SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549

                                     FORM 10-KSB
                    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1996      Commission File No. 0-22750

                                  ROYALE ENERGY, INC.
                    (Name of Small Business Issuer in its charter)

          
       California                      33-0224120
       (State or other                (I.R.S. Employer
       jurisdiction of                Identification No.)
       incorporation or 
       organization)
       
                       7676 Hazard Center Drive, Suite 1500
                                 San Diego, CA 92108
                      (Address of principal executive offices)
                     Issuer's telephone number:     619-297-8505

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
                                (Title of Class)

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

Check if there is no disclosure of delinquent filers in response 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-KSB or any amendment to
this Form 10-KSB. [__]

State issuer's revenues for its most recent fiscal year:  $9,997,594.

At March 3, 1997, there were outstanding 2,722,530 shares of registrant's
Common Stock held by non-affiliates, with an aggregate market value of
approximately $14,021,030, based on the closing Nasdaq price on that date.

At March 3, 1997, there were outstanding a total of 3,856,862 shares of
registrant's Common Stock.

         DOCUMENTS INCORPORATED BY REFERENCE:  None

Transitional Small Business Disclosure Format (check one):  Yes [__]; No [X]


            Exhibit Index appears on page 25.
                                  
<PAGE>  2                                 
                                  TABLE OF CONTENTS


          PART I..........................................................1
               Item 1.Description of Business.............................1
               Item 2.Description of Property.............................5
               Item 3.Legal Proceedings...................................9
               Item 4.Submission of Matters to a Vote of Security Holders10

          PART II........................................................10
               Item 5.Market Price of the Company's Common Stock and
                    Related Stockholder Matters..........................10
               Item 6.Management's Discussion and Analysis of Financial
                    Condition and Results of Operations..................11
               Item 7.Financial Statements and Supplementary Data........15
               Item 8.Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure..................15

          Part III.......................................................15
               Item 9.Directors, Executive Officers, Promoters and Control
                    Persons, Compliance with Section 16(a) of the Exchange
                    Act..................................................15
               Item 10.Executive Compensation............................18
               Item 11.Security Ownership of Certain Beneficial Owners and
                    Management...........................................20
               Item 12.Certain Relationships and Related Transactions....23
               Item 13.Exhibits, Lists, and Reports on Form 8-K..........25
               Signatures................................................27

          Financial Statements...................................       F-1

                                       ii
<PAGE>  3                                 
                                 ROYALE ENERGY, INC.

          PART I

          ITEM 1.  DESCRIPTION OF BUSINESS

          Royale Energy, Inc. (the "Company"), is an independent oil and
          natural gas producer.  The Company's principal lines of business
          are the 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
          the Company.  The Company owns wells and leases in major
          geological basins located mainly in California.  The Company
          offers fractional working interests and seeks to minimize the
          risks of oil and gas drilling by selling multiple well drilling
          ventures which do not include the use of debt financing.  The
          Company was incorporated in California as Royale Energy Funds,
          Inc., in 1986 and commenced operations in 1988.  In 1994 its name
          was changed to Royale Energy, Inc.  Since February 25, 1997,
          Common Stock of the Company has been traded on the Nasdaq
          National Market System; prior to that date, it was traded on the
          Nasdaq Small Cap Market.  On February 15, 1997, the Company had
          11 full time employees.

          During the fiscal year ended December 31, 1996, the Company
          continued its exploration and development of natural gas
          properties in northern California.  The Company drilled nine
          wells in 1996, of which it elected to complete five as
          commercially productive wells.  Four wells drilled in 1996 were
          plugged and abandoned as dry holes.  The Company's estimated
          total natural gas reserves rose from approximately 9.6 Bcf  at
          January 1, 1996 to approximately 12.9 Bcf at January 1, 1997.


          Plan of Business

          The Company is engaged in the acquisition of interests in oil and
          natural gas reserves by sponsoring public and private joint
          ventures.  Management believes that the Company's shareholders
          are better served by diversification and limitation of total
          exposure in individual drilling projects.  For this reason, the
          Company invites other investors to participate in the Company's
          drilling projects.  Through its participation in joint ventures,
          the Company can acquire interests and develop oil and natural gas
          properties with limited expense and risk and still receive an
          interest in the revenues and reserves produced from these
          properties.

          After acquiring the leases or lease participation, the Company
          drills or participates in the drilling of developmental and
          exploratory oil and natural gas wells on its property at its own
          cost, and/or finances part of the drilling cost by selling
          fractional interests in undeveloped wells.  From inception
          through December 31, 1996, the Company has sold fractional
          interests to accredited investors who have paid the Company
          approximately $16,256,712 for the drilling, completion and
          enhancement of 55 wells.  Of these 55 wells, 42 were deemed
          commercially productive oil or natural gas wells.  As of December
          31, 1996, the Company had recorded $1,504,041 as a current

                                       1
<PAGE>  4          
          liability for the Company's obligation to drill four additional
          wells in which the Company has sold fractional interests.

          When the Company sells fractional interests to raise capital to
          drill oil and natural gas wells, the Company generally 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, if the actual cost to drill and complete wells
          is less than the amount paid by the interest holders, the Company
          retains the balance.  If the drilling and completion costs exceed
          the amount paid by the fractional interest holders to drill the
          wells and the Company participates as a working interest owner,
          the excess is capitalized as the cost of the Company's working
          interest.

          When the Company receives funds from an investment in a Turnkey
          Drilling Investment sold by it, a percentage of the invested
          funds are used by the Company to prepay lease costs, intangible
          drilling costs, and other costs as required to allow the drilling
          project to proceed without delay.  These funds are non-refundable
          once the investment has been made.  The non-refundable portion of
          the total Turnkey Drilling Investment is based on a percentage
          calculated by estimating the pre-drilling costs as a percentage
          of total drilling costs for a particular investment.  The Company
          recognizes the non-refundable portion of the total investment as
          revenue and the related pre-drilling costs are expensed.  The
          Company records the remaining funds from the sale of working
          interests as income at the commencement of drilling, and carries
          its obligation to expend the remaining unexpended funds for
          drilling wells on behalf of the investors as a current liability.
          See, Note 1 to the Company's Consolidated Financial Statements.
          The Company maintains internal records of the expenditure of each
          investor's funds for drilling projects and maintains a separate
          bank account for unexpended drilling funds.

          For the years ended December 31, 1996 and 1995, the Company
          reported gross revenues in the amounts of $4,775,175 and
          $4,091,049,  respectively, in connection with the drilling of
          wells on a turnkey contract basis, which represents  47.8% and
          49.1% of the Company's total revenues for those years.  These
          amounts are offset by drilling expenses and development costs of
          $1,530,597 and $1,520,429, respectively.  The Company hires, in
          addition to its own engineering staff, independent contractors to
          drill, test, complete and equip the wells that it drills.

          Wells completed by the Company are generally operated by the
          Company.  Prior to December 1995, the Company's wells were
          operated by a wholly owned subsidiary, Royale Operating Company,
          but in December 1995 Royale Operating Company was dissolved and
          its operations were assumed by the Company.  As operator, the
          Company receives fees and expense reimbursements set by industry
          standards from the owners of fractional interests in the wells.
          For the years ended December 31, 1996, and 1995, the Company (and
          its former subsidiary) earned gross revenues in the amounts of
          $329,397 and $215,993, from operation of the wells, which
          represent 3.3% and 2.6% of the Company's total revenues on a
          consolidated basis for those years, respectively.  As of January
          1, 1997, the Company is the operator of 26 natural gas wells on
          properties leased by the Company in the Sacramento Basin in
          California.

                                       2
<PAGE>  5          
          For the years ended December 31, 1996, and 1995, the Company had
          oil and natural gas sales from production of its wells in the
          amounts of $1,267,919 and $743,079, respectively, which
          represents 12.7% and 8.9%, of the Company's total revenues for
          those years.

          Prior to December 1996, the Company purchased natural gas on a
          spot basis from wells operated by the Company and from
          unaffiliated producers and resold the gas to consumers in the
          open market.  The purchasers were mainly utilities and
          manufacturers located in California.  This was essentially a
          brokerage operation which generates a large volume of sales
          revenue at small profit margins.  Prior to 1996, these operations
          were conducted through a wholly owned subsidiary, Royale Natural
          Gas Marketing, Inc. ("RNGM"), the operations of which were
          discontinued in the first quarter of 1996 when the Company took
          over this business directly.  In December 1996, the Company's gas
          marketing operations were discontinued.  The Company (including
          RNGM) recorded gas distribution sales of $3,625,103 and
          $3,277,978 in the years ended December 31, 1996 and 1995,
          respectively.  The Company recorded cost of gas distribution
          sales of $3,629,991 $3,204,261 in fiscal years 1996 and 1995,
          respectively.


          Affiliated Entities

          On December 31, 1996, Royale Petroleum Corporation ("RPC") owned
          31.47% of the Company's Common Stock (including shares which RPC
          had the right to acquire upon the exercise of warrants which it
          held on that date).  RPC is a holding company which is owned
          equally by Donald H. Hosmer and Stephen M. Hosmer, who are
          brothers.  Donald H. Hosmer is president and director of the
          Company, and Stephen Hosmer is chief financial officer and
          director of the Company.  Donald H. and Stephen M. Hosmer are
          sons of Harry E. Hosmer, chairman of the Company's board of
          directors.  See, Security Ownership of Certain Beneficial Owners
          and Management.  RPC is a predecessor and affiliate of the
          Company.  RPC is a Delaware corporation formed in 1985.

          During 1996, the Company liquidated two former affiliates, Royale
          Energy Corporation, a Delaware corporation, and Royale Energy
          Company, a California corporation.  In 1996, the Company also
          dissolved two limited partnerships for which Royale Energy
          Company had formerly acted as a general partner.

          The Company had no subsidiaries at December 31, 1996.  During
          1996, the Company sold one wholly owned subsidiary, Royale
          Covenant Securities Corporation, and discontinued the operations
          of another wholly owned subsidiary, RNGM.  See, Management's
          Discussion and Analysis of Results of Operations.

                                       3
<PAGE>  6
          Competition, Markets and Regulation

          Competition

          The exploration and production of oil and natural gas is an
          intensely competitive industry.  The sales of securities
          including interests in oil and gas programs such as those the
          Company sells is also very competitive.  The Company 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, many of which companies are substantially
          larger than the Company.


          Markets

          The quantities of, and price obtainable for, oil and natural gas
          production from the Company's oil and natural gas properties, are
          affected by market factors beyond the Company's control.  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 production; 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.  There can be no assurance that oil and
          natural gas prices will not increase or decrease in the future,
          thereby increasing or decreasing the revenues that the Company
          receives from its oil and natural gas sales.


          Regulation

          Environmental Regulation - 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 adversely affect the business
          of the Company.  These laws and regulations may require: the
          acquisition of a permit by operators before drilling commences;
          prohibition of drilling activities on certain lands lying within
          wilderness areas or where pollution arises; and imposition of
          substantial liabilities for pollution resulting from drilling
          operations, particularly operations in offshore waters or on
          submerged lands.  Compliance with such legislation and
          regulations, together with any penalties resulting from
          noncompliance therewith, may also increase the cost of oil and
          natural gas development and production.  Certain of these costs
          may ultimately be borne by the Company.  The Company does not
          presently anticipate that compliance with federal, state and
          local environmental regulations will have a material adverse
          effect on capital expenditures, earnings or the competitive
          position of the Company in the oil and natural gas industry;
          however, since these laws and regulations change frequently, the
          costs of the Company's compliance with existing and future
          environmental regulations cannot be predicted.

                                       4
<PAGE>  7
          Federal Regulation of Natural Gas - The transportation and sale
          of natural gas in interstate commerce is regulated by agencies of
          the federal government.  The following discussion is intended
          only as a summary of the principal statutes, regulations and
          orders that may affect the Company's production and sale of
          natural gas.  This summary should not be relied upon as a
          complete review of applicable natural gas regulatory provisions.

          FERC Order No. 500 - In 1989, the Federal Energy Regulatory
          Commission ("FERC") adopted in final form Order No. 500 affecting
          the transportation and marketability of natural gas.
          Traditionally, natural gas has been sold by producers to pipeline
          companies, which then resold the natural gas to end-users.  FERC
          Order No. 500 alters this market structure by requiring
          interstate pipelines that transport natural gas for others to
          provide transportation service to producers, distributors and all
          other shippers of natural gas on a nondiscriminatory, "first-
          come, first served" basis ("open access transportation"), so that
          producers and other shippers can sell natural gas directly to
          end-users.  FERC Order No. 500 contains additional provisions
          intended to promote greater competition in natural gas markets.
          FERC Order No. 500 has been judicially criticized, and remains
          subject to judicial review and requests for rehearing.

          State Regulations - Production of oil and natural gas from the
          Company's operations is affected to some degree by state
          regulations.  Many states in which the Company operates have
          statutory provisions regulating the production and sale of oil
          and natural gas, including provisions regarding deliverability.
          Such statutes, and the regulations promulgated in connection
          therewith, are generally intended to prevent waste of oil and
          natural gas and to protect correlative rights to produce oil and
          natural gas produced by assigning allowable rates of production
          to each well or proration unit.

