shares of its

common stock. The warrant, w hich expires on June 10, 2013, is exercisable for an aggregate of 191,781

shares at an exercise price of $7.30 per share. The $7.30 per share price was negotiated as a 15% discount

from the 10 day dollar volume weighted average price of the Company’s Comm on Stock on the NASDAQ

Global Market. In conjunction with the August 2009 agreement (see below) the price of these share were

adjusted to an exercise price of $1.99 per share. In March 2011, warrants were exercised for 71,918 shares

of the Company’s comm on stock for approximately $143,117 ($1.99 per share). The net proceeds from the

private placement and warrant exercise went towards general corporate purposes, including the acquisition

of oil and natural gas properties for future development.

On Augus t 4, 2009, Royale Energy, Inc., entered into a Securities Purchase Agreement with Cranshire

Capital, L.P. The terms of the agreement include the sale of 552,764 shares of common stock at $1.99 per

share. The warrants include: (i) Series A Warrants, which a re immediately exercisable for a period of 5

years into 329,850 shares at $2.19 per share; (ii) Series A

- 1 Warrants, which are exercisable beginning

February 6, 2010 for a period of 5 years into 1,808 shares at $2.19 per share, (iii) Series B Warrants, whi ch

are immediately exercisable for a period of up to 1 year into 511,628 shares at $2.15 per share and (iv)

Series C Warrants, which are immediately exercisable for a period of 5 years into 306,977 shares at $2.19

per share but only to the extent that the Series B Warrants are exercised and only in the same percentage that

the Series B Warrants are exercised. All of such warrants contain customary adjustments for corporate

events such as reorganizations, splits, dividends, and the exercise prices of all suc h warrants are subject to

weighted

- average anti

- dilution adjustments in the event of additional issuances of common stock below the

exercise price then in effect. The exercise price of the Series B Warrants is also subject to increases if the

market price of the common stock equals or exceeds $2.40, in which case the exercise price of such Series B

warrant will be increased to 90% of the closing sale price of the common stock on the trading day

immediately preceding the date of exercise thereof. The Company will also provide customary registration

rights in connection with the transaction. In September and October 2009, the Series B warrants were

exercised for 511,628 shares of Royale Energy common stock. The net proceeds received for the shares,

$1,080,65 0, were used for general working capital purposes. During March and April 2011, the Series A

warrants were exercised for 329,850 shares of Royale Energy common stock. The net proceeds received for

the shares, approximately $722,372, were used for general working capital purposes. During February and

March 2011, in a separate exercise, warrants were exercised for 67,160 of the Company’s common

stock. The net proceeds of approximately $185,999 were used for general working capital purposes.Table of Contents

F

- 25 NOTE 10

- OPERATING LEASES

Royale Energy occupies office space through the use of two leases, one for their office in San Diego, CA

and one for an office and yard in Woodland, CA. The San Diego lease is under a 120 month noncancellable

lease contract, which expir es in July 2015. The San Diego lease calls for monthly payments ranging from

$27,010 to $35,271, and the Woodland lease calls for monthly payments of $900. Future minimum lease

obligations as of December 31, 2012 are as follows:

Year Ended

December 31,

2013 $ 403,873

2014 $ 415,842

2015 $ 246,900

Thereafter $

-

Total $ 1,066,615

Rental expense for the years ended December 31, 2012 and 2011 was $ 370,750 and $371,520 respectively.

NOTE 11

- RELATED PARTY TRANSACTIONS

Significant Ownership Interests

Donald H. Hosmer, Royale Energy’s co

- president and co

- chief executive officer owns 8.59% of Royale

Energy common stock. Donald H. Hosmer is the brother of Stephen M. Hosmer, and son of Harry E.

Hosmer.

Stephen M. Hosmer, Royale Energy’s co

- president, co

- chief executive officer and chief financial officer,

owns 11.64% of Royale Energy common stock. Stephen M. Hosmer is the brother of Donald H. Hosmer

an d son of Harry E. Hosmer.

Harry E. Hosmer, Royale Energy's former president and former chief executive officer, owns 6.28% of

Royale Energy common stock. Donald H. and Stephen M. Hosmer are sons of Harry E. Hosmer. Donald H.

Hosmer and Stephen M. Hosmer are also officers and directors of Royale Energy.

The Board of Directors adopted a policy in 1989 that permits directors and officers of the Company to

purchase from the Company, at the Company’s actual costs, up to one percent of a fractional interest in any

well to be drilled by the Company. Current and former officers and directors were billed $3,451 and

$23,010 for their interests for the years ended December 31, 2012 and 2011, respectively.

NOTE 12

- STOCK COMPENSATION PLAN

During the Board of D irectors meeting held in December 2010, directors and executive officers of Royale

Energy were each granted 50,000 stock options, a total of 400,000 options, to purchase common stock at an

exercise or base price of $3.25 per share. These options are to ve st in two parts; the first 200,000 options

vested on January 1, 2011; the remaining 200,000 options vested on January 1, 2012. The options were

granted with a legal life of five years, and a service period of two years beginning January 1, 2011. During

2 012 and 2011, Royale recognized compensation costs of $39,260 and $40,015, respectively and a tax

expense of $38,652 and tax benefit of $11,611, respectively relating to this option grant.Table of Contents

F

- 26 The fair value of the options was calculated using the Black

- Scholes option pricing method. Since, at the

time of option grant, there was currently no market for options of Royale’s common stock, expected

volatilities are based on historical volatility of the Company’s stock and other factors. Royale Energy uses

historical data to estimate option exercise and board member turnover within the valuation model. The risk

free rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in

effect at the time of the grant.

