[DESCRIPTION]  FORM 10-KSB
<PAGE>    1
                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, 1997Commission File No. 0-22750

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

          California                         33-0224120
   (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)              Identification No.)

               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:  $9,066,126

     At March 31, 1998, there were outstanding 2,719,968 shares of
     registrant's Common Stock held by non-affiliates, with an aggregate
     market value of approximately $11,559,864, based on the closing Nasdaq
     price on that date.

     At March 31, 1998, there were outstanding a total of 3,864,300 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 24.
                                 
<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 Holders9

PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
     Item 5.   Market Price of the Company's Common Stock and Related
               Stockholder Matters . . . . . . . . . . . . . . .9
     Item 6.   Management's Discussion and Analysis of Financial Condition
               and Results of Operations . . . . . . . . . . . 10
     Item 7.   Financial Statements and Supplementary Data . . 14
     Item 8.   Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure. . . . . . . . . . . . 14

Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
     Item 9.   Directors, Executive Officers, Promoters and Control
               Persons, Compliance with Section 16(a) of the Exchange Act14
     Item 10.  Executive Compensation. . . . . . . . . . . . . 17
     Item 11.  Security Ownership of Certain Beneficial Owners and
               Management. . . . . . . . . . . . . . . . . . . 19
     Item 12.  Certain Relationships and Related Transactions. 22
     Item 13.  Exhibits, Lists, and Reports on Form 8-K. . . . 24
     Signatures. . . . . . . . . . . . . . . . . . . . . . . . 25

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 (symbol
     ROYL); prior to that date, it was traded on the Nasdaq Small Cap Market. 
     On March 21, 1998, the Company had 13 full time employees.

     During the fiscal year ended December 31, 1997, the Company continued
     its exploration and development of natural gas properties in northern
     California.  The Company drilled thirteen wells in 1997, of which it
     elected to complete nine as commercially productive wells.  Four wells
     drilled in 1997 were plugged and abandoned as dry holes.  The Company's
     estimated total natural gas reserves rose from approximately 12.9 Bcf at
     January 1, 1997 to 16.9 Bcf at January 1, 1998.

     For the years ended December 31, 1997 and 1996, the Company reported
     gross revenues in the amounts of $5,638,437 and $4,775,175, 
     respectively, in connection with the drilling of wells on a turnkey
     contract basis, which represents  62.2% and 47.8% of the Company's total
     revenues for those years.  These amounts are offset by drilling expenses
     and development costs of $3,163,945 and $1,530,597, respectively.  The
     Company hires, in addition to its own engineering staff, independent
     contractors to drill, test, complete and equip the wells that it drills.

     For the years ended December 31, 1997, and 1996, the Company had oil and
     natural gas sales from production of its wells in the amounts of
     $2,992,679 and $1,267,919, respectively, which represents 33.0% and
     12.7%, of the Company's total revenues for those years.


Plan of Business

     The Company is engaged in the acquisition of interests in oil and
     natural gas reserves by sponsoring private joint ventures.  Management
     believes that the Company's shareholders are better served by
     diversification and limitation of total exposure in individual drilling
     projects.  Through its participation in joint ventures, the Company can
     acquire interests and develop oil and
                                1
<PAGE>    4
     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 development and exploratory oil and
     natural gas wells on its property. To the extent that the Company
     retains all or any portion of the working interest, the Company pays its
     proportionate share of the actual cost of drilling, testing, and
     completing the project.

     The Company may also elect to finance part of the drilling cost by
     selling fractional interests in undeveloped wells.  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, the Company recognized gross revenue
     for the amount paid by the purchaser and agrees to pay the expense of
     drilling and development of the well for the participants.  The actual
     drilling and development costs may or may not be greaterthan the gross
     revenue which is recognized by the Company for its fractional interest
     sales.

     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 Financial Statements.  The Company maintains internal
     records of the expenditure of each investor's funds for drilling
     projects.

     Wells completed by the Company are generally operated by the Company. As
     operator, the Company receives fees set by industry standards from the
     owners of fractional interests in the wells and expense reimbursements. 
     For the years ended December 31, 1997, and 1996, the Company (and its
     former subsidiary) earned gross revenues in the amounts of $388,085 and
     $329,397, from operation of the wells, which represent 4.3% and 3.3% of
     the Company's total revenues on a consolidated basis for those years,
     respectively.  As of January 1, 1998, the Company is the operator of 51
     natural gas wells on properties leased by the Company in the Sacramento
     Basin in California.

* * *

     The Company's business is not dependent on a single customer or a few
     customers and management does not believe it will be in the foreseeable
     future.  Oil and natural gas purchasers are readily available in today's
     markets, and the Company does not believe that the loss of any customer
     would have a material affect on the Company's business or ability to
     find ready 
                                2
<PAGE>    5
     purchasers for its oil and gas production at current market prices.  

     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.  In December 1996, the Company's
     gas marketing operations were discontinued.

     The oil business is not generally seasonal in nature.  Natural gas
     demand and the prices paid for gas have become seasonal, showing
     decreases in the summer and fall.

Affiliated Entities

     On December 31, 1997, Royale Petroleum Corporation ("RPC") owned 27.14%
     of the Company's Common Stock (excluding rights to purchase shares
     pursuant to warrants).  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, 1997.


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.
                                3
<PAGE>    6

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

     Production, transportation, and sale of oil and natural gas from the
     Company's operations are affected to some degree by federal and state
     laws and 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 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.