          The preceding discussion of regulation of the oil and natural gas
          industry is not intended to constitute a complete discussion of
          the various statutes, rules, regulations or governmental orders
          to which the Company's operations may be subject.


          ITEM 2.  DESCRIPTION OF PROPERTY

          Since 1993, the Company has concentrated on development of
          properties in the Sacramento Basin of Northern California.  In
          1996, the Company drilled five commercially productive gas wells
          and four dry holes in Northern California.  In 1995, the Company
          drilled six commercially productive gas wells and two dry holes
          in Northern California.  The Company also owns interests in 16
          existing wells in Northern California as a result of purchases of
          producing properties during 1994.  The Company also owns proved,
          undeveloped reserves in the Fort Worth Basin in Texas, as well as
          other interests in properties in Texas and Oklahoma in connection
          with joint ventures in which the Company is a participant but is
          not the operator.

          Following industry standards, the Company generally acquires oil
          and natural gas acreage without warranty of title except as to
          claims made by, through, or under the transferror.  In these cases
          
                                       5
<PAGE>  8      
          due diligence as to title is attempted prior to
          acquisition, but there are no assurances that losses will not
          result 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 interests and contractual obligations as are
          customary within the oil and natural gas industry.

          The following is a discussion of the Company's significant oil
          and natural gas properties.  Reserves at January 1, 1997, for
          each property discussed below, have been determined by Richard
          Stephen Schuster, Professional Engineer in accordance with his
          report dated February 25, 1997 (the most recent report
          available).


          Northern California

          The Company owns lease interests in 10,986.32 gross (6,906.78
          net) acres in the Sacramento and San Joaquin Basins in Northern
          California.  In 1994 the Company purchased 16 wells in Northern
          California from Arkoma Production of California for $2,238,640,
          of which $1,065,000  was borrowed from private lending sources.
          That note was repaid in full in mid 1996, a little more than two
          years after the debt was incurred.  In addition, the Company
          participated in drilling one commercially productive gas well in
          Northern California in 1994 and drilled six commercially
          productive gas wells in 1995 and five commercially productive
          wells in 1996 in this area.  At December 31, 1996, the Company
          operated 26 wells in the Sacramento Basin in Northern California.
          At the end of 1996, the Company's estimated total reserves in
          Northern California were approximately  10.8 Bcf, according to
          the Company's independently prepared reserve report.  The Company
          expects that its drilling program will continue to concentrate on
          Northern California properties in 1997.

          Hood County, Texas

          The Company owns lease interests in 1,494.7 gross (1,494.7 net)
          acres in the Fort Worth Basin in Hood County, Texas, which
          contained estimated proved, undeveloped reserves at January 1,
          1997, of 2,100,039 Mcf of natural gas, according to the Company's
          independently prepared reserve report.  The lease interests and
          undeveloped reserves in Hood County were retained by the Company
          after it sold lease interests in nine producing wells during the
          second quarter of 1996.  See, Management's Discussion and
          Analysis of Financial Condition and Results of Operations.


          Developed and Undeveloped Leasehold Acreage

          As of December 31, 1996, the Company owned leasehold interests in
          the following developed and undeveloped properties in both gross
          and net acreage.
                                       
                                       6
<PAGE>  9         
           
<TABLE>
<CAPTION>         
                        Developed                Undeveloped
                    Gross        Net          Gross        Net
                    Acres        Acres        Acres        Acres
<S>                 <C>          <C>          <C>          <C>
California          4,867.54     1,638.18     6,118.78     5,268.60
Texas               1,386.30     1,188.81     1,494.65     1,494.65
All other states    2,421.00       216.00         0            0

Total               8,674.84     3,042.98     7,613.43     6,763.25
</TABLE>

          Drilling Activities

          The following table sets forth the Company's drilling activities
          during the years ended December 31, 1994, 1995, and 1996.  All
          wells are located in the Continental U.S., in California, Texas,
          Oklahoma, and North Dakota.

<TABLE>
<CAPTION>
                        Gross Wells (b)                Dry Wells
                        -----------------------------  ---------------------
Year  Type of Well (a)  Total  Producing (c)  Dry (d)  Producing (c)  Dry (d)
<S>   <S>               <C>    <C>            <C>      <C>            <C>
1994  Exploratory       0      0              0        0              0
      Developmental     6      5              1        0.4416         0.9775

1995  Exploratory       1      0              1        0              0.1000
      Developmental     7      6              1        1.2360         0.1762

1996  Exploratory       1      0              1        0              0.3263
      Developmental     8      5              3        1.2573         1.0383
</TABLE>

          (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
               the Company owns an interest.  The Company's interest in
               these wells may range from 1% to 100%.

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

                                       7
<PAGE>  10
          (d)  A dry well is a well that is not deemed capable of producing
               hydrocarbons in paying quantities.
          
          As of December 31, 1996, the Company had 3 gross (0.058 net)
          oil wells and 24 gross (4.3 net) currently producing natural gas
          wells.


          Production

          The following table summarizes, for the periods indicated, the
          Company'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 10 to 1 ratio of the price per barrel of oil to the
          price per Mcf of natural gas.  "Net" production is production
          that is owned by the Company either directly or indirectly
          through partnership or joint venture interests produced to its
          interest after deducting royalty, limited partner or other
          similar interests.  The Company 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.

<TABLE>                     
<CAPTION>
                12 Months   12 Months   12 Months
                Ended       Ended       Ended
                12/31/96    12/31/95    12/31/94
                --------    --------    --------
<S>             <C>         <C>         <C>
NET VOLUME           
Oil (Bbl)             76         543         261
Gas (Mcf)        705,926     576,894     621,431
Mcfe             706,686     582,324     624,041
AVERAGE SALES PRICE
Oil (Bbl)         $16.07      $15.63      $15.00
Gas (Mcf)          $1.79       $1.41       $1.72
Net Production
Costs & Taxes   $260,789    $373,859    $395,139
Lifting Costs      $0.37       $0.64       $0.63
</TABLE>
                     
                                       8
<PAGE>  11
          Net Proved Oil and Natural Gas Reserves

          As of January 1, 1997, the Company had proved developed reserves
          of 6,978,805 Mcf of natural gas and 1,647 barrels of oil, and
          total proved reserves of 12,909,322 Mcf of natural gas and 1,647
          barrels of oil on all properties leased by the Company.  Proved
          developed reserves are those reserves which are expected to be
          recovered from already producing completion intervals and are
          currently producing to a market.  Total proved reserves include
          proved developed reserves and those reserves that are estimated
          to be recoverable from new wells on undrilled acreage or from
          existing wells where a major capital expenditure is required for
          additional completion.

          Oil and gas reserve estimates and the discounted present value
          estimates associated therewith are based on numerous engineering,
          geological and operational assumptions that generally are derived
          from limited data.  Common assumptions include such matters as
          the areal extant 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
          data 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 the Company's oil and natural gas
          properties is disclosed in Supplemental Information About Oil and
          Gas Producing Activities (Unaudited), attached to the Company's
          consolidated financial statements which are part of this
          document.  The oil and natural gas reserve information disclosed
          in the supplement to the financial statements are based upon the
          reserve reports for the years ended December 31, 1996 and 1995,
          prepared by an independent reserve engineering consultant,
          Richard Stephen Schuster, P.E.


          ITEM 3.  LEGAL PROCEEDINGS

          On  September 30, 1994, a suit was filed in U.S. District Court
          for the Northern District of Texas against the Company, its
          president, executive vice president, a former officer of the
          Company, and two other members of the board of directors,
          alleging violations of the registration and anti-fraud provisions
          of federal securities laws, the Texas Securities Act, and various
          other related causes of action arising from sales of undivided
          working interests in oil and gas leases in Hood County, Texas, to
          one individual in 1990 and 1991, and seeking damages of $89,973
          plus interest and attorney fees.  The case was transferred to the
          Southern District of California in March 1996.  Discovery has
          been completed and the case has been set for trial beginning June
          2, 1997.  The Company's management deny any liability and intend
          to vigorously contest the suit.

          On March 13, 1995, the same plaintiff that filed the suit described
          in the previous paragraph, filed suit against the same defendants
          in State District Court in Hood County, Texas, alleging nearly
          
                                       9
<PAGE>  12        
          identical causes of action and damages as were
          alleged in the state claims in the Northern District of Texas
          suit. This case was dismissed in 1996, on motion by the Company.
          The Company incurred no liability in this action.

          On June 13, 1995, a suit was filed in Federal District Court for
          the Middle District of Florida against the Company and the board
          of directors, by Pyramid Holdings, Inc., Daniel Allen, Gaming
          Ventures, L.L.C., and S.C. Marketing, Inc., alleging violations
          of the registration and anti-fraud provisions of federal and
          state securities laws and other related causes of action arising
          from sales of 170,000 shares of Common Stock of the Company in a
          private placement in May 1994, and seeking damages of $1,020,000,
          punitive damages of $5,000,000, plus interest and legal fees.
          This suit was settled in October 1996.  As part of the
          settlement, the Company agreed to repurchase 37,500 shares of its
          common stock at a total price of $187,500 in no more than
          eighteen monthly installments beginning December 1, 1996.  See,
          Note 15 to the Company's Consolidated Financial Statements.

          During 1996 the Company was also involved in other legal
          proceedings of a routine nature, incidental to the conduct of its
          business.


          ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          During the fourth quarter of fiscal 1996, no matters were
          submitted to a vote of the security holders of the Company.

          PART II

          ITEM 5.  MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED
               STOCKHOLDER MATTERS

          As of December 31, 1996, a total of 3,834,049 Shares of the
          Company's Common Stock were issued and outstanding which were
          held by approximately 1,179 shareholders and of which 2,239,545
          Shares were eligible for public trading, according to the records
          of the Company's transfer agent.

          On February 25, 1997, the Company's Common Stock began trading on
          the Nasdaq National Market System.  From October 1994 until
          February 24, 1997, the Company's Common Stock was traded on the
          Nasdaq Small Cap Market.  On February 25, 1997, eleven NASD
          member firms were making a market in the Company's Common Stock.
          The following table reflects high and low bid price per share
          quotations in the Nasdaq Small Cap Market from January 1995
          through December 1996  The quotations reflect high and low
          closing sale prices.

                                       10
<PAGE>  13               
<TABLE>
<CAPTION>
        1st Quarter      2nd Quarter      3rd Quarter     4th Quarter
        High    Low      High   Low       High   Low      High   Low
        ----    ----     ----   ----      ----   ----     ----   ----
<S>     <C>     <C>      <C>    <C>       <C>    <C>      <C>    <C>
1995    3 1/4   1 5/8    2 5/8  1 11/16   2 3/8  1 5/8    2 1/2  1 17/32
1996    2 3/4   1 3/4    3 3/4  2 7/8     3 5/8  2 3/4    5      4 1/4
</TABLE>

          Dividends

          The Company has not declared or paid any dividends to its common
          shareholders and does not presently intend to do so.  The future
          determination as to the payment of dividends will depend on the
          Company's financial condition and other factors deemed relevant
          by the Company's board of directors.


          ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                   CONDITION AND RESULTS OF OPERATIONS

          The following discussion should be read in conjunction with the
          Company's Financial Statements and Notes thereto and other
          financial information relating to the Company included elsewhere
          in this document.

          The most significant factors affecting the Company's results of
          operations are (i) the increase in the sales price of natural
          gas, (ii) recording of turnkey drilling revenues and the
          associated drilling expense, (iii) the containment of costs and
          expenses on a company wide basis, and (iv) the increase in
          natural gas reserves owned by the Company.

          The Company's estimated total proved, developed natural gas
          reserves rose from 4,121,616 Mcfe at January 1, 1996 to 6,978,275
          Mcfe at January 1, 1997, a 69% increase, while the Company's
          estimated total natural gas reserves increased from 9,607,860
          Mcfe at January 1, 1996, to 12,925,792 Mcfe at January 1, 1997, a
          34.5% increase.  The Company's management attributes this
          increase to the successful drilling of five commercially
          productive wells during 1996.

          CHANGES IN OPERATIONS DURING 1996

          During 1996, the Company reevaluated its non-core business
          operations with a view to disposing of less profitable
          operations.  As a result of its reevaluation, the Company took
          the following steps.  In the second quarter of 1996, the Company
          sold its subsidiary, Royale Covenant Securities Corporation,
          which resulted in a $18,781 gain.   During the fourth quarter
          1996, the Company determined not to pursue the creation of the
          previously proposed Royale Energy Income Trust and, therefore,
          wrote off $125,250 which it had accumulated as organizational
          expenses for the Trust.  Also during the fourth quarter of 1996,
          the Company discontinued its natural gas brokerage operations
          through the Royale Natural Gas Marketing Division.  The Company's
          management believes that disposition and discontinuance of these
          operations will enable management to better
          
                                       11
<PAGE>  14        
          focus on the main business of the Company, of developing and 
          operating natural gas and oil wells.


          RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31,
          1996, AS COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 1995

          For the year ended December 31, 1996, the Company achieved a net
          operating profit of $1,773,144, a $959,093 or 117.8% improvement
          over the net operating profit in 1995 of $814,051.  The Company's
          management attributes this improvement to increased revenues from
          sales of natural gas and turnkey drilling, and cost containment
          procedures.  For fiscal 1996, the Company reported a net profit
          of $1,398,807, compared to the net profit of $544,643 in 1995.
          Total revenues for the year ended December 31, 1996 were
          $9,997,594, which was an increase of $1,656,495 or 19.9%, when
          compared to 1995.  The increase in total revenues can be
          primarily attributed to increases in both natural gas sales and
          turnkey drilling revenues.

          Oil and gas revenues for the year ended December 31, 1996 were
          $1,267,919 compared to $743,079 for the same period in 1995,
          which represents a $524,840 or 70.6% increase.  This increase in
          revenues was mainly due to the increase in production and price
          the Company received for its natural gas production.  The net
          sales volume for the year ended December 31, 1996, was 705,926
          Mcf with an average price of $1.79 per mcf, versus 576,894 Mcf
          with an average price of $1.41 per Mcf for the same period in
          1995.  The Company's net sales volume for oil production was 76
          barrels with an average price of $16.07 per Bbl for the period
          ended December 31, 1996, compared to 543 barrels at an average
          price of $15.63 per Bbl for the same period in 1995.

          During the first quarter of 1995, the Company sold production
          interests in producing properties, which were a continuation of
          the 1994 drilling programs, in the amount of $13,000, while
          recording costs of these sales of $9,285.  The Company did not
          record any sales or costs of this type during 1996.

          The Company's oil and gas production costs, which are comprised
          of lease operating expenses, decreased by $110,289, or 24.5%, to
          $340,331 for the year ended December 31, 1996, from $450,620 for
          the same period in 1995.  This decrease in costs can be
          attributed to operating efficiencies realized by changes made in
          compression facilities made during 1995.  For fiscal 1996, the
          Company's gross margins on oil and gas production were 73.2%,
          compared to 39.4% in 1995.  The increase in gross margin was due
          to both the increase in the price of natural gas during the
          latter part of 1996 and to the decrease in associated production
          costs.

          For the year ended December 31, 1996, turnkey drilling revenues
          increased $684,126, from $4,091,049 to $4,775,175, or 16.7% for
          the year.  The Company also experienced a $10,168 or 0.67%
          increase in drilling and development costs from $1,520,429 in
          1995 to $1,530,597 in 1996.  This increase in turnkey revenues
          and expenses was due to the Company's drilling of nine wells,
          five of which were commercially productive, that were sold to
          outside parties in 1996, versus six productive wells and two dry
          holes in 1995.  The Company's gross margins, or profits, on
          drilling depend on the Company's ability to accurately estimate
          the costs associated with the development
          
                                       12
<PAGE>  15        
          of projects in which it sells working interests to investors.
          Costs associated with contract drilling depend on location, well
          depth, weather, and availability of drilling contractors and
          equipment.  The Company's gross margins on drilling were 67.9% and
          62.8% for the years ended December 31, 1996 and 1995, respectively.

          The Company's Royale Natural Gas Marketing Division recorded
          sales for the year in 1996 in the amount of $3,625,103, for which
          it incurred costs of sales of $3,629,991.  For the same period in
          1995, sales were$3,277,978, which were offset by cost of sales of
          $3,204,261.  This represents an increase in sales of $347,125 or
          10.6% and an increase in costs of $425,730 or 13.3%.  These
          increases were primarily due to increase sales of the Company's
          own natural gas production.  Although the Natural Gas Marketing
          Division has historically contributed a large portion of the
          Company's total revenues, its operating margin has been
          relatively narrow; in 1996 and 1995, it was -0.13% and 2.3%
          respectively.  In December 1996, the Natural Gas Marketing
          Division was discontinued after management determined that the
          thin margins on which it operated did not justify continued
          operation and attention to it by management, especially in
          comparison to the other, more profitable aspects of the Company's
          business.

          The aggregate of supervisory fees and other income was $329,397
          for the year ended December 31, 1996, an increase of $113,404
          (52.5%) from $215,993 during the same period in 1995.  This
          increase was mainly the result of a $70,000 gain due to the
          partial forgiveness of the note payable in connection with the
          1994 purchase of producing properties from Arkoma Production of
          California and an increase in interest income of $38,428 due to
          increase short-term investment of the Company's available cash.
          Supervisory fees are charged in accordance with the Council for
          Petroleum Accountants Society's (COPAS) policy for reimbursement
          of costs 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, public accountants.  Supervisory fees increased by
          $17,714 or 10.5%, from $168,351 in 1995 to $186,065 in 1996.
          This change can be attributed to the increased number of wells
          that the Company operates.

          Depreciation, depletion and amortization expense increased to
          $479,842 from $399,212, an increase of $80,630 (20.2%) for the
          year ended December 31, 1996, as compared to 1995.  This increase
          in expense can be attributed to the drilling of nine new wells
          during 1996.

          In the fourth quarter of 1995 the Company adopted SFAS No. 121,
          which requires that long-lived assets be reviewed for impairment
          whenever events or changes in circumstances indicate that the
          carrying amount of an asset may not be recoverable.  In addition,
          management also periodically assesses the value of significant
          proved and unproved properties and charges impairments of value
          to expense.  As a result of these reevaluations, a total of
          $213,938 was recorded as an impairment loss for 1995 and $215,000
          was recorded as an impairment loss for 1996.

          During the second quarter of 1996, the Company sold some of its oil
          and gas lease interests in Hood County, Texas.  The sale of these
          interests resulted in a loss of $144,836.  During the third quarter
          
                                       13
<PAGE>  16        
          of 1996, the Company reviewed the economic viability of
          two of its leases located in Texas, the Gonzales and Bruner
          leases, and as a result of the reevaluation wrote off these
          leases, resulting in a $42,812 expense.  In the fourth quarter of
          1996, direct working interest owners of properties previously
          developed by the Company in Andrews County, Texas, sold their
          remaining interests in those properties, and upon their sale the
          Company wrote off $63,694 which had been due from the working
          interest owners for joint interest expenses.  These actions,
          together with other dispositions upon the discontinuance of
          certain less profitable operations totaling $106,469 (See,
          Changes in Operations During 1996, above), resulted in losses on
          asset dispositions in 1996 of $357,811.  This figure represented
          a 76% increase over 1995 losses from disposed assets.  In 1995,
          the Company had realized losses of $202,905 upon the disposition
          certain unprofitable oil and gas properties.

          General and administrative expenses increased slightly by
          $37,436, or 3.05%, from $1,228,378 for the year ended December
          31, 1995, to $1,265,814 for the same period in 1996.  Legal and
          accounting expense increased to $268,683 for the same period,
          compared to $208,295 for the year in 1995, a $60,388 (29%)
          increase.  This increase can be attributed to increased
          litigation costs during the latter part of 1996.  Marketing
          expense for the year ended December 31, 1996, increased $201,562
          or 68.9%, to $494,192, compared to $292,630 for the same period
          in 1995.  Marketing expense for the Company varies from period to
          period according to the number of marketing conferences attended
          by Company personnel and associated travel costs.

          During the first half of 1996, the Company incurred interest
          expense of $14,296 on the note payable issued in connection with
          the purchase of producing properties from Arkoma Production of
          California.  Interest expense for the year in 1995, for this
          note, was $64,103.  In July 1996, a final payment of $169,817 was
          made to the note holder to retire the note, which had an
          inception date of April 1994 and an original principal balance of
          $1,605,144.

          CAPITAL RESOURCES AND LIQUIDITY:

          At December 31, 1996, the Company had current assets totaling
          $4,881,195 and current liabilities totaling $3,451,746.  The
          Company's working capital surplus at December 31, 1996, was
          $1,429,449, compared to a working capital deficit at December 31,
          1995, of $349,352.  The increase in working capital surplus in
          1996 was due mainly to the increased net operating income
          generated by the Company.  In addition, the Company drew upon its
          revolving line of credit for approximately $300,000 for working
          capital purposes, at the end of 1996.  Management believes that
          the Company has sufficient liquidity for the short term.

          Operating Activities.  For the year ended December 31, 1996, cash
          provided by operating activities totaled $1,765,996 compared to
          $1,903,363 provided by operations for the same period in 1995.
          This increase in cash provided can be mainly attributed to
          increased accounts receivable at the end of 1996 when compared to
          the end of 1995.

          Investing Activities.  Net cash used by investing activities,
          primarily in capital acquisitions of oil and gas properties,
          amounted to $682,589 for the period, compared to $736,045 used by
          investing
          
                                       14
<PAGE>  17       
          activities for the same period in 1995.  The primary
          reason for the difference was proceeds received by the Company
          for the sale of its Hood County, Texas, properties.

          Financing Activities.  For the year ended December 31, 1996, net
          cash used by financing activities was $104,823, compared to cash
          used by financing activities for the period in 1995 of $230,321.
          The reason for the decrease in cash used for financing in 1996
          was the Company's repayment in mid 1996 of  the indebtedness that
          it had incurred in 1994 for the purchase of 16 producing wells
          from Arkoma Production of California.


          ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          See, pages F-1, et seq., included herein.
                                                                              

          ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
                   ACCOUNTING AND FINANCIAL DISCLOSURE

          None.


          PART III

          ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, CONTROL PERSONS, COMPLIANCE
               WITH SECTION 16(a) OF THE EXCHANGE ACT

          Listed below is certain information about the current directors
          and executive officers of the Company.  Directors are elected by
          shareholders at each annual shareholders' meeting and serve until
          their successors are elected and qualified.  Officers serve at
          the discretion of the board of directors.

          The following persons currently serve as the directors and
          executive officers of the Company, its subsidiaries and
          affiliated companies.

<TABLE>
<CAPTION>
                                 First Became Director  
Name                        Age  or Executive Officer   Positions Held
-------------               --   --------------------   --------------
<S>                         <C>  <C>                    <C>
Harry E. Hosmer (1)         65   1987                   Chairman of the Board.

Donald H. Hosmer            40   1991                   President, Secretary and
                                                        Director.  Chairman of the
                                                        Board and President of Royale
                                                        Petroleum Corporation ("RPC").
</TABLE>

                                       15
<PAGE>  18
<TABLE>
<CAPTION>
                            First Became Director
Name                        Age  or Executive Officer   Positions Held
-------------               --   --------------------   --------------
<S>                         <C>  <C>                    <C>
Stephen M. Hosmer           30   1991                   Chief Financial Officer and
                                                        Director.  Secretary and
                                                        Director of RPC.

Oscar A.
Hildebrandt (2)             61   1995                   Director.

Rodney Nahama               65   1994                   Director.

Henry C. Thorne (1) (2)     66   1991                   Director and Assistant
                                                        Secretary.
          
George M. Watters (1) (2)   77   1991                   Director.
</TABLE>

          (1)  Member of the audit committee.

          (2)  Member of the compensation committee.


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

          HARRY E. HOSMER is the Chairman of the Board of the Company.  In
          April 1982, Mr. Hosmer founded a former affiliate, Royale Energy
          Company, to act as general partner of oil and gas limited
          partnerships which it sponsored.   In October 1985, Mr. Hosmer
          and three of his sons founded RPC, the largest shareholder of the
          Company.  Mr. Hosmer served as President of the Company from its
          inception until June 1995.  He is a member of the Communications
          and Capital Formations Committees of the Independent Petroleum
          Association of America.

          DONALD H. HOSMER is President and Director of the Company and
          Chairman and President of RPC.  He is responsible for marketing
          working interests in oil and gas projects developed by the
          Company.  He is also responsible for investor relations and
          communications.  He conducts workshops and is the Company liaison
          to the numerous seminars and conferences in which the Company
          participates.  Donald H. Hosmer is the son of Harry E. Hosmer and
          brother of Stephen M. Hosmer.

          STEPHEN M. HOSMER is Chief Financial Officer and Director of the
          Company.  Mr. Hosmer joined the Company as the Management
          Information Systems Manager in May 1988, responsible for developing
          and maintaining the Company's computer software.  Mr. Hosmer
          developed programs and software systems used by the Company.
          Mr. Hosmer graduated from Oral Roberts University in Tulsa, 
          Oklahoma, in May 1988 with a Bachelor of Science in Business
          Administration.  He is a member of the Natural Gas Producers
          Committee of the California Independent Petroleum Landmen's
          Association.   Stephen M. Hosmer is the son of Harry E.
          Hosmer and brother of Donald H. Hosmer.

                                       16
<PAGE>  19
          DR. OSCAR A. HILDEBRANDT, D.V.M., is a Director and is Chairman
          of the Company's Compensation Committee.  From 1994 to 1995 he
          served as an advisory member of the Company's Board of Directors.
          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
          business 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.

          RODNEY NAHAMA was employed as president and chief executive
          officer of Nahama & Weagant Energy Co. from 1971 until March
          1994.  Since March 1994, Mr. Nahama has pursued private business
          interests, including the provision of geologic consulting
          services to the Company.  Mr. Nahama holds a B.A. degree in
          geology from the University of California, Los Angeles, and an
          M.A. degree in geology from the University of Southern
          California.  He was an independent exploration geologist from
          1965 to 1971 and prior to that served as a geologist with Franco
          Western Oil Company from 1963 to 1965.  Between 1957 and 1963,
          Mr. Nahama worked as an exploration geologist with Honolulu Oil
          Company, Getty Oil Company, and Sunray Oil Company.  Mr. Nahama
          is a member of the American Association of Petroleum Geologists,
          the San Joaquin Geological Society, the California Independent
          Producers Association and the Independent Petroleum Association
          of America.