A summary of the status of Royale Energy's stock option plan as of December 31, 2012 and 2011, and

changes during the years ending on those dates is presented below:

2012 2011

Weighted

- Weighted

Average Average

Exercise Exercise

Shares Price Shares Price

Options

Outstanding at Beginning of Year 675,000 $ 3.36 320,000 $ 3.50

Granted

- $ 400,000 3.25

Exercised (283,692 ) $ 3.46 (45,000 ) 3.44

Expired or Ineligible (45,000 ) 3.50

-

Outstanding at End of Year 346,308 $ 3.25 675,000 $ 3.36

Options Exercisable at Year End 346,308 $ 3.25 475,000 $ 3.40

Weighted

- average Fair Value of Options

Granted During the Year $

- - $ 0.21

The weighted

- average grant

- date fair value of options granted during 2011 was $0.21 per share, and the fair

value of the options vested in 2011 was $40,015. The total intrinsic value of options exerci sed during 2011

was $112,050. At December 31, 2011, Royale’s stock price was $4.58 creating an intrinsic value of

$823,500 and $560,500 for the options outstanding and exercisable at year end, respectively. At December

31, 2012, Royale Energy’s stock price , $2.58, was less than the weighted average exercise price, and as such

the outstanding and exercisable stock options had no intrinsic value. These stock options have a weighted

average remaining contractual term of 3 years as of December 31, 2012. There were no new stock options

granted during 2012.

In November 2008, the Board of Directors granted the directors and executive officers of Royale Energy

95,000 shares of restricted common stock. The number of granted shares will double to 190,000 shares o f

common stock if Royale’s stock price reaches $15 a share during the period. The grant is to be vested in

three parts. Each part of 31,665 shares vested on Novembe r 30, 2009, 2010, and 2011. Royale recognized

share

- based compensation of $67,583 and $19 ,610 as a tax benefit for this stock grant in the year ended

December 31, 2011.Table of Contents

F

- 27 A summary of the status of Royale Energy's restricted stock grant plans as of December 31, 2012 and 2011,

and changes during the years ending on those dates is presente d below:

2012 2011

Weighted

- Weighted

Average Average

Grant

- Date Grant

- Date

Shares Fair Value Shares Fair Value

Non

- vested Shares

Non

- vested at Beginning of Year

- $

- 31,670 $ 3.31

Granted

- -

Reinstated

- -

Vested

- 31,670 $ 3.31

Expired or Ineligible

- $

-

Non

- vested at End of Year

- - $ 3.31

NOTE 13

- SIMPLE IRA PLAN

In April 1998, the Company established a Simple IRA pension plan covering all employees. The Company

will contribute a matching contribution to each eligible employee’s Simple IRA equal to the employee’s

salary reduction contributions up to a limit of 3% of the employee’s compensation for the year. The

employer contribution for the years ending December 31, 2012 and 2011, were $57,405, and $60,366

respectively.

NOTE 14

- ENVIRONMENTAL MATTERS

Royale Energy has established procedures for the continuing evaluation of its operations to identify potential

environmental exposures and assure compliance with regulatory policies and procedures. Management

monitors these laws and regulations and perio dically assesses the propriety of its operational and accounting

policies related to environmental issues. The nature of Royale Energy's business requires routine day

- to

- day

compliance with environmental laws and regulations. Royale Energy incurred no mate rial environmental

investigation, compliance and remediation costs in 2012 or 2011.

Royale Energy is unable to predict whether its future operations will be materially affected by these laws

and regulations. It is believed that legislation and regulation s relating to environmental protection will not

materially affect the results of operations of Royale Energy.

NOTE 15

- CONCENTRATIONS OF CREDIT RISK

The Company bids its gas sales on a month to month basis and generally sells to a single customer with out

commitment to future gas sales to any particular customer. The Company normally sells approximately 83%

of its monthly natural gas production to one customer on a month to month basis. Since we are able to sell

our natural gas to other readily availab le customers, the loss of any one customer would not have an adverse

effect on our overall sales operations.

The Company maintains cash in depository institutions that are guaranteed by the Federal Deposit Insurance

Corporation (FDIC) up to $250,000 per institution for our interest bearing accounts in the years ended

December 31, 2012, and 2011. At December 31, 2012, and 2011, the Company’s non

- interest bearing

accounts were fully insured by the FDIC. At December 31, 2012 and 2011, cash in banks exceed ed the

FDIC limits by approximately $1.2 million and $2.4 million, respectively. The Company has not

experienced any losses on deposits.Table of Contents

F

- 28 NOTE 16

- COMMITMENTS AND CONTINGENCIES

The Company may become involved from time to time in litigation on various matters, which are routine to

the conduct of its business. The Company believes that none of these actions, individually or in the

aggregate, will have a material adverse effect on its financial position or results of operations, though any

adverse decisi on in these cases or the costs of defending or settling such claims could have a material effect

on its business.

National Fuel Corporation (“NFC”) v. Royale Energy, Inc., No. 080800735, Uintah County, Utah. NFC

filed this lawsuit seeking to remove Royal e as operator of the property in which Royale is the 75% record

owner and operator and NFC was a non

- operator with a 25% ownership. Trial was held on October 18

- 21,

2011, at which Royale defended itself vigorously. On February 2, 2012, the Court issued i ts ruling, denying

NFC’s request to remove Royale as operator. On April 6, 2012, judgment pursuant to the ruling was

entered, and NFC filed an appeal. Effective February 1, 2013, during the pendency of the appeal, the case

was settled. We anticipate tha t the appeal will be dismissed shortly, and the litigation concluded. There was

no cash paid out as a result of the ruling.

Douglas Jones v. Royale Energy, Inc., et.al.