     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.
                                4
<PAGE>    7
Item 2.   Description of Property

     Since 1993, the Company has concentrated on development of properties in
     the Sacramento Basin of Northern California.  In 1997, the Company
     drilled nine commercially productive gas wells and four dry holes in
     Northern California.  In 1996, the Company drilled five commercially
     productive gas wells and four dry holes in Northern California.  The
     Company also owns interests in 35 existing wells in Northern California
     as a result of purchases of producing properties during 1994 and 1997. 
     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 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 Company has available a $5,000,000 revolving credit line from a
     major commercial bank for working capital purposes, acquisitions, and
     development of oil and gas properties.  At December 31, 1997, $3,900,000
     in loans were outstanding under this credit line.  All of the Company's
     oil and gas properties and an assignment of production are pledged to
     secure this credit line.

     The following is a discussion of the Company's significant oil and
     natural gas properties.  Reserves at January 1, 1998, for each property
     discussed below, have been determined by Mark E. Andersen, Professional
     Engineer, in accordance with his report dated March 28, 1998 (the most
     recent report available).


Northern California

     The Company owns lease interests in 36,906.44 gross (26,175.30 net)
     acres in the Sacramento and San Joaquin Basins in Northern California. 
     At December 31, 1997, the Company operated 51 wells in Northern
     California, and its estimated total gas reserves in Northern California
     were approximately 16.3 Bcf, according to the Company's independently
     prepared reserve report.

     During 1997, the Company acquired interests in sixteen gas wells and one
     sale water disposal well in the Sacramento Basin from Vernon E.
     Faulconer, Inc., for a purchase price of approximately $3.3 million. 
     The Company expects to drill additional wells on the Faulconer leases,
     which cover approximately 10,000 acres.  All of the Company's drilling
     and development operations in 1997
                                5
<PAGE>    8
     were conducted in Northern California, and it expects to continue
     drilling in this region during 1998.


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, 1998, of 605,616 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.


Developed and Undeveloped Leasehold Acreage

     As of December 31, 1997, the Company owned leasehold interests in the
     following developed and undeveloped properties in both gross and net
     acreage.
<TABLE>
<CAPTION>
                    Developed           Undeveloped
               Gross           Net           Gross           Net
               Acres          Acres               Acres          Acres
<S>            <C>       <C>            <C>       <C>
California           9,946.53 6,785.59       26,959.91 19,389.71
Texas                1,386.30 1,188.81        1,494.65  1,494.65
All other States     2,421.00   216.00             -         -   

Total               13,753.83 8,190.40       28,454.56 20,884.36
</TABLE>

Drilling Activities

     The following table sets forth the Company's drilling activities during
     the years ended December 31, 1995, 1996, and 1997.  All wells are
     located in the Continental U.S., in California, Texas, Oklahoma, and
     North Dakota.
<TABLE>
<CAPTION>
                    Gross Wells(b)           Net Wells 
                    ----------------------------  --------------------
Year Type of Well(a)     Total  Producing(c)  Dry (d)  Producing(c)  Dry(d)
<S>  <S>            <C>   <C>         <C>    <C>         <C>
1995 Exploratory         1     -           1          -            0.1000
     Developmental  7     6           1       1.2360     0.1762
                                6
<PAGE>    9
                    Gross Wells(b)           Net Wells 
                    ----------------------------  --------------------
Year Type of Well(a)     Total  Producing(c)  Dry (d)  Producing(c)  Dry(d)

1996 Exploratory         1     -           1      -           0.3263
     Developmental  1     5           3      1.2573      1.0383

1997 Exploratory         3     1           2      .4430            .6150
     Developmental  10    8           2      3.1507      .7650
</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.

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

          As of December 31, 1997, the Company had 3 gross (0.058 net) oil
     wells and 46 gross (20.87 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.
                                7
<PAGE>    10
<TABLE>
<CAPTION>
               12 Months      12 Months      12 Months
                 Ended          Ended          Ended
               12/31/97       12/31/96       12/31/95
<S>            <C>            <C>            <C>
NET VOLUME
Oil (Bbl)            679                22             543
Gas (Mcf)      1,365,562       672,383        576,894
Mcfe             1,376,334          672,603        582,324
AVERAGE SALES PRICE
Oil (Bbl)         $14.42         $16.07         $15.63
Gas (Mcf)          $2.26         $1.79          $1.41
Net Production 
Costs & Taxes  $460,768       $260,789       $373,859
Lifting Costs     $0.34          $0.37          $0.64
</TABLE>

Net Proved Oil and Natural Gas Reserves

     As of January 1, 1998, the Company had proved developed reserves of
     8,606,456 Mcf of natural gas and 4,698 barrels of oil, and total proved
     reserves of 16,882,699 Mcf of natural gas and 4,698 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.
                                8
<PAGE>    11
     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 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, 1997 and
     1996, prepared by the Company's independent reserve engineering
     consultants.


Item 3.   Legal Proceedings

     In May 1997 a suit was filed in San Diego, California, Superior Court
     against the Company, its chairman, its president, and other defendants
     (Lucille F. Beigel, et al., v. Royale Energy, Inc., et al., No. 710630).
     This is a case alleging fraud, breach of contract, and related claims
     brought by several direct working interest owners and one Company
     shareholder who invested primarily in the Texas wells from 1989 to 1994. 
     Discovery has commenced.  The Company has denied any wrongdoing,
     believes it has meritorious defenses including the statute of
     limitations, and intends to vigorously contest the allegations of the
     complaint.