          HENRY C. THORNE is a Director of the Company.  Mr. Thorne is a
          former manager of Business and Regional Development for AMOCO
          Corporation.  Mr. Thorne retired from AMOCO Corporation in
          December 1986, and in early 1987 he founded Petrochem
          International, a venture development company which assists
          clients in development of international export-import markets.
          Mr. Thorne has served as President of Petrochem International
          from its inception through the present.  Mr. Thorne received his
          Bachelor's Degree in chemical engineering with distinction from
          Cornell University and his Masters degree in Business
          Administration with distinction from Northwestern University. He
          is a member of the Commercial Development Association, the
          Licensing executives Society and the American Institute of
          Chemical Engineers.

          GEORGE M. WATTERS has been retired from full time employment during
          the last five years.  Mr. Watters retired from AMOCO Corporation in
          1983 after serving for 24 years in senior management positions with
          AMOCO Corporation and its affiliates.  From 1987 to the present Mr.
          Watters has managed his personal investments.  Mr. Watters has
          also served from 1983 to the present as managing director of Kuo
          International Oil (UK) Ltd. responsible for acquiring crude oil in
          Europe, Africa and the Middle East, and has served as managing
          director of USA Petroleum International from 1987 to the present.
          Mr. Watters received his Bachelor of Science degree from
          Massachusetts Institute of Technology in 1942.

                                       17
<PAGE>  20
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

          Section 16(a) of the Securities Exchange Act of 1934 and
          Securities and Exchange Commission regulations require that the
          Company's directors, certain officers, and greater than 10
          percent shareholders are required to file reports of ownership
          and changes in ownership with the SEC and the NASD and to furnish
          the Company with copies of all such reports they file.  The
          Company has never received a copy of any report pursuant to
          Section 16(a) of the Securities Exchange Act from Mr. Owen
          LeTissier, a resident of the British Channel Islands who is
          believed by the Company to hold more than 10 percent of its
          Common Stock.  See, Security Ownership of Certain Beneficial
          Owners and Management - Common Stock.  Except for possible
          reporting obligations, if any, by Mr. LeTissier, and based solely
          upon a review of the copies of the forms furnished to the
          Company, or written representations from certain reporting
          persons that no reports were required, the Company believes that
          no person failed to file required reports on a timely basis
          during or in respect of 1996.


          ITEM 10.  EXECUTIVE COMPENSATION

          The following table summarizes the compensation of the chairman
          of the board and the president of the Company and its
          subsidiaries, Harry E. Hosmer and Donald H. Hosmer (the "Named
          Officers), for the fiscal years ended December 31, 1996, 1995,
          and 1994.

<TABLE>
<CAPTION>                                            
                                                                Long Term
                                   Annual Compensation          Compensation
                                   -------------------------    Awards
(a)               (b)              (c)          (d)             (e)
                                                Other           Securities
Name              Period Covered   Salary       Compensation *  Underlying Options
---------------   --------------   --------     ------------    ------------------
<S>               <S>              <C>          <C>             <C>
Donald H.         FYE 12/31/96     $100,000       $703               0
Hosmer, CEO       FYE 12/31/95     $100,000       $785          30,000
                  FYE 12/31/94      $89,583     $5,500               0
Harry E. Hosmer,  FYE 12/31/96     $122,444       $882               0
Chairman          FYE 12/31/95     $110,000     $1,295          30,000
                  FYE 12/31/94     $120,000     $1,190               0
</TABLE>

          *  Under the terms of a plan adopted by the board of directors in
             1989, Harry E. and Donald H. Hosmer have elected to participate
             in wells drilled by the Company.  See, Certain Relationships and
             Related Transactions.  The costs incurred by Messrs. Harry and
             Donald Hosmer 
             
                                       18

<PAGE>  21
             for interests acquired in wells pursuant to this policy are less
             than  would have been the cost of purchasing an equivalent
             percentage as working interests in these wells which are sold to
             unaffiliated outside investors.  The difference between the
             Hosmers' actual cost and the cost incurred by outside investors
             could be considered as additional compensation to them.
             However, the Company's management does not believe that the
             amount of such difference is significant.  In addition, prior to
             June 1995, the Company advanced funds to Harry and Donald Hosmer
             to pay for their well participation interests.  To the extent
             that the advances amount to interest free loans, Harry and Donald
             Hosmer could also be considered to have received additional
             compensation.  The Other Compensation in the foregoing table
             consists of the amounts which the Company's management believe
             may be considered income to be imputed from such foregone
             interest.  The imputed interest was estimated using approximate
             amounts due at the end of each period, as if that amount had been
             due for the entire period.  The imputed interest rate used by the
             Company is currently 7.5% simple interest per annum. In June
             1995, the Company's policy regarding advancement of funds was
             changed.  The Current policy requires that all such purchases of
             interests in wells must be paid in cash prior to the drilling of
             the well.


          The Company does not maintain a retirement plan or "Section
          401(k)" compensation plan on behalf of its employees.


          STCK OPTIONS GRANTED IN 1996

          No stock options were granted to officers, directors, or
          employees during 1996.


          AGGREGATED 1996 OPTION EXERCISES AND YEAR-END VALUES

          Neither of the Named Officers exercised any stock options or
          stock appreciation rights in 1996, 1995, or 1994.  The following
          table summarizes the number and value of all unexercised stock
          options held by the Named Officers at the end of 1996.

<TABLE>
<CAPTION>
(a)                 (b)                            (c)
                    Number of Securities            Value of Unexercised In-
                    Underlying Unexercised          the-Money Options/SARs
                    Optins/SARs at FY-End (#)       at FY-End ($) (1)

Name                Exercisable/Unexercisable (2)   Exercisable/Unexercisable
---------------     ------------------------------  -------------------------
<S>                 <C>                             <C>
Harry E. Hosmer     15,000/30,000                   $15,000/$63,000
Donald H. Hosmer    15,000/30,000                   $15,000/$63,000
</TABLE>

                                       19
<PAGE>  22
        (1)  Based on a fair market value of $4.00 per share, which was the
             minimum bid price of the Company's Common Stock in the Nasdaq
             Small Cap Market on December 31, 1996.

        (2)  All unexercisable options held by Named Officers on December 31,
        1996, became exercisable on March 10, 1997.


          COMPENSATION OF DIRECTORS

          The Company compensates non-employee directors for their service
          on the board of directors.   No directors received any stock
          options or stock appreciation rights in 1996.  The following
          table sets forth information regarding the cash compensation paid
          to directors, other than Named Officers, in 1996.

<TABLE>
<CAPTION>
(a)                      (b)                   (c)
                         Annual Retainer       Consulting Fees/
                         Fees                  Other Fees (1)
--------------------     ---------------       ----------------
<S>                      <C>                   <C>
Oscar A. Hildebrandt     $6,800                $9,225
Rodney Nahama            $6,800                $2,600
Henry C. Thorne          $7,300 (2)              $850
George M. Watters        $7,300 (2)            $3,550
</TABLE>

          (1)  Consists of payments for directors fees due for services in
               prior years.

          (2)  Includes $500 paid for service as a committee member in 1996.


          ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                    MANAGEMENT

          The following tables set forth certain information regarding the
          ownership of the Company's voting securities as of December 31,
          1996, by: (i) each person who is known by the Company to own
          beneficially more than 5% of the outstanding shares of each class
          of equity securities, (ii) each director of the Company, and
          (iii) all directors and officers of the Company 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.

          Common Stock

          On December 31, 1996, 3,834,049 shares of the Company's Common
          Stock were outstanding.

                                       20
<PAGE>  23
<TABLE>
<CAPTION>
                                 Shares Owned (1)
                                 -------------------------------
Shareholder  (2)                 Number                  Percent
----------------------------     -------------------     -------
<S>                              <C>                     <C>
Royale Petroleum Corporation     1,279,243 (3) (4)       31.47%
Donald H. Hosmer                 1,049,688 (3) (4)       31.89%
Harry E. Hosmer                     15,000 (4)            0.39%
Oscar A. Hildebrandt                41,422 (5)            1.08%
Stephen M. Hosmer                1,049,938 (3) (4)       31.77%
Owen LeTissier                     500,000 (6)           13.04%
  St. Peter Port
  Guernsey, Channel Islands
Henry C. Thorne                     13,472                0.35%
George M. Watters                   47,500 (7)            1.24%
All directors and officers
  as a group (7 persons)          1,423,887 (3)          34.52% 
</TABLE>

          (1)  Includes shares which the listed shareholder has the right to
               acquire before March 1,1997, from options or warrants.

          (2)  Unless otherwise indicated, the mailing address of each listed
               shareholder is 7676 Hazard Center Drive, Suite 1500, San
               Diego, California 92108.

          (3)  Because Messrs. Donald and Stephen Hosmer are directors of
               Royale Petroleum Corporation ("RPC") and have power to vote
               the shares of Common Stock owned by RPC, pursuant to Rule
               13d-3 promulgated under the Securities Exchange Act of 1934,
               as amended, each of them may be deemed to be the beneficial
               owner of all the Common Stock owned by RPC.  Accordingly, the
               1,279,243 shares of the Company owned by RPC are included in
               the number of shares held by both Donald and Stephen Hosmer
               and in the number of shares owned by all officers and
               directors as a group.

          (4)  Donald H. and Stephen M. Hosmer are sons of Harry E. Hosmer,
               Chairman of the Board.

          (5)  Includes shares held by a family partnership of which Dr.
               Hildebrandt is a 50% partner and shares held by a trust 
               of which Dr. Hildebrandt is trustee.

          (6)  The Company's transfer records reflect that Owen LeTissier
               holds 400,000 shares (10.43% of the outstanding shares at
               December 31, 1996) as the Trustee of two foreign 

                                       21

<PAGE>  24
               charitable trusts which were formed in 1994 by Harry E. Hosmer,
               the chairman of the board.  Mr. LeTissier holds sole voting
               power over the shares, although Harry E. Hosmer acts as an
               adviser to the Trusts.  The beneficiaries of the Trusts are
               certain charitable organizations, although the wife and
               certain sons of Harry E. Hosmer have the right to become
               beneficiaries of the Trusts after his death.  Donald and
               Stephen Hosmer have indicated that, in the event they are
               named as beneficiaries, they have no intention to elect to
               become beneficiaries and will decline to exercise any rights
               under the trusts to vote or otherwise control the shares of
               the Company which the Trusts hold.  Accordingly, the ownership
               interest of Donald and Stephen Hosmer do not reflect the shares
               owned by the Trusts.  The Company's transfer records also
               indicate that 100,000 shares are held by Stratford
               Investments, Limited, which the Company believes to be an
               affiliate of Mr. LeTissier.
               
          (7)  Includes Common Stock held by a trust of which Mr. Watters is
               the Trustee.


          PREFERRED STOCK

          Holders of each series of preferred shares have voting rights
          equal to the number of shares into which they are convertible.
          None of the Preferred shareholders have the right to vote as much
          as 5% of the shares entitled to vote when taking into account the
          total number of both Common and Preferred Shares.  On December
          31, 1996, there were 24,375 shares of  Series A and 115,000
          shares of Series AA Convertible Preferred Stock outstanding. The
          shares of each series of Convertible Preferred Stock is
          convertible into the Company'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.

<TABLE>
<CAPTION>
                                      Series A            Series AA
                                      ----------------     ----------------
Shareholder (1)                       Number   Percent     Number   Percent
---------------------------------     ------   -------     ------   -------
<S>                                   <C>      <C>         <C>      <C>
Richard G. and Margaret E. Algire      3,125   12.8%
Charles J. Anderson                                        25,000   21.7%
Flora M. Bardet                                            12,500   10.9%
Larry Burns                                                 6,250    5.4%
Marjorie Carson                                             6,250    5.4%
Virginia L. Hoffman                   12,500   51.3%
Navin G. Leap                                              15,000   13.0%
Overland Bank                                               6,250    5.4%
Karl Sanders                           2,500   10.3%
</TABLE>

                                       22
<PAGE>  25
<TABLE>
<CAPTION>
                                      Series A             Series AA 
                                      ----------------     ----------------
Shareholder (1)                       Number   Percent     Number   Percent
--------------------------------      ------   -------     ------   -------
<S>                                   <C>      <C>         <C>      <C>
George Singleton                                           6,250     5.4%
Charles Swaner                                             6,250     5.4%
James S. Trowbridge                   6,250    25.6%
William W. Well                                            6,250     5.4%
Jerome Winston                                             6,250     5.4%
All officers and directors
  as a group                              0     0.0%           0     0.0%
</TABLE>

          (1)  The mailing address of each listed shareholder is 7676 Hazard
               Center Drive, Suite 1500, San Diego, California 92108.


          ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          In 1989, the board of directors adopted a policy (the "1989
          policy") as to all directors and officers of the Company that
          permits each director and officer to purchase from the Company,
          at its cost, up to one percent (1%) fractional interest in any
          well to be drilled by the Company.  When an officer or director
          elects to make such a purchase, the amount charged per each
          percentage working interest is equal to the actual pro rata cost
          to the Company of drilling and completion costs, rather than the
          higher amount that the Company charges to working interest
          holders for the purchase of a percentage working interest in a
          well.  Of the current officers and directors, Donald Hosmer,
          Stephen Hosmer, Harry E. Hosmer, Henry Thorne, and Oscar
          Hildebrandt have at various times elected to purchase interests
          in certain wells drilled by the Company under the 1989 policy.  A
          former officer of the Company, Douglas E. Hosmer ( a son of Harry
          E. Hosmer and brother of Donald and Stephen Hosmer), also had
          purchased working interests under this policy while he was
          employed by the Company.

          Under the 1989 policy, officers and directors may elect to
          participate in wells at any time up until drilling of the
          prospect commences.  Participants do not pay a set, turnkey price
          (as do outside investors who purchase undivided working interests
          from the Company), but are liable for all direct costs and
          expenses through completion of a well, whether or not the well
          drilling  and completion expenses exceed the Company's cost
          estimates.  Thus, they participate on terms much the same as
          would be afforded to other oil and gas industry participants or
          joint venturers.  Participants are invoiced for their share of
          direct costs of drilling and completion as expenses are incurred
          by the Company.

          Officer and director participants under this program do not pay
          some expenses paid by outside, retail investors in working interest
          such as sales commission, if any, or marketing expenses.  The

                                       23
<PAGE>  26
          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, the
          Company's Management believes that the terms on which officers
          and directors participate in wells under the Board of Directors'
          policy are being offered their interests 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
          the Company.

          Donald and Stephen Hosmer have each individually participated in
          23 wells under the 1989 policy.  Donald and Stephen Hosmer have
          also participated in 9 wells in the name of RPC, a corporation
          jointly owned by them, beginning in 1996.  The Hosmer Trust, a
          trust for the benefit of family members of Harry E. Hosmer, has
          participated in 24 wells.  Douglas Hosmer (a former officer of
          the Company) participated in 14 wells.

          Pursuant to the 1989 policy, in 1995, the Hosmer Trust, Donald
          Hosmer, and Stephen Hosmer were each charged $1,522 for costs
          related to one well in which they had each agreed, in 1995, to
          acquire a 0.5% interest.  In 1995, Donald and Stephen Hosmer were
          each charged a total of $2,113 for purchasing a 0.5% interest in
          one well and a 0.25% interest in a second well.  The cost of
          purchasing direct working interests of similar size in those two
          wells would have been $7,533.

          During 1996, Donald and Stephen Hosmer invested in nine wells
          under the 1989 policy in the name of RPC.  RPC was charged a
          total of $4,619 for a 0.25% interest in each of the nine wells
          drilled by the Company in 1996, with the exception of Bowerbank
          #4A and #4B, in which its interests were 0.0625% and 0.1875%,
          respectively.  The amount charged was based on those costs
          actually billed through December 31, 1996.  Certain of the wells
          in which RPC invested were not completed in 1996, and additional
          costs relating to those wells will be incurred  and billed to RPC
          during 1997.  The cost of purchasing a 0.25% direct working
          interest in the nine wells would have been $15,395.  In addition,
          during 1996 RPC was charged $1,303 for costs related to one well
          in which Donald and Stephen Hosmer had originally invested
          individually, prior to 1996, under the 1989 policy.

          During 1995, Oscar A. Hildebrandt invested $7,841 in working
          interests in three wells under the 1989 policy.  The cost of
          purchasing the same percentage interest in direct working
          interests would have been $12,954.  During 1996, Dr. Hildebrandt
          invested $ 12,954 in working interests in five wells under the
          under the 1989 policy.  The cost of purchasing the same
          percentage interest in direct working interests would have been
          $29,155.

          Prior to June 1995, the Company had advanced to the participants
          under the 1989 policy, the funds with which to purchase their
          interests, with funds to be repaid from future production from the
          working interests, with advances to be repaid from well production.
          Each month, participants are credited with well income and charged
          with well expenses from producing wells, at the same
          
                                       24
<PAGE>  27        
          time as other investors including working interest
          purchasers.  Each officer and director who participates in one or
          more wells with the Company has a single account to which all
          charges and income from all wells is credited.  The Company has
          advanced a total of $50,814 to the Hosmer Trust for participation
          in 24 wells, of which $18,758 and $4,767 remained outstanding at
          December 31, 1995 and 1996, respectively.  See, Executive
          Compensation.  The Company has advanced Donald and Stephen Hosmer
          each a total of $28,906 for their interests in 23 wells, of which
          a total of $13,247 and $5,481 remained unpaid by each of them at
          December 31, 1995 and 1996, respectively.  The Company advanced a
          total of $12,132 to Douglas Hosmer for his participation
          interests, of which $4,251 and $0 remained outstanding at
          December 31, 1995 and 1996, respectively.  In June 1995, the
          Company's policy regarding the advancement of funds was changed.
          Current policy requires that all such purchases of interests in
          wells must be paid in cash prior to the drilling of the well.

          During 1995, one independent director, Henry Thorne, was
          partially compensated for directors' fees and reimbursed for
          expenses incurred for board meetings by receiving an assignment
          of a 0.5% interest in one well drilled by the Company.  The value
          of the well interest he received was $1,826, calculated on
          approximately the same basis as that under which directors could
          have participated in the well under the 1989 policy.  In 1996,
          Mr. Thorne was also partially compensated for directors' fees and
          expenses by receiving an assignment of a 0.5% interest in one
          well.  The value of the well interest that he received was
          $1,864, also calculated on approximately the same basis as that
          under which directors and officers could have participated in
          the wells under the 1989 policy.


          ITEM 13.  EXHIBITS, LISTS, AND REPORTS ON FORM 8-K

          (a)  Certain of the Exhibits set forth in the following index are
          incorporated by reference.

          3.1  Restated Articles of Incorporation of Royale Energy, Inc.,
               incorporated by reference to Exhibit 3.1 of the Company's
               Form 10-SB Registration Statement.

          3.2  Certificate of Amendment to the Articles of Incorporation of
               Royale Energy, Inc. (effecting reverse stock split and
               defining certain rights of equity security holders),
               incorporated by reference to Exhibit 3.1 of the Company's
               Form 8-K dated October 31, 1994.

          3.3  Bylaws of Royale Energy, Inc., incorporated by reference to
               Exhibit 3.2 of the Company's Form 10-SB Registration
               Statement.

          4.1  Certificate of Determination of the Series A Convertible
               Preferred Stock, incorporated by reference to Exhibit 4.1 of
               the Company's Form 10-SB Registration Statement.

                                       25
<PAGE>  28
          4.2  Certificate of Determination of the Series AA Convertible
               Preferred Stock, incorporated by reference to Exhibit 4.2 of
               the Company's Form 10-SB Registration Statement.

          10.1 Wellbore Farmout Agreement between Royale Energy Funds,
               Inc., and Pacific Gas & Electric Co., dated March 15, 1993,
               incorporated by reference to Exhibit 10.2 of the Company's
               Form 10-SB Registration Statement.

          10.2 Purchase and Sale Agreement between Arkoma Production of
               California, et al., and Royale Energy Funds, Inc.,
               incorporated by reference to Exhibit 10.1 of the Company's
               Form 8-K Report dated April 12, 1994, as amended.

          10.3 Form of Indemnification Agreement, incorporated by reference
               to Exhibit 10.3 of the Company's Form 10-SB Registration
               Statement.


          (b)  Reports on Form 8-K

          The Company filed a Report on Form 8-K dated October 10, 1996, to
          report that the Company had retained the Peter Grandich Company
          ("PGC"), a financial public relations firm, to provide investor
          relations consulting services to the Company.  PGC  assists the
          Company in distributing reports concerning the Company's
          operations to financial news services and in maintaining contact
          between the Company and investors.  The Company pays fees to PGC
          based on specific financial public relations tasks and events.

                                       26
<PAGE>  29
                                      SIGNATURES

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

                                             ROYALE ENERGY, INC.


          Date:  April 14, 1997              /s/ DONALD H. HOSMER            
                                             Donald H. Hosmer, President

               Pursuant to the requirements of the Securities Exchange Act
          of 1934, this report has been signed below by the following
          persons on behalf of the registrant and in the capacities
          indicated.


          Date:__________________            ____________________________
                                             Harry E. Hosmer, Chairman of
                                             the Board


          Date:  April 14, 1997              /s/ DONALD H. HOSMER
                                             Donald H. Hosmer, Chief
                                             Executive Officer,
                                             President, Secretary, and
                                             Director


          Date:  April 14, 1997              /s/ STEPHEN M. HOSMER
                                             Stephen M. Hosmer, Chief
                                             Financial Officer
                                             and Director


          Date:  April 14, 1997              /s/ OSCAR A. HILDEBRANDT
                                             Oscar A. Hildebrandt, Director


          Date:__________________            ____________________________
                                             Rodney Nahama, Director


          Date:__________________            ____________________________
                                             Henry C. Thorne, Director


          Date:  April 14, 1997              /s/ GEORGE M. WATTERS
                                             George M. Watters, Director
                                 
<PAGE>  30                               
                       ROYALE ENERGY, INC. AND SUBSIDIARIES
                           INDEX TO FINANCIAL STATEMENTS
                               AND SUPPLEMENTARY DATA



<TABLE>
<CAPTION>
                                                                        Page
<S>                                                                     <C>
Index to Financial Statements                                            F-1

Report of Brown, Armstrong, Randall and Reyes, Independent Auditors      F-2

Consolidated Balance Sheets at December 31, 1996 and 1995                F-3

Consolidated Statements of Income for the Years Ended
   December 31, 1996 and 1995                                            F-5

Consolidated Statements of Stockholders' Equity for the
   Years Ended December 31, 1996 and 1995                                F-6

Consolidated Statements of Cash Flows for the Years
   Ended December 31, 1996 and 1995                                      F-8

Notes to the Consolidated Financial Statements                          F-10

Supplemental Information About Oil and Gas Producing Activities
(Unaudited)                                                             F-24
</TABLE>

Financial statement schedules have been omitted since they are either not
required, are not applicable, or the required information is shown in the
financial statements and related notes.

                                      F-1
<PAGE>  31                                        
                         REPORT OF INDEPENDENT AUDITORS



          Shareholders and Board of Directors
          Royale Energy, Inc.


          We have audited the accompanying consolidated balance sheets of
          Royale Energy, Inc. (a California corporation) and consolidated
          subsidiaries as of December 31, 1996 and 1995, and the related
          consolidated statements of income, 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 audit.
          
          We conducted our audit in accordance with generally accepted
          auditing standards.  Those standards require that we plan and
          perform the audit to obtain reasonable assurance about whether the
          financial statements are free of material misstatement.  An audit
          includes examining, on a test basis, evidence supporting the
          amounts and disclosures in the financial statements.  An audit
          also includes assessing the accounting principles used and
          significant estimates made by management, as well as evaluating
          the overall financial statement presentation.  We believe that our
          audit provides 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. and consolidated  subsidiaries as of December 31,
          1996 and 1995, and the results of their operations and their cash
          flows for the years then ended in conformity with generally
          accepted accounting principles.

                                    BROWN ARMSTRONG RANDALL & REYES
                                    ACCOUNTANCY CORPORATION






          Bakersfield, California
          February 14, 1997
                                 
                                      F-2
<PAGE>  32                               
<TABLE>
<CAPTION>
                     ROYALE ENERGY, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS

                                    ASSETS


                                                      December 31,
                                                      -----------------------
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
CURRENT ASSETS
  Cash and cash equivalents                           $2,595,444   $1,616,860
  Accounts receivable                                  1,928,472      879,165
  Receivables from related parties                        34,897       24,468
  Note receivable                                        131,847       33,500
  Other current assets                                   190,535      100,730
                                                      ----------   ----------
     Total Current Assets                              4,881,195    2,654,723
                                                      ----------   ----------
Oil and gas properties (successful efforts basis),
  equipment and fixtures, net                          3,478,707    3,756,646
                                                      ----------   ----------
OTHER ASSETS
  Receivables from related parties, net                    3,535       53,376
  Deferred costs on trust organization                       -        125,250
  Other                                                      -          1,132
                                                      ----------   ----------
     Total Other Assets                                    3,535      179,758
                                                      ----------   ----------
                                                      $8,363,437   $6,591,127
                                                      ==========   ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>  33
<TABLE>
<CAPTION>

                                 ROYALE ENERGY, INC. AND SUBSIDIARIES
                                     CONSOLIDATED BALANCE SHEETS

                                 LIABILITIES AND STOCKHOLDERS' EQUITY


                                                      December 31,
                                                      -----------------------
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>      
CURRENT LIABILITIES
  Accounts payable and accrued expenses               $1,947,705   $2,357,514
  Current portion of long-term debt                          -        113,621
  Deferred revenue from turnkey drilling               1,504,041      532,940
                                                      ----------   ----------
      Total Current Liabilities                        3,451,746    3,004,075
                                                      ----------   ----------
Long-Term Debt, net of current portion                   300,000      320,043