On July 1, 2010, Douglas Jones filed a lawsuit against the Company in the Circuit Cou rt, 17th Judicial

District, Broward County, Florida. Mr. Jones was an independent contractor handling certain aspects of

sales for the Company prior to July 2, 2008. He asserts that he is entitled to an unspecified amount for

commissions and expenses. T he Company denies that any money is owed to Mr. Jones, and intends to

defend the lawsuit vigorously. On August 16, 2010, the Company

, through Florida counsel Adam Hodkin,

filed a motion to dismiss the lawsuit for lack of jurisdiction in the Florida courts

. The Court has set the

motion to dismiss for hearing on March 15, 2012, but the hearing was taken off calendar at the request of the

plaintiff, Mr. Jones. The court then reset the motion for hearing on February 27, 2013. At the hearing, the

judge took t he matter under submission to consider whether he needed to hold an evidentiary hearing or

whether he could rule on the papers. If the motion to dismiss is denied, Royale intends to answer their

complaint and oppose the lawsuit vigorously.

NOTE 17

- SUBSEQUENT EVENTS

On January 2, 2013 and on April 4, 2013, Royale’s convertible note holders exercised their put option to

redeem 25% of the original principal amount. Royale paid $854,167, which included a 2.5% premium

because the obligation was met in cash, on January 7, 2013, and issued 479,589 of its common stock on

April 5, 2013 to satisfy each notice to redeem 25% of the original principal amount. As of April 15, 2013,

Royale has an outstanding balance of approximately $1,666,667 related to the convertible notes.Table of Contents

F

- 29 NOTE 18

– RESTATEMENT TO REFLECT CHANGE IN REVENUE RECOGNITION POLICY

The Company has restated its previously issued 2011 financial statements for the correction of an e rror in

the method of revenue recognition. The effect on the Company’s issued 2011 financial statements is

summarized below:

As

Previously

Reported As Restated

Balance sheet as of December 31, 2010:

Accumulated deficit (16,807,424 ) (18,037,663 )

Balance sheet as of December 31, 2011:

Deferred Tax Asset 6,055,803 6,771,474

Total Assets 20,745,589 21,461,260

Deferred Revenue from Turnkey Drilling 4,879,853 6,909,666

Total Current Liabilities 9,423,834 11,453,647

Total Liabilities 12,749,446 14,779,259

Accumulated Deficit 20,911,762 22,225,904

Total paid in capital and accumulated deficit 7,543,515 6,861,377

Total Stockholder’s Equity 7,996,143 6,682,001

Total Liabilities and Stockholder’s Equity 20,745,589 21,461,260

Statement of Operations for the year ended

December 31, 2011:

Turnkey Drilling 5,933,065 5,794,427

Total Revenues 11,671,048 11,532,410

Income From Operations (5,643,891 ) (5,782,529 )

Income Before Income Tax Expense (5,782,109 ) (5,920,747 )

Income Tax Provision (Benefit) (1,677,771 ) (1,732,506 )

Net Income (Loss) (4,104,338 ) (4,188,241 )

Comprehensive Income (Loss) (4,101,303 ) (4,185,206 )Table of Contents

F

- 30 ROYALE ENERGY, INC.

SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES

(UNAUDITED)

The following estimates of proved oil and gas reserves, both developed and undeveloped, represent interests

owned by Royale Energy which are located solely in the United States. Proved reserves represent estimated

quantities of crude oil and natural gas which geological and engineering data demonstrate to be reasonably

certain to be recovera ble in the future from known reservoirs under existing economic and operating

conditions. Proved developed oil and gas reserves are reserves that can be expected to be recovered through

existing wells, with existing equipment and operating methods. Prove d undeveloped oil and gas reserves are

reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells for

which relatively major expenditures are required for completion.

Disclosures of oil and gas reserves, which f ollow, are based on estimates prepared by independent petroleum

engineering consultants Netherland, Sewell & Associates, Inc. and Source Energy, LLC, the net reserve

value of its proved developed and undeveloped reserves was approximately $7.6 million at D ecember 31,

2012, based on natural gas prices ranging from $2.59 per MCF to $3.09 per MCF as applied on a field

- by

field basis. Source Energy, LLC supplied reserve value estimates for Royale Energy’s Utah properties, and

Netherland, Sewell & Associates, I nc. provided reserve information for the Company’s California, Texas,

Oklahoma, and Louisiana properties. Such estimates are subject to numerous uncertainties inherent in the

estimation of quantities of proved reserves and in the projection of future rates of production and the timing

of development expenditures. These estimates do not include probable or possible reserves.

The technical persons responsible for preparing the reserves estimates presented in the report of Netherland,

Sewell & Associates, In c., meet the requirements regarding qualifications, independence, objectivity, and

confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves

Information promulgated by the Society of Petroleum Engineers. Netherland, Sewell & Associates, Inc. is a

firm of independent petroleum engineers, geologists, geophysicists, and petrophysicists; and do not own an

interest in our properties and are not employed on a contingent basis. All activities and reports perform ed

and completed by Netherland, Sewell & Associates, Inc. with regards to our reserve valuation estimates are

managed and reviewed by Royale’s Chief Geologist and Vice President of Exploration. This person earned

a Ph.D. in geosciences from the University of Sheffield, England, and has over 30 years of experience in the

petroleum exploration industry. After our Chief Geologist and Vice President of Exploration completes his

review and analysis of the estimates from Netherland, Sewell & Associates, the est imates are reviewed again

by Royale’s Co

- CEO, Co

- President, and CFO.

These estimates are furnished and calculated in accordance with requirements of the Financial Accounting

Standards Board and the Securities and Exchange Commission (SEC). Because of unp redictable variances

in expenses and capital forecasts, crude oil and natural gas price changes, largely influenced and controlled

by U.S. and foreign government actions, and the fact that the bases for such estimates vary significantly,

management believe s the usefulness of these projections is limited. Estimates of future net cash flows

presented do not represent management's assessment of future profitability or future cash flows to Royale

Energy. Management's investment and operating decisions are bas ed upon reserve estimates that include

proved reserves prescribed by the SEC as well as probable reserves, and upon different price and cost

assumptions from those used here.