Item 4.   Submission of Matters to a Vote of Security Holders

     During the fourth quarter of fiscal 1997, 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, 1997, a total of 3,864,300 shares of the Company's
     Common Stock were issued and outstanding which were held by
     approximately 1,100 shareholders and of which 2,468,913 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 March 31, 1998, approximately ten 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 1996 through December 1997.  The quotations
     reflect high and low closing sale prices.
                                9
<PAGE>    12
<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>
1996 2    1         3    2         3    2         5    4 1/4  
1997 3    41/16          5    4         5    37/16          5 1/4   3 
</TABLE>

Dividends

     The Company has not declared or paid any cash 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.


Issuance of Common Stock upon Conversion of Preferred Stock

     During the fourth quarter of 1997, 2,500 shares of the Company's Common
     Stock were issued to a holder of the Company's previously issued Series
     A Convertible Preferred Stock, pursuant to the individual exercise by
     one shareholder of the right to convert shares of Preferred Stock to
     Common Stock.  The sole consideration received by the Company was the
     Preferred Stock surrendered in the conversion.  Each outstanding share
     of Series A Preferred Stock is convertible to Common Stock at a ratio of
     one share of Common Stock to be issued for each two shares of Preferred. 
     The Preferred Stock had originally been issued prior to 1994 in a
     private placement pursuant to Section 4(2) of the Securities Act of
     1933, and to the extent, if any, that the individual shareholder's
     conversion of Preferred shares to Common might be considered a sale of
     securities, the 1997 issuance of Common upon conversion of Preferred
     shares was also made pursuant to Section 4(2) of the Securities Act of
     1933.


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) changes 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 6,995,275 Mcfe at January 1, 1997 to 8,658,502 at January 1,
     1998, a 23.8% increase, while the Company's 
                                10
<PAGE>    13
     estimated total natural gas reserves increased from 12,925,792 Mcfe at
     January 1, 1997, to 17,031,701 Mcfe at January 1, 1998, a 31.8%
     increase.  The Company's management attributes this increase to the
     successful drilling of nine commercially productive wells during 1997.

     The Company valued its oil and gas properties at $9,380,742 at December
     31, 1997, an increase of $5,998,498 (177%) from $3,382,244 at December
     31, 1996.  In June 1997, the Company purchased lease interests covering
     approximately 10,000 acres in the Sacramento Basin, Northern California,
     including interests in sixteen gas wells and one salt water disposal
     well, for approximately $3.3 million, of which price $3 million was
     financed from its banking line of credit.  The remaining increase in oil
     and gas properties is attributable to successful drilling and
     development operations in Northern California and to capitalization of
     the repurchase of interests in wells previously drilled by the Company
     as part of settlement of a lawsuit in October 1997.  See, Notes 1 and 14
     to the Company's Financial Statements.

     During 1997, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Standards No. 128 (SFAS 128),
     "Earnings Per Share," which was adopted by the Company for the year
     ended December 31, 1997.  SFAS 128 replaces the presentation of primary
     earnings per share with a presentation of basic earnings per share based
     upon the weighted average number of common shares for the period.  See,
     Note 1 to the Company's Financial Statements.

     The Company has reviewed its management information systems to determine
     whether, in the Year 2000, it can expect any difficulties with its
     computer systems which may be encountered by software systems which do
     not adequately identify dates which end in years with "00" as the last
     two digits.  Based on its review, the Company has not identified or
     encountered any such problems.  The Company uses mainly "off the shelf"
     software programs and is receiving updated programs as available from
     its software suppliers to the extent that any of these programs  may
     require Year 2000 updates.

     Results of Operations for the Twelve Months Ended December 31, 1997, as
     Compared to the Twelve Months Ended December 31, 1996

     For the year ended December 31, 1997, the Company reported a net profit
     of $1,510,383, a 111,576 (8.0%) increase from the net profit of
     $1,398,807 in 1996.  Total revenues and expenses for the year ended
     December 31, 1997 both decreased from 1996.  Revenues for 1997 were
     $9,066,125, compared to $9,997,594 in 1996, and 1997 expenses were
     $7,304,467, compared to $8,224,450 in 1996.  The decrease in total
     revenues and expenses can be primarily attributed to discontinuance at
     the end of 1996 of the Company's natural gas marketing program, which
     had contributed significant revenues but marginal profits.  On the other
     hand, the Company's revenues from its core businesses of oil and gas
     sales and turnkey drilling both increased in 1997, and with the result
     that the Company's income from operations and after tax income both
     increased substantially over 1996, and profits from oil and gas
     production rose $1,453,654, or 157%, from $927,588 in 1996 to $2381,242
     in 1997.
                                11
<PAGE>    14
     Oil and gas revenues for the year ended December 31, 1997 were
     $2,992,679 compared to $1,267,919 for the same period in 1996, which
     represents a $1,724,760 or 136.0% increase.  This increase in revenues
     was mainly due to the increase in gas production.  The net sales volume
     for the year ended December 31, 1997, was 1,365,562 Mcf with an average
     price of $2.26 per Mcf, versus 672,383 Mcf with an average price of
     $1.79 per Mcf for the same period in 1996.  The Company's net sales
     volume for oil production was 679 barrels with an average price of
     $14.42 per Bbl for the period ended December 31, 1997, compared to 22
     barrels at an average price of $16.07 per Bbl for the same period in
     1996.

     The Company's oil and gas production costs, which are comprised of lease
     operating expenses, increased 79.7% to 611,437 for the year ended
     December 31, 1997, a $271,106 increase from $340,331 for the same period
     in 1996.  This increase in costs can be attributed to the Company's
     expanded production operations from additional wells during 1997. For
     fiscal 1997, the Company's gross margins on oil and gas production were
     119%, compared to 73.24% in 1996.  The increase in gross margin was due
     to the increase in the average price the Company received for its
     natural gas during 1997.