Redeemable Preferred Stock
  Series A, convertible preferred stock, no par value,
  259,250 shares authorized; 24,375 and
  36,875 shares, respectively, issued and outstanding     79,100      129,100
                                                      ----------   ----------
            
STOCKHOLDERS' EQUITY
  Common stock, no par value, 10,000,000 shares
   authorized; 3,834,049 and 3,980,549 shares,
   respectively, issued and outstanding                8,386,273    8,289,398
  Convertible preferred stock, Series AA, no par value,
   147,500 shares authorized; 115,000 and 135,000
   shares, respectively, issued and outstanding          460,000      540,000
  Accumulated deficit                                 (4,292,682)  (5,691,489)
                                                      ----------   ----------
    Total paid in capital and accumulated deficit      4,553,591    3,137,909
                                                      
  Less cost of treasury stock 4,200 and 0 shares,
     respectively                                        (21,000)         -
                                                      ----------   ----------
       Total Stockholders' Equity                      4,532,591    3,137,909
                                                      ----------   ----------
                                                      $8,363,437   $6,591,127
                                                      ==========   ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>  34
<TABLE>
<CAPTION>
                      ROYALE ENERGY, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

                                                      Year Ended December 31,
                                                      -----------------------
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
REVENUES
  Sale of oil and gas                                 $1,267,919    $ 743,079
  Gas distribution                                     3,625,103    3,277,978
  Turnkey drilling                                     4,775,175    4,091,049
  Sale of direct working interests                           -         13,000
  Supervisory fees and other                             329,397      215,993
                                                      ----------   ----------
      Total Revenues                                   9,997,594    8,341,099
                                                      ----------   ----------
COSTS AND EXPENSES
  Cost of gas distribution sales                       3,629,991    3,204,261
  General and administrative                           1,265,814    1,228,378
  Turnkey drilling and development                     1,530,597    1,520,429
  Lease operating                                        340,331      450,620
  Cost of direct working interests sales                     -          9,285
  Lease impairment                                       215,000      213,938
  Legal and accounting                                   268,683      208,295
  Marketing                                              494,192      292,630
  Depreciation, depletion and amortization               479,842      399,212
                                                      ----------   ----------
      Total Costs and Expenses                         8,224,450    7,527,048
                                                      ----------   ----------
INCOME FROM OPERATIONS                                 1,773,144      814,051
                                                      ----------   ----------
OTHER (EXPENSE)
  Interest                                               (14,926)     (64,103)
  Loss on asset disposition                             (357,811)    (202,905)
                                                      ----------   ----------
      Total Other (Expense)                             (372,737)    (267,008)
                                                      ----------   ----------
INCOME BEFORE INCOME TAX EXPENSE                       1,400,407      547,043
                                                     
INCOME TAX EXPENSE                                         1,600        2,400
                                                      ----------   ----------
NET INCOME                                            $1,398,807     $544,643
                                                      ==========   ==========
NET INCOME PER COMMON AND COMMON
 EQUIVALENT SHARE                                     $      .34   $      .14
                                                      ==========   ==========
NET INCOME PER SHARE - FULLY DILUTED                  $      .34   $      .14
                                                      ==========   ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>  35
<TABLE>
<CAPTION>
                      ROYALE ENERGY, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
          
                                                        Preferred Stock
                              Common Stock              Series AA                             Treasury Stock
                              ---------------------     ---------------------                 ------------------
                              Number                    Number
                              of Shares                 of Shares
                              Issued and                Issued and              Accumulated   Number
                              Outstanding  Amount       Outstanding  Amount     Deficit       of Shares   Amount
                              ---------    ----------   ---------    --------   -----------   ---------   ------
<S>                           <C>          <C>          <C>          <C>        <C>           <C>         <C>
Balance, January 1, 1995      3,960,299    $8,091,248   147,500      $590,000   $(6,236,132)          -   $    -

Shares issued in connection
 with property acquisition        1,500             -         -             -             -           -        -

Compensation recognized
 on stock options issued              -        48,150         -             -             -           -        -

Shares issued in connection
 with preferred stock
 Series A conversion             12,500       100,000         -             -             -           -        -

Shares issued (redeemed)
 in connection with
 preferred stock Series
 AA conversion                    6,250        50,000   (12,500)      (50,000)            -           -        -

Net income                            -             -         -             -       544,643           -        -
                              ---------    ----------   -------      --------   -----------   ---------  -------
Balance,
 December 31, 1995            3,980,549    $8,289,398   135,000      $540,000   $(5,691,489)          -   $    -
                              =========    ==========   =======      ========   ===========   =========   ======                    
</TABLE>
                            (Continued on next page)

                                      F-6
<PAGE>  36
<TABLE>
<CAPTION>
                      ROYALE ENERGY, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995


                                                        Preferred Stock
                              Common Stock              Series AA                             Treasury Stock
                              -------------------       -------------------                   ------------------
                              Number                    Number
                              of Shares                 of Shares
                              Issued and                Issued and              Accumulated   Number
                              Outstanding  Amount       Outstanding  Amount     Deficit       of Shares   Amount
                              ---------    ------       ---------    ------     -------       ---------   -------
<S>                           <C>          <C>          <C>          <C>        <C>           <C>         <C>
Balance, January 1, 1996      3,980,549    $8,289,398   135,000      $540,000   $(5,691,489)          -   $     -

Shares issued in connection
 with preferred stock
 Series A Conversion              6,250        50,000         -             -             -           -         -

Shares issued in connection
 with preferred stock
 Series AA conversion             3,750        30,000    (7,500)      (30,000)            -           -         -

Shares issued in connection
 with property acquisition
 cancelled                     (166,500)            -         -             -             -           -         -

Shares donation                  10,000        16,875         -             -             -           -         -

Shares purchased                      -             -         -             -             -       4,200    21,000


Shares redeemed and                                                                                                 
 cancelled                            -             -   (12,500)      (50,000)            -           -         -

Net income                            -             -         -             -     1,398,807           -         -

Balance,                      ---------    ----------   -------      --------   -----------       -----   -------
 December 31, 1996            3,834,049    $8,386,273   115,000      $460,000   $(4,292,682)      4,200   $21,000
                              =========    ==========   =======      ========   ===========       =====   =======
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      F-7
<PAGE>  37
<TABLE>
<CAPTION>
                                ROYALE ENERGY, INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                      Year Ended  December 31,
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                          $1,398,807   $  544,643
  Adjustment to reconcile net income to net
   cash provided by operating activities:
    Depreciation, depletion and amortization             479,842      399,212
    Loss on disposal of assets                           357,811      202,905
    Loss on lease impairment                             215,000      213,938
    Stock option compensation for officers and directors     -         48,150
    (Increase) decrease in:
     Accounts receivable                              (1,049,307)     (26,801)
     Receivable from related parties                     (10,429)     (11,596)
     Prepaid expenses and other assets                   (89,805)     (17,998)
     Notes receivable                                    (98,347)         -
     Other                                                 1,132        5,222
    Increase(Decrease) in:
     Accounts payable and accrued expenses              (409,809)     796,851
     Deferred revenues - DWI                             971,101     (251,163)
                                                      ----------   ----------
      Net Cash Provided by Operating Activities        1,765,996    1,903,363
                                                      ----------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Expenditures for oil and gas properties               (688,194)    (706,842)
  Proceeds from sale of oil and gas properties            51,374        1,017
  Other capital expenditures                             (45,769)     (30,220)
                                                      ----------   ----------
        Net Cash Used by Investing Activities           (682,589)    (736,045)
                                                      ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  (Increase) decrease in receivable from
   related parties, net                                   49,841       66,199
  Proceeds from line of credit                           300,000          -
  Principal payments on notes payable                   (433,664)    (296,520)
  Treasury stock purchased                               (21,000)         -
                                                      ----------   ----------
         Net Cash Used by Financing Activities          (104,823)    (230,321)
                                                      ----------   ----------
NET INCREASE IN CASH AND CASH  EQUIVALENTS               978,584      936,997

CASH AT BEGINNING OF YEAR                              1,616,860      679,863
                                                      ----------   ----------
CASH AT END OF YEAR                                   $2,595,444   $1,616,860
                                                      ==========   ==========
</TABLE>   
   
   The accompanying notes are an integral part of these financial statements.

                                      F-8
<PAGE>  38
<TABLE>
<CAPTION>
                   ROYALE ENERGY FUNDS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                      Year Ended December 31,
                                                      -----------------------
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
SUPPLEMENTAL INFORMATION:

  Cash paid for interest                              $   14,930   $   70,248

  Cash paid for taxes                                      1,600        7,852


NONCASH TRANSACTIONS:

  Series A preferred stock exchanged
   for common stock                                       50,000      100,000

  Compensation recognized on stock options                   -         48,150

  Series AA stock exchanged for common stock              30,000       50,000

  Common stock issued for charitable donation             16,875          -
</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                      F-9
<PAGE>  39
                                 ROYALE ENERGY, INC. AND SUBSIDIARIES
                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Royale Energy, Inc. and
Subsidiaries (the "Company") is presented to assist in understanding the
Company's financial statements.  The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity.  These accounting policies conform to generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.

Description of Business

The Company is an independent oil and gas producer which also has operations
in the areas of natural gas marketing and turnkey drilling.  The Company owns
wells and leases in major geological basins located in California. The Company
offers fractional working interests and seeks to minimize the risks of oil
and gas drilling by selling multiple well drilling ventures which do not
include the use of debt financing.

Business Combinations

The financial statements for the year ended December 31, 1995 are consolidated
and include the accounts of Royale Energy, Inc. and its wholly owned
subsidiaries, Royale Operating Company, Royale Covenant Securities Corporation
and Royale Natural Gas Marketing, Inc. All significant intercompany accounts
and transactions have been eliminated in the consolidation. At their meeting
of December 15, 1995, the Board of Directors voted to dissolve Royale
Operating Company. During 1996, by Board of Directors action, Royale
Covenant Securities Corporation was sold. Additionally, Royale Natural Gas
Marketing, Inc. was dissolved. The accounts and operations of Royale
Operating Company and Royale Natural Gas Marketing, Inc. were absorbed by
Royale Energy, Inc., and there was no material effect on these financial
statements.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles 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.
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 proved reserves.
Estimated reserves are used in the calculation of depletion, depreciation and
amortization as well as the Company's assessment of proved oil and gas
properties for impairment.

Revenue Recognition

The Company recognizes revenues from the sales of oil and gas in the period of
delivery.

                                      F-10
<PAGE>  40
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Oil and Gas Property and Equipment (Successful Efforts)

The Company accounts for its oil and gas exploration and development costs
using the successful efforts method.  Under this method, costs to acquire
mineral interests in oil and gas properties, to drill and complete development
wells, and drill and complete exploratory wells that find proved reserves are
capitalized.  Exploratory dry-hole costs and other exploratory costs,
including geological and geophysical costs, are charged to expense when
incurred.  The costs of carrying and retaining unproved properties are also
expensed when incurred.  Depletion, depreciation and amortization of oil and
gas producing properties are computed on an aggregate basis using the units-
of-production method.

In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and/or Long-Lived Assets to be Disposed
of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. It establishes guidelines 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 SFAS No. 121
is calculated as the difference between the carrying amount of the asset and
its 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, the Company
periodically assessed its proved properties 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 which there are
identifiable cash flows. In the case of the Company, this results in a
property by property impairment review.

The Company adopted SFAS No. 121 in the fourth quarter of 1995, and primarily
as a result of implementation, recorded an impairment loss on certain oil and
gas properties totaling $95,388. The impairment loss on the oil and gas
properties was calculated as the difference between the asset book carrying
amounts and future undiscounted net cash flow projections, giving
consideration to recent prices, pricing trends and estimated reserve
quantities. These projections represent the Company's best estimate of fair
value based on the information available.

In addition to recognition of impairment under SFAS No. 121, management also
periodically assesses the value of significant proved and unproved properties
and charges estimated impairments of value to expense. In 1996 and 1995,
$215,000 and $118,550, respectively, was recorded as an impairment loss based
on management's assessment.

Upon the sale of oil and gas reserves in place, costs less accumulated
amortization of such property are removed from the accounts and resulting gain
or loss on sale is reflected in operations.  Upon abandonment of properties,
the reserves are deemed fully depleted and any unamortized costs are recorded
in the statement of operations under loss on leases.

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.

                                      F-11
<PAGE>  41
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 of 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.

Capitalization of Interest

Interest cost is capitalized on construction and development programs until
placed into operation.