It should be recognized that applying current costs and prices and a 10 percent standard discount rate does

not convey absolute value. The discounted amounts arrived at are only one measure of the value of proved

reserves.Table of Contents

F

- 31 Changes in Estimated Reserve Quantities

The net interest in estimated quantities of proved developed reserves of crude oil and natural gas at

December 31, 2012 and 2011 and changes in such quantities during each of the years then ended, were as

follows:

2012 2011

Oil (BBL) Gas (MCF) Oil (BBL) Gas (MCF)

Proved developed and undeveloped reserves:

Beginning of period 4,900 4,569,850 16,830 5,733,873

Revisions of previous estimates (2,658 ) (436,443 ) 2,205 (1,044,000 )

Production (1,558 ) (559,590 ) (2,264 ) (1,144,469 )

Extensions, discoveries and improved recovery 63,200 892,990 1,024,446

Purchase of minerals in place 16 31,162

Sales of minerals in place (11,871 )

Proved reserves end of period 63,900 4,497,970 4,900 4,569,850

2012 2011

Oil (BBL) Gas (MCF) Oil (BBL) Gas (MCF)

Proved developed reserves:

Beginning of period 4,900 4,174,050 16,830 5,041,179

End of period 700 3,188,390 4,900 4,174,050

2012 2011

Oil (BBL) Gas (MCF) Oil (BBL) Gas (MCF)

Proved undeveloped reserves:

Beginning of period

- 395,800

- 692,694

End of period 63,200 1,309,580

- 395,800

For December 31, 2012, natural gas extensions, discoveries and improved recovery amounted to 89 2,990

MCF which was mainly the result of drilling one new exploratory well in 2012, which consisted of 856,030

MCF of proved undeveloped reserves. Another location, carried over from December 31, 2011, which was

not drilled in 2012, was revised upward to 416,590 MCF in proved undeveloped reserves at year end

2012. Additionally in 2012, oil extensions, discoveries and improved recovery came to 63,200 BBL which

was due to four new locations, on previously owned leases, which during 2012 were proven by new o utside

development in the area. Each of the four locations has approximately 15,800 BBL and 9,240 MCF of

proved undeveloped reserves. A location which had 347,000 MCF in proved developed reserves at

December 31, 2011, was drilled and began producing in 2011, was revised downward 306,837 MCF at

December 31, 2012. An additional location, which was also drilled and began producing in 2011, had

proved developed reserves of 379,300 at December 31, 2011, revised downward 126,653 MCF at December

31, 2012.Table of Contents

F

- 32 For December 31, 2011, extensions, discoveries and improved recovery came to 1,024,446 MCF which was

added as a result of drilling three new developmental wells in 2011. These consisted of 127,846 MCF of

proved developed producing reserves on one location and 896,600 MCF of proved developed non

- producing

reserves on three locations. Another location which had 300,683 MCF in proved undeveloped reserves at

December 31, 2010, was drilled and began producing in 2011, was revised downward 270,560 MCF at

Decemb er 31, 2011. Another location, carried over from December 31, 2010, was not drilled in 2011, has

395,800 MCF in proved undeveloped reserves.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves

The standardized measure of discounted future net cash flows is presented below for the two years ended

December 31, 2012.

The future net cash inflows are developed as follows:

• Estimates are made of quantities of proved reserves and the future periods duri ng which they are

expected to be produced based on year

- end economic conditions.

• The estimated future production of proved reserves is priced on the basis of year

- end prices.

• The resulting future gross revenue streams are reduced by estimated future co sts to develop and to

produce proved reserves, based on year

- end estimates. Estimated future development costs by year

are as follows:

2013 $ 2,311,210

2014 1,455,100

2015 22,000

Thereafter 167,200

Total $ 3,955,510

The resulting future net revenue streams are reduced to present value amounts by applying a ten percent

discount.

Disclosure of principal components of the standardized measure of discounted future net cash flows

provides information concerning the factors involved in making the calculation. In addition, the disclosure

of both undiscounted and discounted net cash flows provides a measure of comparing proved oil and gas

reserves both with and without an estimate of producti on timing. The standardized measure of discounted

future net cash flow relating to proved reserves reflects estimated income taxes.

Changes in standardized measure of discounted future net cash flow from proved reserve quantities

This statement discloses the sources of changes in the standardized measure from year to year. The amount

reported as “Net changes in prices and production costs” represents the present value of changes in prices

and production costs multiplied by estimates of proved res erves as of the beginning of the year. The

“accretion of discount” was computed by multiplying the ten percent discount factor by the standardized

measure on a pretax basis as of the beginning of the year. The “Sales of oil and gas produced, net of

product ion costs” are expressed in actual dollar amounts. “Revisions of previous quantity estimates” is

expressed at year

- end prices. The “Net change in income taxes” is computed as the change in present value

of future income taxes.Table of Contents

F

- 33 2012 2011

Future cash inflows $ 18,248,440 19.133,280

Future production costs (6,661,330 ) (7,698,630 )

Future development costs (3,955,510 ) (1,181,010 )

Future income tax expense (2,289,480 ) (3,076,065 )

Future net cash flows 5,342,120 7,177,575

10% annual discount for estimated timing of cash flows (1,404,499 ) (1,619,267 )

Standardized measure of discounted future net cash flows $ 3,937,621 5,558,308

Sales of oil and gas produced, net of production costs $ (344,130 ) (1,130,540 )

Revisions of previous quantity estimates (2,813,520 ) (4,115,420 )

Net changes in prices and production costs (1,158,708 ) (1,068,429 )

Sales of minerals in place

- (307,644 )

Purchases of minerals in place

- -

Extensions, discoveries and improved recovery 1,480,350 1,459,973

Accretion of discount 520,741 688,468

Net change in income tax 694,580 1,342,077

Net decrease $ (1,620,687 ) (3,131,515 )

Future Development Costs

In order to realize future revenues from our proved reserves estimated in our reserve report, it will be

necessary to incur future costs to develop and produce the proved reserves. The following table estimates

the costs to develop and produce our proved reserves in the years 2013 through 2015.