     For the year ended December 31, 1996, turnkey drilling revenues
     increased $863,262, from $4,775,175 to $5,638,437, or 18.1% for the
     year.  The Company  experienced a $1,633,348 or 106.7% increase in
     drilling and development costs from $1,530,597 in 1996 to $3,163,945. 
     This increase in turnkey revenues and expenses was due to the Company's
     drilling of 13 wells, 9 of which were commercially productive, that were
     sold to outside parties in 1997, versus nine productive wells and four
     dry holes in 1996.  The Company's gross margins, or profits, on drilling
     depend on the Company's ability to accurately estimate the costs
     associated with the development 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
     43.9% and 67.9% for the years ended December 31, 1997 and 1996,
     respectively.

     The aggregate of supervisory fees and other income was $388,085 for the
     year ended December 31, 1997, an increase of $58,688 (17,8%) from
     $329,397 during the same period in 1996.  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
     $95,499 or 51.3%, from $186,065 in 1996 to $281,564 in 1997.  This
     change can be attributed to the increased number of wells that the
     Company operates.

     Depreciation, depletion and amortization expense increased to $665,694
     from $479,842, an increase of $185,852 (38.7%) for the year ended
     December 31, 1997, as compared to 1996.  This increase in expense can be
     attributed to the drilling of 13 new wells during 1997.
                                12
<PAGE>    15

     The Company periodically  reviews its long-lived assets for impairment
     whenever events or changes in circumstances indicate that the carrying
     amount of an asset may not be recoverable, pursuant to SFAS No. 121.  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 $215,000 was
     recorded as an impairment loss for 1996 and $300,000 was recorded as an
     impairment loss for 1997.

     During 1996, the Company realized losses from sale of Texas leasehold
     interests and discontinuance of unprofitable operations totaling
     $357,811.  The Company had no such losses on asset dispositions during
     1997.  The Company believes that the disposition of Texas operations and
     focus on relatively more profitable California operations have increased
     the Company's operating efficiency.

     General and administrative expenses increased  by $171,232, or 13.5%,
     from $1,265,814 for the year ended December 31, 1996, to $1,437,046 for
     the same period in 1997.  Legal and accounting expense increased to
     $658,864 for the same period, compared to $268,683 for the year in 1996,
     a $390,181 (145.2%) increase.  This increase can be attributed to trial
     litigation costs during the summer of 1997.  Marketing expense for the
     year ended December 31, 1997 decreased $50,452 or 10.2%, to $443,740,
     compared to $494,192 for the same period in 1996.  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.

     The Company discontinued its gas marketing division at the end of 1996. 
     These marketing operations had contributed a large share of revenues and
     expenses but a relatively insignificant net revenue.  In 1997, the
     Company recorded one brokered natural gas sale during 1997 of $46,925,
     which was offset by cost of sales of $23,741.  The Company regards the
     1997 sale as only an isolated trade rather than a continuing marketing
     effort, but the Company intends to take advantage of any such trading
     opportunities, should they arise in the future.

     During the first half of 1997, the Company obtained a credit line from a
     major commercial bank, which it has used to purchase the California
     assets of Vernon E. Faulconer, Inc.  Because of borrowings pursuant to
     this credit line, interest expense dramatically increased to $134,799 in
     1997 from $14,296 in 1996.

Capital Resources and Liquidity:

     At December 31, 1997, the Company had current assets totaling $4,185,090
     and current liabilities totaling $3,848,582.  The Company's working
     capital surplus at December 31, 1997, was $336,508, compared to a
     working capital surplus at December 31, 1996. of $1,429,449.  The
     decrease in working capital surplus in 1997 was due mainly to use of
     working capital to purchase revenue generating assets and to better
     manage interest expenses by reducing the Company's revolving line of
     credit. In addition, the Company drew upon its revolving line of credit
     for approximately $3,900,000 during 1997.  Management believes that the
     Company has sufficient liquidity for the 
                                13
<PAGE>    16
short term.

     Operating Activities.  For the year ended December 31, 1996, cash
     provided by operating activities totaled $2,998,779 compared to
     $1,765,996 provided by operations for the same period in 1995.  This
     increase in cash provided can be mainly attributed to the decrease in
     accounts receivable for the year in 1997 when compared to 1996.

     Investing Activities.  Net cash used by investing activities, primarily
     in capital acquisitions of oil and gas properties, amounted to
     $6,929,049 for the period, compared to $682,5889 used by investing
     activities for the same period in 1996.  The increase due to
     expenditures of $6,929,049 for oil and gas properties in 1997, compared
     to only $688,194 for property acquisition in 1996.

     Financing Activities.  For the year ended December 31, 1997, net cash
     provided by financing activities was $3,434,179, compared to cash used
     by financing activities for the period in 1996 of $104,823.  The reason
     for the increase in cash provided for financing in 1997 was the
     Company's use of its credit line in 1997 to acquire oil and gas
     properties.


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, Promoters and 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.
                                14
<PAGE>    17
<TABLE>
<CAPTION>
                      First Became Director
Name             Age   or Executive Officer  Positions Held
----             ---  ---------------------- --------------
<S>              <C>          <C>                 <C>
Harry E. Hosmer*      67      1987                Chairman of the Board.
     
Donald H. Hosmer      41      1987                President, Secretary and
                                                  Director.  Chairman of
                                                  the Board and President
                                                  of Royale Petroleum
                                                  Corporation ("RPC").