Deferred Revenue from Turnkey Drilling

The Company enters into turnkey drilling agreements with investors to develop
leasehold acreage acquired by the Company.  The Company receives funds from
investors for the drilling and completion of oil and gas wells.  If the
drilling effort is successful, each investor receives a working interest in
the wells, and the Company also participates as a working interest owner.  In
years previous to 1995, the Company deferred these funds and costs related to
the drilling of wells until the commencement of actual drilling operations,
which usually occurs within one year. At the commencement of drilling, the
Company recognized the associated deferred drilling funds as revenue and
deferred costs as expenses. During the year ended December 31, 1995, the
Company modified the Turnkey Drilling Contract and Investment Program. The
program modifications require a percentage of total funds invested to be used
by the Company to prepay intangible drilling costs and other costs as required
to allow the drilling projects to proceed without delay. These funds are non-
refundable once the investment has been made. The non-refundable portion of
the total Turnkey Drilling investment is based on a percentage calculated by
estimating the pre-drilling costs as a percentage of total drilling costs for
a particular investment. The non-refundable portion of the total investment is
recognized as revenue and the related pre-drilling costs are expensed. Net
revenue recognized for the year ended December 31, 1995, rather than deferred
under the prior Turnkey Drilling Program is $338,635. If costs exceed revenues
and the Company participates as a working interest owner, the excess is
capitalized as the cost of the Company's working interest.  If the Company is
unable to drill the wells, the deferred funds received would be returned to
the investors. Included in cash and cash equivalents are amounts restricted
for use in the completion of Turnkey drilling programs in progress. At
December 31, 1996 and 1995, restricted balances for deferred Turnkey drilling
were $1,098,384 and $445,305, respectively.

Deferred Costs on Trust Organization

Deferred costs consist of expenses incurred by the Company to establish an
energy investment trust. The trust was not capitalized at December 31, 1996,
and the $125,250 in deferred costs was charged to operations in 1996.

                                      F12
<PAGE>  42
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share

The computation of earnings per common and common equivalent share is based
upon the weighted average number of common shares outstanding during the
period plus (in periods in which they have dilutive effect) the effect of
common shares contingently issuable, primarily from stock options and
warrants.

The fully diluted per share computation reflects the effect of warrants in
periods in which such exercise would cause dilution.  Fully diluted earnings
per share also reflect additional dilution related to stock options due to the
use of the market price at the end of the period,  when market price is higher
than the average price for the period, and convertible preferred stock.

The weighted average number of common and common equivalent shares used to
compute earnings per share is:

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -----------------------
                                                      1996         1995
                                                      ---------    ---------
<S>                                                   <C>          <C>
For earnings per common and common equivalent shares  4,077,920    3,968,417

For earnings per share assuming full dilution         4,163,483    3,968,417
</TABLE>

Income Taxes

The provision for income taxes is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported net amounts.

Concentration of Credit Risk

The Company sells oil, gas and natural gas liquids produced by the Company as
well as production purchased from outside sources to utility companies and
manufacturers principally located in California.  Revenue generated by these
sales is recognized upon delivery of the product to the purchaser. Credit is
extended based on an evaluation of the customer's financial condition, and
generally collateral is not required.  The following summarizes the accounts
receivable balances and sales activity with significant customers for the year
ended December 31, 1996.

<TABLE>
<CAPTION>
                      Accounts
Customer              Receivable               Sales
--------              ----------               ----------
<S>                   <C>                      <C>
A                     $ 19,724                 $1,125,432
B                          -                      678,843
C                          -                      498,346
</TABLE>

The Company places its temporary cash investments with a high quality credit
financial institution.

                                      F-13
<PAGE>  43
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Values of Financial Instruments

Disclosure of the estimated fair value of financial instruments is required
under SFAS No. 107,  "Disclosure About Fair Value of Financial Instruments."
The fair value estimates are made at discrete points in time based on relevant
market information and information about the financial instruments. These
estimates may be subjective in nature and involve uncertainties and
significant judgment and therefore cannot be determined with precision.

The Company includes fair value in the notes to consolidated financial
statements when the fair value of its financial instruments is different from
the book value. The Company 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 financial instruments,
the Company uses quoted market prices or, to the extent that there are no
available quoted market prices, market prices for similar instruments.

Reclassification

Certain amounts in the financial statements have been reclassified to be
consistent and comparable from year-to-year.

NOTE 2 - NOTE RECEIVABLE

Notes receivable at December 31, 1996 consist of $103,844 note from an
individual secured by oil and natural gas interests bearing an interest rate
of prime plus 1.5%, and a note from a corporation in the amount of $28,003
secured by Royale Covenant Security Corporation stock, bearing an interest
rate of prime plus 1.5%.

NOTE 3 - OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

Oil and gas properties, equipment and fixtures consist of the following at
December 31:

<TABLE>
<CAPTION>
Oil and Gas
                                                      1996           1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
Proved properties:
   Producing properties, including intangible
     drilling costs                                   $2,866,941   $3,013,695
   Lease and well equipment                            2,030,728    1,983,434
                                                      ----------   ----------
                                                       4,897,669    4,997,129
   Accumulated depletion, depreciation and 
     amortization                                     (1,086,487)  (1,104,195)
   Reserve for lease impairment                         (428,938)    (213,938)
                                                      ----------   ----------
                                                       3,382,244    3,678,996
                                                      ----------   ----------
Commercial and Other

   Furniture and equipment                               214,800      174,654
   Accumulated depreciation                              118,337       97,004
                                                      ----------   ----------
                                                          96,463       77,650
                                                      ----------   ----------
                                                      $3,478,707   $3,756,646
                                                      ==========   ==========
</TABLE>

                                      F-14
<PAGE>  44
NOTE 3 - OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES (Continued)

The following sets forth costs incurred for oil and gas property acquisition
and development activities, whether capitalized or expensed:

<TABLE>
<CAPTION>
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
Development                                           $  592,806   $  706,842
</TABLE>

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:

<TABLE>
<CAPTION>
                                                      1996         1995
                                                      ----------   ---------
<S>                                                   <C>          <C>
Oil and gas sales                                     $1,267,919   $  743,079
Production related costs                                (340,331)    (450,620)
Depreciation, depletion and amortization                (458,951)    (382,188)
                                                      ----------   ----------
Results of operations from producing
  and exploration activities                          $  468,637   $  (89,729)
                                                      ==========   ==========
</TABLE>

NOTE 4 - TURNKEY DRILLING CONTRACTS

The Company receives funds under turnkey drilling contracts which requires the
Company to drill oil and gas wells within a reasonable time period from the
date of receipt of the funds.  As of December 31, 1996 and 1995, the Company
had recorded deferred turnkey drilling revenue associated with undrilled wells
of $1,504,041 and $532,940, respectively, as a current liability.

NOTE 5 - LONG-TERM DEBT

Long-term debt at December 31, consist of the following:

<TABLE>
<CAPTION>
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
Note payable for the purchase of the Arkoma oil and
gas leases in California dated April 12, 1994, maturing
April 12, 1998,  interest at prime plus 2.5% compounded
monthly.  The prime rate of 8.5% plus the 2.5% spread
resulted in a rate of 11.0% at December 31, 1995.
Monthly payments equaling 40% of gross revenue from
producing properties listed in the note agreement, with a
minimum monthly payment of 2.5% of the outstanding
principal balance,  secured by property and 165,000
shares of common stock of Royale Energy, Inc.         $    -       $  433,664
</TABLE>

                                      F-15
<PAGE>45
NOTE 5 - LONG TERM DEBT (Continued)
<TABLE>
<CAPTION>
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
Revolving line of credit with a maximum available
of $1,250,000 for working capital purposes,
acquisitions, and development of oil and gas
properties. Interest at New York prime plus 150
basis points, resulting in a rate of 9.75% at
December 31, 1996. Interest payable monthly, with
the outstanding principal due at maturity on
May 30, 1998. Secured by property and
assignment of production.                                300,000         -

Less current portion                                         -        113,621
                                                      ----------   ----------
                                                        $300,000     $320,043
                                                      ==========   ==========
</TABLE>

Maturities of long-term debt for years subsequent to December 31, 1996 are as
follows:

<TABLE>
<CAPTION>
                 December 31,
                 <S>                                               <C>
                 1997                                              $     -
                 1998                                                 300,000
                                                                   ----------
                                                                   $  300,000
                                                                   ==========
</TABLE>

The loan agreement for the revolving line of credit prohibits the purchase of
treasury stock; however, the lender has waived this requirement under specific
circumstances. The Company purchased treasury stock under this waiver in 1996.

Subsequent to December 31, 1996, the Company paid the line of credit down in
full.

                                      F-16
<PAGE>  46
NOTE 6 - INCOME TAXES

The provisions for income taxes for the years ended December 31, 1996 and 1995
represents minimum state taxes.

As of December 31, 1996, the Company had federal and state net operating loss
carryforwards as indicated:

<TABLE>
<CAPTION>
     Year               Year of               Net Operating
     Originated         Expiration            Loss
     __________         __________            _____________
     <S>                <C>                   <C>
     1988               2003                  $   50,966
     1989               2004                     885,795
     1990               2005                     970,101
     1991               2006                     227,241
     1993               2008                   1,654,713
                                              ----------
                                              $3,788,816
                                              ==========
</TABLE>

The Company files consolidated federal and state tax returns.

The components of the net deferred tax assets were as follows:

<TABLE>
<CAPTION>
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
Deferred Tax Assets:
  Net operating loss carryforwards                    $1,288,197   $1,664,535
  Statutory depletion carryforwards                      182,622          -
  Accumulated depreciation                                94,487          -
                                                      ----------   ----------
Total Deferred Tax Assets                              1,565,306    1,664,535
                                                      ----------   ----------
Valuation Allowance                                   (1,565,306)  (1,664,535)
                                                      ----------   ----------
Net Deferred Tax Assets                               $      -     $      -
                                                      ==========   ==========
</TABLE>

A full valuation allowance has been established for the deferred tax assets
generated by net operating loss carryforwards due to the uncertainty of future
utilization. Carryforwards available for financial statement purposes to
offset income in future years approximate $2,450,501.

                                      F-17
<PAGE>  47
NOTE 6 - INCOME TAXES (Continued)

A reconciliation of the Company's provision for income taxes and the amount
computed by applying the U.S. statutory federal income tax rate of 34% at
December 31, 1996 and 1995, respectively, to pretax income is as follows:

<TABLE>
<CAPTION>
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
Tax computed at 34%, respectively                     $  476,138   $  185,995

Increase (decrease) in taxes resulting from:
   Net operating loss carryforwards                     (476,138)    (185,995)
   State taxes, net of federal income tax benefit          1,600        2,400
                                                      ----------   ----------
                                                      $    1,600   $    2,400
                                                      ==========   ==========
Effective Tax Rate                                          0.1%         0.4%
</TABLE>

NOTE 7 - REDEEMABLE PREFERRED STOCK

In 1993, the Company's Board of Directors authorized the issuance of 259,250
shares of Series A Convertible Preferred Stock which were sold through a
private placement offering.  The Series A Convertible Preferred Stock was
offered in units.  Each unit consisted of 25,000 shares of Series A
Convertible Preferred Stock and a 0.1% interest in the distributions of the
Royale Energy Income Trust, to be formed.  The Company had the right to sell
fractional units.  The Series A Convertible Preferred Stock has a stated value
of $4 per share and provides shareholders with a one time 10% dividend payable
thirty days after the expiration of one year from the date of purchase.  The
dividend has been paid on all outstanding shares at December 31, 1994. There
were no dividends declared and/or paid during 1995 or 1996.

The Series A Convertible Preferred Stock is convertible any time at the basic
conversion rate of one share of common stock for two shares of Series A
Convertible Preferred Stock, subject to adjustment. The Company has the option
to call, at any time, the Series A Convertible Preferred Stock at either the
issue price of $4 per share  plus 10%, if called within one year after
issuance, or $4 per share thereafter.  (Subject to the holders' conversion
rights outlined above).

Upon the sale of 50% of the units of beneficial interest in Royal Energy
Income Trust, a holder of Series A Convertible Preferred Stock may require the
Company to redeem their Series A Convertible Preferred Stock at the issue
price of $4 per share plus accrued dividends, if any.

The Series A Convertible Preferred Stock has a liquidation preference to the
common stock equal to $4 per share plus accrued dividends. Holders of Series A
Convertible Preferred Stock shall have voting rights equal to the number of
shares of common stock into which the Series A Convertible Preferred Stock may
be converted.

On October 28, 1993, the Company's Series A Convertible Preferred Stock
shareholders were made a one time offer to convert their Series A Convertible
Preferred Stock to common stock.  This conversion would be at one share of
common stock for each share of Series A Convertible Preferred Stock, rather
than at the original conversion price of $4 per share.  This conversion would
not affect the shareholders' rights and incentives in the Royale Energy Income
Trust.  As of December 31, 1996, 209,875 shares of Series A Convertible
Preferred Stock had been converted to 191,125 shares of common stock.

                                      F-18
<PAGE>  48
NOTE 8 - SERIES AA PREFERRED STOCK

In April 1992, the Company'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 Stockholders (Note 7).  The Series AA Convertible
Preferred Stock does not have the right of redemption at the shareholders'
option.  As of December 31, 1996 and 1995, there were 115,000 and 135,000
shares issued and outstanding, respectively.  The dividend has been paid on
all shares outstanding at December 31, 1996.

NOTE 9 - COMMON STOCK

During 1996, 3,750 shares of common stock were issued for conversion of 7,500
Series AA Preferred Stock, and 6,250 common shares were issued for conversion
of 12,500 shares of Series A Preferred Stock. Also in 1996, 166,500 common
shares were returned by the holder of the Arkoma note and were cancelled.
Additionally in 1996, 10,000 shares were issued and donated to a charitable
organization.