Future development cost of: 2013 2014 2015

Proved developed reserves $ 14,010 $

- $

-

Proved non

- producing reserves 57,100 55,100 22,000

Proved undeveloped reserves 2,240,100 1,400,000

-

Total $ 2,311,210 $ 1,455,100 $ 22,000

Common assumptions include such matters as the real extent and average thickness of a particular reservoir,

the average porosity and permeability of the reservoir, the anticipated future production from existing and

future wells, future development and production costs and the ultimate hydrocarbon recovery

percentage. As a result, oil and gas reserve estimates and discounted present value estimates are frequently

revised in subsequent periods to reflect production da ta obtained after the date of the original estimate. If

the reserve estimates are inaccurate, production rates may decline more rapidly than anticipated, and future

production revenues may be less than estimated.

Additional data relating to Royale Energy 's oil and natural gas properties is disclosed in Supplemental

Information About Oil and Gas Producing Activities (Unaudited), attached to Royale Energy's Financial

Statements, beginning on page F

- 1Table of Contents

F

- 34 Historic Development Costs for Proved Reserves

In each year we expend funds to drill and develop some of our proved undeveloped reserves. The following

table summarizes our historic costs incurred in each of the past three fiscal years to drill and develop

reserves that were classified as proved undeveloped reserves as of December 31 of the immediately

preceding year:

2012 $ 0

2011 $ 1,560,735

2010 $ 0Table of Contents

F

- 35 Exhibit 23.1

Consent of Independent

Registered Public Accounting Firm

We consent to the incorporation by reference in Registration Statement (No. 333

- 163184) filed November

18, 2009 on Form S

- 3 of Royale Energy, Inc. of our report dated April 15, 2013, relating to our audits of the

financial statements, which appear in the Annual Report on Form 10

- K of Royale Energy, Inc. as of

December 31, 2012 and 2011, and for the years then ended.

We also consent to the reference to our firm under the captions “Experts” in the Prospectus, which is part of

the Registr ation Statement.

/s/ Padgett, Stratemann & Co., L.L.P.

Padgett, Stratemann & Co., L.L.P.

San Antonio, Texas

April 15, 2013Table of Contents

F

- 36 Exhibit 23.2

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS

We hereby consent to the inclusion of our report of Royale Energy (the “Company”) dated April 3, 2013, in

the Annual Report on Form 10

- K for the year ended December 31, 2012, of the Company and its

subsidiaries, to be filed with the Securities and Exchange Commission.

We al so consent to the reference to our firm under the captions “Experts” in the Prospectus, which is part of

the Registration Statement.

NETHERLAND, SEWELL & ASSOCIATES, INC.

By: /s/ Danny D. Simmons

Danny D. Simmons, P.E.

President and Chief Operating Officer

Houston, Texas

April 15, 2013

Please be advised that the digital document you are viewing is provided by Netherland, Sewell &

Associates, Inc. (NSAI) as a convenience to our clients. The digital document is intended to be

substantively the same as the original signed document maintained by NSAI. The digital document is

subject to the parameters, limitations, and condit ions stated in the original document. In the event of any

differences between the digital document and the original document, the original document shall control and

supersede the digital document.Table of Contents

F

- 37 Exhibit 23.3

Source Energy Corp.

3555 Santoro Way, Suite A

San Diego, CA 92130

Phone (858) 259

- 2271

Fax (858) 259

- 2273

April 15, 2013

Mr. Stephen Hosmer

Royale Energy Inc.

7676 Hazard Center Drive, Suite 1500

San Diego, CA 92108

Dear Mr. Hosmer:

We hereby consent to the incorporation by re ference in the registration statement (No. 333

- 163184) on Form

S

- 3 of Royale Energy, Inc. (the “Company”) of the reference to Source Energy Corp. and the inclusion of

our report dated February 14, 2013, in the Annual Report on Form 10

- K for the year ended December 31,

2012, of the Company, filed with the Securities and Exchange Commission.

We also consent to the reference to our firm under the captions "Experts" in the Prospectus, which is part of

this Registration Statement.

Source Energy Corp

By: /s/ James Frimodig

Title: PresidentTable of Contents

F

- 38 Exhibit 31.1

I, Donald H. Hosmer, certify that:

1. I have reviewed this report on Form 10

- K of Royale Energy, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report;

3. Base d on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presen ted in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure

controls and procedures (as defined in Exchange Act Rules 13a

- 15(e) and 15d

- 15(e)) and internal control

over financial re porting (as defined in Exchange Act Rules 13a

- 15(f) and 15d

- 15(f)) for the registrant and

have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that mat erial information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared;

b) designed such internal control over finan cial reporting, or caused such internal control over

financial reporting to be designed under our supervision, to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial statements for external purpose s in

accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in

this report our conclusions about the effectiveness of the disclosure controls and proced ures, as of the end of

the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter (t he registrant’s fourth fiscal in the case of an

annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s

internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of

internal control over financial reporting, to the registrant's auditors and the audit committee of the

registrant's board of directors (or persons performing the equivalent functions):

a) all signi ficant deficiencies and material weaknesses in the design or operation of internal control

over financial reporting which are reasonably likely to adversely affect the registrant's ability to record,

process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant's internal control over financial reporting.