Stephen M. Hosmer      31          1991                Chief Financial Officer
                                                       and Director.  Secretary
                                                       and Director of RPC.
Oscar A. 
Hildebrandt+      62          1995                Director.
Rodney Nahama     66          1994                Director.
Henry C. Thorne*+      67          1991                Director and Assistant
                                                       Secretary.
George M. Watters*+  78       1991                Director.
</TABLE>
*    Member of the audit committee.

+    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 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 was 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 
                                15
<PAGE>    18
     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.

     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.
                                16
<PAGE>    19
     Mr. Watters received his Bachelor of Science
     degree from Massachusetts Institute of Technology in 1942.

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.  During 1997, the Company did not receive 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 1997.


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, 1997, 1996, and 1995.
                                17
<PAGE>    20
<TABLE>
<CAPTION>
                                                  Long Term
                       Annual Compensation        Compensation
                       -------------------        Awards
(a)        (b)           (c)       (d)            (e)
Name       Period Covered     Salary    Compensation   Underlying Options
-----           --------------     -------   -------------  ------------------
<S>        <S>           <C>       <C>            <C>
Donald H.  FYE 12/31/97  $103,974  $356 
Hosmer, CEO     FYE 12/31/96  $100,000  $703           -
           FYE 12/31/95  $100,000  $785           30,000
Harry E.
Hosmer,    FYE 12/31/97  $110,000  $299 
Chairman   FYE 12/31/96  $122,444  $882           -
           FYE 12/31/95  $110,000  $1,295         30,000
</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 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.

     In 1997, the Company did not maintain a retirement plan or "Section
     401(k)" compensation plan on behalf of its employees.
                                18
<PAGE>    21

Stock Options Granted in 1997

     No stock options were granted to officers, directors, or employees
     during 1997.


Aggregated 1996 Option Exercises and Year-End Values

     Neither of the Named Officers exercised any stock options or stock
     appreciation rights in 1997, 1996, or 1995.  The following table
     summarizes the number and value of all unexercised stock options held by
     the Named Officers at the end of 1997.
<TABLE>
<CAPTION>
(a)            (b)                      (c)
               Number of Securities          Value of Unexercised In-the-
               Underlying Unexercised        Money Options/SARs at FY-
               Options/SARs at FY-End (#)    End ($) 1

Name           Exercisable/Unexercisable 2   Exercisable/Unexercisable
------------------------------------------------------------------------------
<S>            <C>                      <C>
Harry E. Hosmer     45,000/0                 $182,700/0
Donald H. Hosmer    45,000/0                 $182,700/0
</TABLE>
1    Based on a fair market value of $4.06 per share, which was the closing
     bid price of the Company's Common Stock in the Nasdaq National Market
     System on December 31, 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 1997.  The following table sets forth information
     regarding the cash compensation paid to directors, other than Named
     Officers, in 1997.
<TABLE>
<CAPTION>
(a)                 (b)
                    Annual Retainer
Name                Fees

<S>                 <C>
Oscar Hildebrandt        $6,800
Rodney Nahama       $6,800
Henry C. Thorne          $6,800
George M. Watters        $6,800
</TABLE>
                                19
<PAGE>    22
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, 1997,
     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, 1997, 3,864,300 shares of the Company's Common Stock
     were outstanding.

<TABLE>
<CAPTION>
                                       Shares Owned (1)
                                       ----------------
          Shareholder (2)               Number            Percent
          ---------------                 ------               -------
<S>                                <C>               <C>
Royale Petroleum Corporation            1,279,243 (3), (4)   31.24%
Donald H. Hosmer                        1,325,243 (3), (4)   32.42%
Harry E. Hosmer                            45,000 (4)      1.15%
Oscar A. Hildebrandt                       62,422 (5)      1.61%
Stephen M. Hosmer                       1,310,793 (3), (4)   32.04%
Owen LeTissier
St. Peter Port
Guernsey, Channel Islands                 400,000 (6)     10.35%
Rodney Nahama                         14,000          0.36%
Henry C. Thorne                            33,472          0.86%
George M. Watters                          77,500 (7)      1.99%
All directors and officers as a group
(7 persons)                             1,588,887 (3)     36.87%
</TABLE>
(1)  Includes shares which the listed shareholder has the right to acquire
     before March 1,1998, from options or warrants, as follows: Royale
     Petroleum Corporation 230,555, Donald H. Hosmer 45,000, Harry E. Hosmer
     45,000, Stephen M. Hosmer 30,000, Oscar Hildebrandt 20,000, Rodney
     Nahama 14,000, Henry C. Thorne 30,000, George M. Watters 30,000, and all
     officers and directors as a group 214,000.
                                20
<PAGE>    23
(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 1,048,688 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 as the Trustee of two foreign charitable trusts.

(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, 1997, there were
     16,875 shares of  Series A and 50,000 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    %    Number    %
---------------                    ------    -    ------    -
<S>                           <C>      <C>   <C>      <C>
Richard G. and Margaret E. Algire  3,125     18.6%                    
Marjorie Carson                                   6,250         12.50%     
June L. Ginnings                                  3,125          6.25%
Virginia L. Hoffman           7,500         44.4%                
Overland Bank                                6,250         12.50%
                                21
<PAGE>    24
                              Series A       Series AA
                              -------------  -------------
Shareholder (1)                    Number    %    Number    %
---------------                    ------    -    ------    -
Audrey Sanabria & B.G. Dienelt, Jr.                    3,125          6.25%     
George Singleton                                  6,250         12.50%
Charles Swaner                               6,250         12.50%     
James S. Trowbridge           6,250         37.0%                
William W. Well                                   6,250         12.50%
Jerome Winston                               6,250         12.50%
Nim E. Wire                                       6,250         12.50%
All officers and directors as a group
(7 persons).                      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.