NOTE 10 - STOCK WARRANTS

Changes in the Company's common stock warrants were as follows:

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -----------------------
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
Outstanding warrants at beginning of period              480,555      480,555
Additional warrants issued
  -  Exercise of stock warrants                              -            -
  -  Warrants expired or ineligible                      250,000          -
                                                      ----------   ----------
Outstanding warrants at end of period                    230,555      480,555
</TABLE>            

The Company's affiliate, RPC, acquired 111,111 shares of the Company's common
stock during the year ended December 31, 1993, at a purchase price of
$333,333.  This transaction was pursuant to the exercise of a stock purchase
warrant granted to RPC by the Company's Board of Directors on December 18,
1992, to purchase a maximum of 166,666 shares at the minimum bid price on
December 18, 1992 of $3.00 per share.  Warrants to purchase the remaining
55,555 additional shares pursuant to this grant will expire on December 31,
1997.

At the November 3, 1993 Board of Directors meeting, the Board of Directors
granted RPC additional warrants to purchase 175,000 shares of the Company's
common stock at prices ranging from $1.50 to $3.00 per share.  This grant will
expire on December 31, 1997.  As of December 31, 1996, no warrants were
exercised pursuant to this grant.  The difference between market and option
prices, $75,000, was recorded as compensation for the RPC shareholders.

                                      F-19
<PAGE>  49
NOTE 11 - OPERATING LEASES

In November 1991, the Company entered into a forty-three month noncancellable
operating lease for the rental of office space which expired in July 1995.
The lease provided for annual rent escalations resulting in rent payments
which range from $8,260 to $14,868 over the term of the lease.  The
accompanying consolidated financial statements reflect rent expense on a
straight-line basis over the term of this lease.

In August 1995, the Company entered into a new sixty month noncancellable
operating lease, which expires in July 2000. The lease calls for monthly
payments ranging from $10,875 to $12,325. Future minimum lease obligations as
of December 31, 1996 are as follows:

<TABLE>
<CAPTION>
              Year Ended December 31,
              <S>                                     <C>
              1997                                    $  136,665
              1998                                       141,013
              1999                                       145,359
              2000                                        86,275
                                                      -----------
                                                      $  509,312
                                                      ==========
</TABLE>
            
Rental expense for the years ended December 31, 1996 and 1995, was $132,911
and $99,488, respectively.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Litigation

The Company occasionally becomes party to lawsuits which arise in the ordinary
course of business.  In the opinion of management, based on advice of legal
counsel, pending or threatened litigation involving the Company will not have
a material adverse affect upon its financial condition or results of
operations.

NOTE 13 - RELATED PARTY TRANSACTIONS

Significant Ownership Interests

On December 31, 1996, 27.48% of the Company's common stock was owned by Royale
Petroleum Corporation (RPC). RPC is a company which is owned equally by Donald
H. Hosmer and Stephen M. Hosmer. The Company's former president and former
chief executive officer, Harry E. Hosmer, is principal adviser to trusts which
own 10.43% of the Company's common stock at December 31, 1996. 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 the Company.

                                      F-20
<PAGE>  50
NOTE 13 - RELATED PARTY TRANSACTIONS (Continued)

Related Party Receivables

Amounts due from officers were $34,897 and $75,845 at December 31, 1996 and
1995, respectively. Receivables from other related parties amounted to $3,535
and $1,999 on December 31, 1996 and 1995, respectively.

Stock Compensation Plan

On December 18, 1992, the Board of Directors granted the directors and
executive officers of the Company 60,000 options to purchase common stock at
an exercise or base price of $1.50 per share.  All options are exercisable on
or after the second anniversary of the date of grant.  Also on this date, the
Board of Directors voted to adopt a policy of awarding stock options to key
employees based on performance, with a minimum of 5,000 shares and maximum of
15,000 shares per employee.  The details of this policy have not yet been
formulated and no such options have been awarded under the policy.

At the March 10, 1995 Board of Directors meeting, directors and executive
officers of the Company were granted 154,000 options to purchase common stock
at an exercise or base price of $1.90 per share. These options were granted
for a period of ten years, and may be exercised after the second anniversary
of the grant. The Company applies APB Opinion 25 and related interpretations
in accounting for its plans. Accordingly, the Company recorded $48,150 as
compensation expense for the directors and officers in 1995. Had compensation
cost for the Company's stock-based compensation plan been determined based on
the fair value at the grant date for awards consistent with the method of FASB
Statement 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                      1996         1995
                                                      ----------   ----------
<S>                            <S>                    <C>          <C>
Net income                     As reported            $1,398,807   $  544,643
                               Pro forma               1,398,807      384,893

Primary earnings per share     As reported            $      .34   $      .14
                               Pro forma                     .34          .10

Fully diluted earnings
per share                      As reported            $      .34   $      .14
                               Pro forma                     .34          .10
</TABLE>

The fair value of the option grant was estimated on the date of granting using
the Black-Scholes American option-pricing model with the following
assumptions: risk-free interest rate 7.5 percent, dividend yield rate of zero,
expected life of 8.2 years, and volatility of 57.7 percent.

                                      F-21
<PAGE>  51
NOTE 13 - RELATED PARTY TRANSACTIONS (Continued)

Stock Compensation Plan (Continued)

A summary of the status of the Company's stock option plan as of December 31,
1996 and 1995, and changes during the years ending on those dates is presented
below:

<TABLE>
<CAPTION>
                                1996                         1995
                                --------------------------   ------------------------
                                            Weighted-                  Weighted-
                                            Average                    Average
                                Shares      Exercise Price   Shares    Exercise Price
                                -------     --------------   -------   --------------
<S>                             <C>         <C>              <C>       <C>
Fixed Options
   Outstanding at beginning
     of year                    214,000     $1.79            60,000    $1.50
   Granted                          -                       154,000     1.90
   Exercised                        -                           -
                                -------                     -------
Outstanding at end of year      214,000                     214,000
                                =======                     =======
Options exercisable at
 year end                        60,000                      60,000

Weighted-average fair
 value of options granted
 during the year                $    -                      $  1.35
</TABLE>

The following table summarizes information about fixed stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>
             Options Outstanding                                Options Exercisable
             -----------------------------------------------    --------------------------------
                              Weighted-
             Number           Average                           Number
Range of     Outstanding at   Remaining       Weighted-         Outstanding at    Weighted-
Exercise     December 31,     Contractual     Average           December 31,      Average
Prices       1996             Life (Years)    Exercise Price    1995              Exercise Price
--------     ------------     ------------    --------------    ------------      --------------
<C>          <C>              <C>             <C>               <C>               <C>
$ 1.50       60,000           6.0             $ 1.50            60,000            $1.50
$ 1.90      154,000           8.2               1.90               -                 -
            -------                                             ------
$1.50 to
$1.90       214,000           7.6               1.79            60,000             1.50
            =======                                             ======
</TABLE>            

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 book
value, up to one percent of a fractional interest in any well to be drilled by
the Company.  Current and former officers and directors, and a trust organized
for the benefit of the family of a Company officer, received as compensation
or were billed $21,774 and $9,049 for their interests for the years ended
December 31, 1996 and 1995, respectively.

                                      F-22
<PAGE>  52
NOTE 14 - ENVIRONMENTAL MATTERS

The Company has established procedures for the on-going evaluation of its
operations to identify potential environmental exposures and assure compliance
with regulatory policies and procedures. Management monitors these laws and
regulations and periodically assesses the propriety of its operational and
accounting policies related to environmental issues. The nature of the
Company's business requires routine day-to-day compliance with environmental
laws and regulations. The Company incurred no environmental investigation,
compliance and remediation costs in 1996 or 1995.

The Company is unable to predict whether its future operations will be
materially affected by these laws and regulations. It is believed that
legislation and regulations relating to environmental protection will not
materially affect the results of operations of the Company.

NOTE 15 - LITIGATION SETTLEMENTS

In 1996, the Company agreed to purchase 37,500 shares of its common stock from
an investor as part of a litigation settlement. The stock was to be purchased
at a total price of $187,500 in no more than eighteen monthly installments
beginning no later than December 1, 1996. As of December 31, 1996, the Company
had purchased 4,200 shares at a cost of $21,000.


NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)

Operating revenues, operating income, net income, and earnings per common
share by quarters from 1996 and 1995 are shown below. The Company, in its
opinion, has included all adjustments necessary for a fair presentation of the
results of operations for the quarters. Due to the nature of Turnkey Drilling
Revenues, which are recognized at specified times over program development on
specified wells,  annual amounts are not generated evenly by quarter during
the year.

<TABLE>
<CAPTION>

                                                               Earnings     Weighted
                                                Net            (Loss) per   Average
                                                Income         Common       Shares
Quarter Ended       Net Sales    Gross Profit   (Loss)         Share        Outstanding
-----------------   ----------   ------------   ----------     ----         -----------
<S>                 <C>          <C>            <C>            <C>          <C>
December 31,  1996  $3,008,221   $1,299,194     $  538,377     0.14         3,909,277
              1995   2,968,263    1,287,846        412,176     0.10         3,803,234
                                                              
September 30, 1996  $2,860,866    1,029,360        440,803     0.11         3,962,359
              1995   2,180,406      855,276        382,067     0.10         3,608,675

     June 30, 1996  $2,333,053    1,215,756        382,653     0.10         3,960,299
              1995   2,164,167      611,950        300,300     0.08         3,522,913

    March 31, 1996  $1,795,454      496,414         36,974     0.01         3,960,299
              1995   1,028,263          763       (549,900)   (0.14)        3,479,139
</TABLE>

                                      F-23
<PAGE>  53
                    ROYALE ENERGY, INC. AND SUBSIDIARIES

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 the Company 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 recoverable 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.  Proved 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 follow are based on estimates
prepared by independent engineering consultants for the years ended December
31, 1996 and 1995.  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.

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 unpredictable 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 believes 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 the Company.  Management's investment and operating decisions are
based 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.

                                      F-24
<PAGE>  54
Changes in Estimated Reserve Quantities

<TABLE>
The net interest in estimated quantities of proved developed reserves of crude
oil and natural gas at December 31, 1996 and 1995 and changes in such
quantities during each of the years then ended, were as follows:

<CAPTION>
                                    1996                    1995
                                    ------------------      ------------------
                                    Oil      Gas          Oil        Gas
                                    (BBL)    (MCF)        (BBL)      (MCF)
                                    ------   ----------   ------     ---------
<S>                                 <C>      <C>          <C>        <C>
Proved developed and
undeveloped reserves:

Beginning of period                 22,401    9,383,850    21,877    6,627,837
Revisions of previous estimates    (20,732)   2,071,879    15,598    4,225,321
Production                             (22)    (672,383)  (15,074)  (3,211,572)
Extensions, discoveries and
 improved recovery                     -      2,125,976       -      1,747,478
Purchase of minerals in place          -            -         -            -
Sale of minerals in place              -            -         -         (5,214)
                                    ------   ----------   -------    ---------
Proved reserves end of period        1,647   12,909,322    22,401    9,383,850
                                    ======   ==========   =======    =========
Gas equivalent reserve              16,470                224,010
                                    ======                =======
Proved developed reserves:

  Beginning of period                1,852    4,121,616     1,464    3,280,953
                                    ======   ==========   =======    =========
  End of period                      1,647    6,978,805     1,852    4,121,616
</TABLE>

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, 1996.

The future net cash inflows are developed as follows:

(1)  Estimates are made of quantities of proved reserves and the future
     periods during which they are expected to be produced based on year-
     end economic conditions.

(2)  The estimated future production of proved reserves is priced on the
     basis of year-end prices.

(3)  The resulting future gross revenue streams are reduced by estimated
     future costs to develop and to produce proved reserves, based on
     year end estimates.

(4)  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 production timing.  The
standardized measure of discounted future net cash flow relating to proved
reserves reflects estimated income taxes.

                                      F-25
<PAGE>  55
<TABLE>
<CAPTION>
                                                    1996         1995
                                                    -----------  ------------
<S>                                                 <C>          <C>
Future cash inflows                                 $45,882,082  $16,418,681
Future production costs                             (11,985,243)  (6,691,945)
Future development costs                             (2,263,988)  (2,390,356)
Future income tax expenses                           (9,489,856)  (1,922,643)

Future net cash flows                                22,142,995    5,413,737

10% annual discount for estimated timing
  of cash flows                                     (10,121,742)  (2,716,322)

Standardized measure of discounted
  future net cash flow                              $12,021,253   $2,697,415
</TABLE>


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 reserves 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
production 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>
<CAPTION>
                                                      1996         1995
                                                      ----------   ----------
<S>                                                   <C>          <C>
Standardized measure - beginning of year              $ 2,697,415   $2,558,613
                                                      -----------   ----------
Sales of oil and gas produced,
 net of production costs                                 (970,483)  (2,263,723)

Revisions of estimates of reserves provided
 in prior years:
    Net changes in prices and production costs         10,634,281    1,042,311

Sales of minerals in place                                    -         (1,136)

Extensions, discoveries and improved recovery           3,722,480    1,441,927

Accretion of discount                                     (57,512)     (21,087)

Net change in income taxes                             (4,004,928)     (59,490)

Net increase                                            9,323,838      138,802

Standardized measure - end of year                    $12,021,253   $2,697,415
                                                      ===========   ==========
</TABLE>                             

                                      F-26