Date: April 30, 2013 /s/ Donald H. Hosmer

Donald H. Hosmer, Co

- President and Co

- Chief Executive Officer

Exhibit 31.2Table of Contents

F

- 39 I, Stephen M. Hosmer, certify that:

1. I have reviewed this report on Form 10

- K of Royale Energy, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to

state a material fact necessary to make the statements made, in light of the circumstances under which such

statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this report;

4. The regis trant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure

controls and procedures (as defined in Exchange Act Rules 13a

- 15(e) and 15d

- 15(e)) and internal control

over financial reporting (as defined in Exchange A ct Rules 13a

- 15(f) and 15d

- 15(f)) for the registrant and

have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and

procedures to be designed under our supervision, to ensure that material information relating to the

registrant, including its consolidated subsidiaries, is made known to us by others within those entities,

particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such in ternal control over

financial reporting to be designed under our supervision, to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with generally ac cepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in

this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of

the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that

occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal in the case of an

annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s

internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our mo st recent evaluation of

internal control over financial reporting, to the registrant's auditors and the audit committee of the

registrant's board of directors (or persons performing the equivalent functions)

a) all significant deficiencies and material weaknesses in the design or operation of internal control

over financial reporting which are reasonably likely to adversely affect the registrant's ability to record,

process, summarize and report financial information; and

b) any fraud, whether or not ma terial, that involves management or other employees who have a

significant role in the registrant's internal control over financial reporting.

Date: April 30, 2013 /s/ Stephen M. Hosmer

Stephen M. Hosmer, Co

- President, Co

- Chief Executive Officer a nd Chief

Financial OfficerTable of Contents

F

- 40 Exhibit 32.1

Certification Pursuant to 18 U.S.C. § 1350

The undersigned, Donald H. Hosmer, Co

- President and Co

- Chief Executive Officer of Royale Energy, Inc.,

a California corporation (the "Company"), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906

of the Sarbanes Oxley Act of 2002, hereby certifies that:

(1) the Company's Quarterly Report on Form 10

- K for the period ended December 31, 2012 (the "Report")

fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition

and results of operations of the Company.

Date: April 30, 2013 By: /s/ Donald H. Hosmer

Donald H. Hosmer, Co

- President and Co

- Chief Executive OfficerTable of Contents

F

- 41 Exhibit 32.2

Certification Pursuant to 18 U.S.C. § 1350

The undersigned, Stephen M. Hosmer, Co

- President, Co

- Chief Executive Officer and Chief Financial

Officer of Royale Energy, Inc., a California corporation (the "Company"), pursuant to 18 U.S.C. 1350, as

adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, hereby certifies that:

(1) the Company's Annual Report on Form 10

- K for the period ended December 31, 2012 (the "Report")

fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition

and res ults of operations of the Company.

Date: April 30, 2013 By: /s/ Stephen M. Hosmer

Stephen M. Hosmer, Co

- President, Co

- Chief Executive Officer and

Chief Financial OfficerTable of Contents

F

- 42 Exhibit 99.1

April 3, 2013

Mr. Stephen Hosmer

Royale Energy, Inc.

7676 Hazard Center Drive, Suite 1500

San Diego, California 92108

Dear Mr. Hosmer:

In accordance with your request, we have estimated the proved reserves and future revenue, as of December

31, 2012, to the Royale Energy, Inc. ( Royale) interest in certain oil and gas properties located in California,

Louisiana, Oklahoma, and Texas. We completed our evaluation on or about February 11, 2013. It is our

understanding that the proved reserves estimated in this report constitute appr oximately 90 percent of all

proved reserves owned by Royale. The estimates in this report have been prepared in accordance with the

definitions and regulations of the U.S. Securities and Exchange Commission (SEC) and, with the exception

of the exclusion o f future income taxes, conform to the FASB Accounting Standards Codification Topic

932, Extractive Activities

— Oil and Gas. Definitions are presented immediately following this letter. This

report has been prepared for Royale's use in filing with the SEC; in our opinion the assumptions, data,

methods, and procedures used in the preparation of this report are appropriate for such purpose.

We estimate the net reserves and future net revenue to the Royale interest in these properties, as of

December 31, 201 2, to be:

Net Reserves Future Net Revenue (M$)

Oil Gas Present

Worth

Category (MBBL) (MMCF) Total at 10%

Proved Developed Producing 0.7 796.1 856.2 720.6

Proved Developed Non

- Producing 0.0 1,914.5 3,406.8 2,063.6

Proved Undeveloped 63.2 1,309.6 2,493.3 1,684.1

Total Proved 63.9 4,020.2 6,756.3 4,468.4

Totals may not add because of rounding.

The oil reserves shown include crude oil and condensate. Oil volumes are expressed in thousands of barrels

(MBBL); a barrel is equivalent to 42 United States gallons. Gas volumes are expressed in millions of cubic

feet (MMCF) at standard temperature and pressure bases.F

- 43 The estimates shown in this report are for proved reserves. No study was made to determine whether

probable or possible reserves might be established for these properties. This report does not include any

value that could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped

reserves have been estimated. Reserves categorization conveys the relative degree of certainty; rese rves

subcategorization is based on development and production status. The estimates of reserves and future

revenue included herein have not been adjusted for risk.

Gross revenue is Royale's share of the gross (100 percent) revenue from the properties pr ior to any

deductions. Future net revenue is after deductions for Royale's share of production taxes, ad valorem taxes,

capital costs, and operating expenses but before consideration of any income taxes. The future net revenue

has been discounted at an a nnual rate of 10 percent to determine its present worth, which is shown to

indicate the effect of time on the value of money. Future net revenue presented in this report, whether

discounted or undiscounted, should not be construed as being the fair market value of the properties.