     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, 
                                22
<PAGE>    25
     retail investors in working interests, such as sales commission, if any,
     or marketing expenses. The outside, turnkey drilling agreement
     investors, on the other hand, are not obligated to pay additional costs
     if a drilling project experiences cost overruns or unanticipated
     expenses in the drilling and completion stage.  Accordingly, 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 25
     wells under the 1989 policy.  Donald and Stephen Hosmer have also
     participated in 26 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.

     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 1994, 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 1996, Director Oscar 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 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 
                                23
<PAGE>    24
     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
     $4,767 and $3,328.29 remained outstanding at December 31, 1996 and 1997,
     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 $5,481 and $4,418.77 remained unpaid by
     each of them at December 31, 1996 and 1997, 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 1996, 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
     $1,864, calculated on approximately the same basis as that under which
     directors could have participated in the well 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.

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 
                                24
<PAGE>    27
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 no Reports on Form 8-K during the last fiscal quarter
     of 1997.


                            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.

        4/20/98               /s/ Donald H. Hosmer
Date:------------------       ------------------------------------
                              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.

        4/20/98                /s/ Harry E. Hosmer
Date:-------------------      ------------------------------------
                              Harry E. Hosmer, Chairman of the Board

        4/20/98                /s/ Donald H. Hosmer
Date:-------------------      -------------------------------------
                              Donald H. Hosmer, Chief Executive Officer,
                              President, Secretary, and Director

        4/20/98                /s/ Stephen M. Hosmer
Date:-------------------      -------------------------------------
                              Stephen M. Hosmer, Chief Financial Officer
                              and Director

   
Date:-------------------      -------------------------------------
                              Oscar A. Hildebrandt, Director


Date:-------------------      --------------------------------------
                              Rodney Nahama, Director


Date:-------------------      --------------------------------------
                              Henry C. Thorne, Director

        4/20/98                /s/ George M. Watters
Date:-------------------      --------------------------------------
                              George M. Watters, Director
                                25
<PAGE>    28
<TABLE>
<CAPTION>

                               ROYALE ENERGY, INC.
                          INDEX TO FINANCIAL STATEMENTS
                             AND SUPPLEMENTARY DATA

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

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

Balance Sheets at December 31, 1997 and 1996. . . . . . . . . . . . . . . .  F-3

Statements of Income for the Years Ended
   December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . .  F-5

Statements of Stockholders' Equity for the
   Years Ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . . .  F-6

Statements of Cash Flows for the Years
   Ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . .  F-8

Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . .  F-10

Supplemental Information About Oil and Gas Producing Activities (Unaudited)  F-23
<FN>
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.
</TABLE>
                                      F-1
<PAGE>  29
                         REPORT OF INDEPENDENT AUDITORS



Shareholders  and  Board  of  Directors
Royale  Energy,  Inc.


We  have  audited  the  accompanying  balance  sheets  of Royale Energy, Inc. (a
California  corporation)  as  of  December  31,  1997  and 1996, and the related
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  audits  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  audits  provide  a  reasonable  basis  for  our opinion.

In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Royale Energy, Inc., as of December
31,  1997 and 1996, and the results of their operations and their cash flows for
the  years  then  ended  in  conformity  with  generally  accepted  accounting
principles.


                              /S/ BROWN ARMSTRONG RANDALL & REYES
                              BROWN  ARMSTRONG  RANDALL  &  REYES
                              ACCOUNTANCY  CORPORATION





Bakersfield,  California
February  27,  1998

                                      F-2
<PAGE>  30

<TABLE>
<CAPTION>

                               ROYALE ENERGY, INC.
                                 BALANCE SHEETS



                                     ASSETS


                                                       December 31,
                                               -------------------------
                                                   1997          1996
                                               -------------  ----------
<S>                                            <C>            <C>
CURRENT ASSETS
  Cash and cash equivalents . . . . . . . . .  $   2,032,001  $2,595,444
  Accounts receivable . . . . . . . . . . . .      1,823,388   1,928,472
  Receivables from related parties. . . . . .         34,218      34,897
  Note receivable . . . . . . . . . . . . . .        159,024     131,847
  Other current assets. . . . . . . . . . . .        136,459     190,535
                                               -------------  ----------

    Total Current Assets. . . . . . . . . . .      4,185,090   4,881,195
                                               -------------  ----------

OIL AND GAS PROPERTIES (SUCCESSFUL
 EFFORTS BASIS),  EQUIPMENT AND FIXTURES, NET      9,509,414   3,478,707
                                               -------------  ----------

OTHER ASSETS
  Receivables from related parties, net . . .          9,652       3,535
                                               -------------  ----------


                                               $  13,704,156  $8,363,437
                                               =============  ==========
</TABLE>


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

                                      F-3
<PAGE>  31

<TABLE>
<CAPTION>

                               ROYALE ENERGY, INC.
                                 BALANCE SHEETS


                      LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                 December 31,
                                                         ----------------------------
                                                              1997           1996
                                                         --------------  ------------
<S>                                                      <C>             <C>
CURRENT LIABILITIES
  Accounts payable and accrued expenses . . . . . . . .  $   2,112,756   $ 1,947,705 
  Deferred revenue from turnkey drilling. . . . . . . .      1,735,826     1,504,041 
                                                         --------------  ------------

    Total Current Liabilities . . . . . . . . . . . . .      3,848,582     3,451,746 
                                                         --------------  ------------

LONG-TERM DEBT, NET OF CURRENT PORTION. . . . . . . . .      3,900,000       300,000 
                                                         --------------  ------------

REDEEMABLE PREFERRED STOCK
  Series A, convertible preferred stock, no par value,
    259,250 shares authorized; 16,875 and
    24,375 shares, respectively, issued and outstanding         49,100        79,100 
                                                         --------------  ------------

STOCKHOLDERS' EQUITY
  Common stock, no par value, 10,000,000 shares
    authorized; 3,864,300 and 3,834,049 shares,
    respectively, issued and outstanding. . . . . . . .      8,676,273     8,386,273 
  Convertible preferred stock, Series AA, no par value,
    147,500 shares authorized; 50,000 and 115,000
    shares, respectively, issued and outstanding. . . .        200,000       460,000 
  Accumulated deficit . . . . . . . . . . . . . . . . .     (2,782,299)   (4,292,682)
                                                         --------------  ------------

    Total paid in capital and accumulated deficit . . .      6,093,974     4,553,591 

  Less cost of treasury stock 37,500 and 4,200 shares,
    respectively. . . . . . . . . . . . . . . . . . . .       (187,500)      (21,000)
                                                         --------------  ------------

    Total Stockholders' Equity. . . . . . . . . . . . .      5,906,474     4,532,591 
                                                         --------------  ------------

                                                         $  13,704,156   $ 8,363,437 
                                                         ==============  ============
</TABLE>


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

                                      F-4
<PAGE>  32

<TABLE>
<CAPTION>

                               ROYALE ENERGY, INC.
                              STATEMENTS OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


                                              Year Ended December 31,
                                             ------------------------

                                                1997         1996
                                             -----------  -----------
<S>                                          <C>          <C>
REVENUES
  Sale of oil and gas . . . . . . . . . . .  $2,992,679   $1,267,919 
  Gas distribution. . . . . . . . . . . . .      46,925    3,625,103 
  Turnkey drilling. . . . . . . . . . . . .   5,638,437    4,775,175 
  Supervisory fees and other. . . . . . . .     388,085      329,397 
                                             -----------  -----------

    Total Revenues. . . . . . . . . . . . .   9,066,126    9,997,594 
                                             -----------  -----------

COSTS AND EXPENSES
  Cost of gas distribution sales. . . . . .      23,741    3,629,991 
  General and administrative. . . . . . . .   1,437,046    1,265,814 
  Turnkey drilling and development. . . . .   3,163,945    1,530,597 
  Lease operating . . . . . . . . . . . . .     611,437      340,331 
  Lease impairment. . . . . . . . . . . . .     300,000      215,000 
  Legal and accounting. . . . . . . . . . .     658,864      268,683 
  Marketing . . . . . . . . . . . . . . . .     443,740      494,192 
  Depreciation, depletion and amortization.     665,694      479,842 
                                             -----------  -----------

    Total Costs and Expenses. . . . . . . .   7,304,467    8,224,450 
                                             -----------  -----------

INCOME FROM OPERATIONS. . . . . . . . . . .   1,761,659    1,773,144 
                                             -----------  -----------

OTHER (EXPENSE)
  Interest. . . . . . . . . . . . . . . . .    (149,725)     (14,926)
  Loss on asset disposition . . . . . . . .           -     (357,811)
                                             -----------  -----------

    Total Other (Expense) . . . . . . . . .    (149,725)    (372,737)
                                             -----------  -----------

INCOME BEFORE INCOME TAX EXPENSE. . . . . .   1,611,934    1,400,407 

INCOME TAX EXPENSE. . . . . . . . . . . . .     101,551        1,600 
                                             -----------  -----------

NET INCOME. . . . . . . . . . . . . . . . .  $1,510,383   $1,398,807 
                                             ===========  ===========

DILUTED EARNINGS PER SHARE. . . . . . . . .  $      .37   $      .34 
                                             ===========  ===========

BASIC EARNINGS PER SHARE. . . . . . . . . .  $      .39   $      .36 
                                             ===========  ===========
</TABLE>


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

                                      F-5
<PAGE>  33

<TABLE>
<CAPTION>

                                               ROYALE ENERGY, INC.
                                       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
  canceled. . . . . . . . .     (166,500)           -            -          -             -           -        -
Shares donation . . . . . .       10,000       16,875            -          -             -           -        -
Shares purchased. . . . . .            -            -            -          -             -       4,200   21,000

Shares redeemed and
  canceled. . . . . . . . .            -            -      (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>


                            (Continued on next page)

                                      F-6
<PAGE>  34
<TABLE>
<CAPTION>

                                                ROYALE ENERGY, INC.
                                        STATEMENTS OF STOCKHOLDERS' EQUITY
                                  FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


                                                           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, 1997. .    3,834,049   $8,386,273      115,000   $ 460,000   $(4,292,682)      4,200  $ 21,000
Shares issued in connection
  with preferred stock
  Series A Conversion . . .        3,750       30,000            -           -             -           -         -
Shares issued in connection
  with preferred stock
  Series AA conversion. . .       32,501      260,000            -           -             -           -         -

Shares purchased. . . . . .            -            -            -           -             -      33,300   166,500