Prices used in this report are based on the 12

- month unweighted arithmetic average of the first

- day

- of

- the

month price for each month in the period January through December 2012. For oil volumes, the average

West Texas Intermed iate posted price of $91.21 per barrel is adjusted by lease for quality, transportation

fees, and regional price differentials. For gas volumes, the average PG&E city

- gate spot price of $3.088 per

MMBTU is used for the California properties and the averag e Henry Hub spot price of $2.757 per MMBTU

is used for all other properties. Gas prices are adjusted by lease for energy content, transportation fees, and

regional price differentials. All prices are held constant throughout the lives of the properties. The average

adjusted product prices weighted by production over the remaining lives of the properties are $84.91 per

barrel of oil and $2.882 per MCF of gas.

Operating costs used in this report are based on operating expense records of Royale. For nono perated

properties, these costs include the per

- well overhead expenses allowed under joint operating agreements

along with estimates of costs to be incurred at and below the district and field levels. As requested,

operating costs for the operated propert ies are limited to direct lease

- and field

- level costs and Royale's

estimate of the portion of its headquarters general and administrative overhead expenses necessary to

operate the properties. Operating costs are held constant throughout the lives of the properties.

Capital costs used in this report were provided by Royale and are based on authorizations for expenditure

and actual costs from recent activity. Capital costs are included as required for workovers, new

development wells, and production equipment. Based on our understanding of future development plans, a

review of the records provided to us, and our knowledge of similar properties, we regard these estimated

capital costs to be reasonable. Our estimates do not include any salvage value f or the lease and well

equipment or the cost of abandoning the properties. It is our understanding that Royale has fully prefunded

accounts that meet or exceed its estimates of abandonment costs for the properties, net of any salvage value.

For the purpo ses of this report, we did not perform any field inspection of the properties, nor did we

examine the mechanical operation or condition of the wells and facilities. We have not investigated possible

environmental liability related to the properties; there fore, our estimates do not include any costs due to such

possible liability.

We have made no investigation of potential gas volume and value imbalances resulting from overdelivery or

underdelivery to the Royale interest. Therefore, our estimates of rese rves and future revenue do not include

adjustments for the settlement of any such imbalances; our projections are based on Royale receiving its net

revenue interest share of estimated future gross gas production.F

- 44 The reserves shown in this report are es timates only and should not be construed as exact quantities. Proved

reserves are those quantities of oil and gas which, by analysis of engineering and geoscience data, can be

estimated with reasonable certainty to be economically producible; probable and possible reserves are those

additional reserves which are sequentially less certain to be recovered than proved reserves. Estimates of

reserves may increase or decrease as a result of market conditions, future operations, changes in regulations,

or ac tual reservoir performance. In addition to the primary economic assumptions discussed herein, our

estimates are based on certain assumptions including, but not limited to, that the properties will be

developed consistent with current development plans, th at the properties will be operated in a prudent

manner, that no governmental regulations or controls will be put in place that would impact the ability of the

interest owner to recover the reserves, and that our projections of future production will prove consistent

with actual performance. If the reserves are recovered, the revenues therefrom and the costs related thereto

could be more or less than the estimated amounts. Because of governmental policies and uncertainties of

supply and demand, the sales r ates, prices received for the reserves, and costs incurred in recovering such

reserves may vary from assumptions made while preparing this report.

For the purposes of this report, we used technical and economic data including, but not limited to, well lo gs,

geologic maps, seismic data, well test data, production data, historical price and cost information, and

property ownership interests. The reserves in this report have been estimated using deterministic methods;

these estimates have been prepared in a ccordance with the Standards Pertaining to the Estimating and

Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE

Standards). We used standard engineering and geoscience methods, or a combination of methods, including

performance analysis, volumetric analysis, and analogy, that we considered to be appropriate and necessary

to categorize and estimate reserves in accordance with SEC definitions and regulations. A substantial

portion of these reserves are for b ehind

- pipe zones and undeveloped locations; such reserves are based on

estimates of reservoir volumes and recovery efficiencies along with analogy to properties with similar

geologic and reservoir characteristics. As in all aspects of oil and gas evaluati on, there are uncertainties

inherent in the interpretation of engineering and geoscience data; therefore, our conclusions necessarily

represent only informed professional judgment.F

- 45 The data used in our estimates were obtained from Royale, public dat a sources, and the nonconfidential files

of Netherland, Sewell & Associates, Inc. (NSAI) and were accepted as accurate. Supporting work data are

on file in our office. The titles to the properties have not been examined by NSAI, nor has the actual degree

or type of interest owned been independently confirmed. The technical persons responsible for preparing

the estimates presented herein meet the requirements regarding qualifications, independence, objectivity,

and confidentiality set forth in the SPE Sta ndards. We are independent petroleum engineers, geologists,

geophysicists, and petrophysicists; we do not own an interest in these properties nor are we employed on a

contingent basis.

Sincerely,

NETHERLAND, SEWELL & ASSOCIATES, INC.

Texas Registered Engineering Firm F

- 2699

By: /s/ C.H. (Scott) Rees III

C.H. (Scott) Rees III, P.E.

Chairman and Chief Executive Officer

By: /s/ C. Ashley Smith By: /s/ Mike K. Norton

C. Ashley Smith, P.E. 100560 Mike K. Norton, P.G. 441

Vice President Senior Vice President

Date Signed: April 3, 2013 Date Signed: April 3, 2013

CAS:MSS

Please be advised that the digital document you are viewing is provided by Netherland, Sewell

& Associates, Inc. (NSAI) as a convenience to our clients. The digital document is intended to be

substantively the same as the original signed document maintained by NSAI. The digital document is

subject to the parameters, limitations, and conditions stated in the original document. In the event of any

differences between the digital document and the original document, the original document shall control and

supersede the digital document.F

- 46 Exhibit 99.2

Source Energy Corp.

3555 Santoro Way, Suite A

San Diego, CA 92130

February 12, 2013

Mr. Stephen Hosmer

Royale Energy, Inc.

7676 Hazard Center Drive, Suite 1500

San Diego, California 92108

Dear Mr. Hosmer:

In accordance with your request, I have estimated the proved reserves and future revenue, as of December

31, 2012, to the Royale Energy, Inc. (Royale) interest in certain oil and gas properties located in Grand

County, Utah, as listed in the following tables. I completed my evalu ation on or about the date of this letter.

It is my understanding that the proved reserves estimated in this report constitute approximately 10 percent

of all proved reserves owned by Royale. In my opinion the estimates in this report have been prepared in

accordance with the definitions and guidelines of the U.S. Securities and Exchange Commission (SEC) and,

with the exception of the exclusion of future income taxes, conform to the FASB Accounting Standards

Codification Topic 932, Extractive Activities

- Oil and Gas. Definitions employed within are taken from

Netherland, Swell & Associates and are attached.

As presented in the accompanying summary projections I estimate the net reserves and future net revenue to

the Royale interest in these properties, as o f December 31, 2012, to be:

Net

Reserves Future Net Revenue

Category Gas (MCF) Total Present Worth

@10%

Proved Developed

Producing 434,990 $ 841,720 $ 710,160

Proved Developed

Non

- Producing 42,790 $ 33,570 $ 28,850

Total Proved 477,780 $ 875,290 $ 739,010

Gas volumes shown above are expressed m thousands of cubic feet (MCF) at standard temperature and

pressure basis.

The estimates shown in this report are for proved reserves. No study was made to determine whether

probable or possible reserves might be established for these properties. Reserves categorization conveys the

relative degree of certainty; reserves subcategorization is based on development and production status. The

estimates of reserves and future revenue included herein have not been adjusted for risk. As shown in the

attached table s, for each reserves category this report includes a summary projection of reserves and

revenue along with one

- line summaries of basic data, reserves and economics by well.F

- 47 Gross revenue shown in this report is Royale's share of the gross (100 percent) revenue from the properties

prior to any deductions. Future net revenue is after deductions for Royale's share of production taxes, ad

valorem taxes, capital costs, and operating expenses but before consideration of any income taxes. The

future net revenu e has been discounted at an annual rate of 10 percent to determine its present worth, which

is shown to indicate the effect of time on the value of money. Future net revenue presented in this report,

whether discounted or undiscounted, should not be constr ued as being the fair market value of the

properties.

Gas prices used in this report were provided by Royale and are based on the 12

- month unweighted

arithmetic average of the first

- day

- of

- the

- month actual sales price for the period January through Decemb er 2012, or $2.59 per MMBTU. Prices are held constant throughout the lives of the properties.

Lease and well operating costs used in this report are based on operating expense records of Royale. As

requested, lease and well operating costs for the operate d properties are limited to direct lease

- and field

level costs and Royale's estimate of the portion of its headquarters general and administrative overhead

expenses necessary to operate the properties. Lease and well operating costs are held constant thro ughout the

lives of the properties. Capital costs are included as required for workovers. The future capital costs are held

constant to the date of expenditure.

I have performed a field inspection and generally concluded the mechanical operation and condi tion of the

wells should not be inconsistent with the attached forecast. I did not observe any environmental liability

related to the properties and my estimates do not include any costs due to any such liability. Also my

estimates do not include any salva ge value for the leases and well equipment or the cost of abandoning the

properties. It is my understanding that Royale has fully prefunded accounts that meet or exceed its estimates

of abandonment costs for the properties, net of any salvage value.

I hav e made no investigation or inclusion of potential gas volume and value imbalances resulting from over

delivery or under

- delivery to the Royale interest. Therefore, my estimates of reserves and future revenue do

not include adjustments for the settlement of any such imbalances; my projections are based on Royale

receiving its net revenue interest share of estimated future gross gas production.

The reserves shown in this report are estimates only and should not be construed as exact quantities. Proved

reserv es are those quantities of oil and gas which, by analysis of engineering and geoscience data, can be

estimated with reasonable certainty to be economically producible. Estimates of reserves may increase or

decrease as a result of market conditions, future operations, changes in regulations, or actual reservoir

performance. In addition to the primary economic assumptions discussed herein, my estimates are based on

certain assumptions including, but not limited to, that the properties will be developed consis tent with

current development plans, that the properties will be operated in a prudent manner, that no governmental

regulations or controls will be put in place that would impact the ability of the interest owner to recover the

estimated amounts, and that my projections of future production will prove consistent with actual

performance. If the reserves are recovered, the revenues therefrom and the costs related thereto could be

more or less than the estimated amounts because of governmental policies and un certainties of supply and

demand, the sales rates, prices received for the reserves, and costs incurred in recovering such reserves may

vary from assumptions made while preparing this report.

For the purposes of this report, I used technical and economic data including, but not limited to, well logs,

geologic maps, seismic data, well test data, production data, historical price and cost information, and

property ownership interests

. The reserves in this report have been estimated using deterministic methods ;

these estimates have been prepared in accordance with the Standards Pertaining to the Estimating and

Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE

Standards). I used standard en gineering and geoscience methods, or a combination of methods, including

performance analysis, volumetric analysis, and analogy, that I considered to be appropriate and necessary toF

- 48 categorize and estimate reserves in accordance with SEC definitions and re gulations. As in all aspects of oil

and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geoscience data;

therefore , my conclusions necessarily represent only informed professional judgment.

The data used in my es timates were obtained from Royale and were accepted as accurate. Supporting work

data are on file in my office. The titles to the properties were not been examined by me nor has the actual

degree or type of interest owned been independently confirmed. I am an independent petroleum engineer

and do not own an interest in these properties and I am not employed by Royale on a contingent basis.

Sincerely,

Source Energy Co rp.

James Frimodig

President