Shares redeemed and
  canceled. . . . . . . . .       (6,000)           -      (65,000)   (260,000)            -           -         -
Net income. . . . . . . . .            -            -            -           -     1,510,383           -         -
                             ------------  ----------  ------------  ----------  ------------  ---------  --------
Balance,
  December 31, 1997 . . . .    3,864,300   $8,676,273       50,000   $ 200,000   $(2,782,299)     37,500  $187,500
                             ============  ==========  ============  ==========  ============  =========  ========
</TABLE>


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

                                      F-7
<PAGE>  35

<TABLE>
<CAPTION>

                                 ROYALE ENERGY, INC.
                              STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


                                                          Year  Ended  December  31,
                                                          --------------------------
                                                              1997          1996
                                                          ------------  ------------
<S>                                                       <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income . . . . . . . . . . . . . . . . . . . . . .  $ 1,510,383   $ 1,398,807 
  Adjustment to reconcile net income to net
    cash provided by operating activities:
    Depreciation, depletion and amortization . . . . . .      665,694       479,842 
    Loss on disposal of assets . . . . . . . . . . . . .            -       357,811 
    Loss on lease impairment . . . . . . . . . . . . . .      300,000       215,000 
    Stock option compensation for officers and directors            -             - 
    (Increase) decrease in:
      Accounts receivable. . . . . . . . . . . . . . . .      105,084    (1,049,307)
      Receivable from related parties. . . . . . . . . .       (6,117)      (10,429)
      Prepaid expenses and other assets. . . . . . . . .       54,076       (89,805)
      Notes receivable . . . . . . . . . . . . . . . . .      (27,177)      (98,347)
      Other. . . . . . . . . . . . . . . . . . . . . . .            -         1,132 
    Increase(Decrease) in:
      Accounts payable and accrued expenses. . . . . . .      165,051      (409,809)
      Deferred revenues - DWI. . . . . . . . . . . . . .      231,785       971,101 
                                                          ------------  ------------

      Net Cash Provided by Operating Activities. . . . .    2,998,779     1,765,996 
                                                          ------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Expenditures for oil and gas properties. . . . . . . .   (6,929,049)     (688,194)
  Proceeds from sale of oil and gas properties . . . . .        7,307        51,374 
  Other capital expenditures . . . . . . . . . . . . . .      (74,659)      (45,769)
                                                          ------------  ------------

      Net Cash Used by Investing Activities. . . . . . .   (6,996,401)     (682,589)
                                                          ------------  ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  (Increase) decrease in receivable from
    related parties, net . . . . . . . . . . . . . . . .          679        49,841 
  Proceeds from line of credit . . . . . . . . . . . . .    3,900,000       300,000 
  Principal payments on notes payable. . . . . . . . . .     (300,000)     (433,664)
  Treasury stock purchased . . . . . . . . . . . . . . .     (166,500)      (21,000)
                                                          ------------  ------------

      Net Cash Provided (Used) by Financing Activities .    3,434,179      (104,823)
                                                          ------------  ------------

NET INCREASE (DECREASE)  IN CASH AND
  CASH  EQUIVALENTS. . . . . . . . . . . . . . . . . . .     (563,443)      978,584 

CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . .    2,595,444     1,616,860 
                                                          ------------  ------------

CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . .  $ 2,032,001   $ 2,595,444 
                                                          ============  ============
</TABLE>


                            (Continued on next page)

                                      F-8
<PAGE>  36

<TABLE>
<CAPTION>

                            ROYALE ENERGY FUNDS, INC.
                            STATEMENTS OF CASH FLOWS


                                            Year Ended December 31,
                                            -----------------------
                                                 1997     1996
                                               --------  -------
<S>                                            <C>       <C>
SUPPLEMENTAL INFORMATION:

  Cash paid for interest. . . . . . . . . . .  $149,725  $14,930

  Cash paid for taxes . . . . . . . . . . . .   101,551    1,600


NONCASH TRANSACTIONS:

  Series A preferred stock exchanged
    for common stock. . . . . . . . . . . . .    30,000   50,000

  Series AA stock exchanged for common stock.   260,000   30,000

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


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

                                      F-9
<PAGE>  37


                               ROYALE ENERGY, INC.
                          NOTES TO FINANCIAL STATEMENTS


NOTE  1  -  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES
            ----------------------------------------------

This  summary  of  significant  accounting  policies of Royale Energy, Inc. (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  area  of  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
----------------------

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 the remaining operations of Royale Natural Gas Marketing, Inc. were
absorbed  by  Royale  Energy,  Inc.  The results of these actions eliminated all
subsidiaries of the Company and  there was no material effect on these financial
statements  from  these  actions.

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.

                                      F-10
<PAGE>  38

NOTE  1  -  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (Continued)
            ----------------------------------------------
Revenue  Recognition
--------------------
The  Company  recognizes revenues from the sales of oil and gas in the period of
delivery.

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,  along  with  the investors, receive an assignment of working
interests. 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 pay their share of the land 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. 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, and a suitable replacement well is not
found,  the deferred funds received would be returned to the investors. Included
in  cash  and  cash equivalents are amounts for use in the completion of Turnkey
drilling  programs  in  progress.

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  field  by  field  impairment  review.

In  1997  and  1996,  $300,000  and  $215,000,  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.

                                      F-11
<PAGE>  39

NOTE  1  -  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (Continued)
            ----------------------------------------------

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.

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.

Earnings  Per  Share  (SFAS  128)
--------------------

In  February  1997,  the  Financial  Accounting  Standards  Board  (FASB) issued
Statement  of  Financial  Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share",  which  was adopted by the Company for the year ended December 31, 1997.
SFAS  128  replaces  the  presentation  of  primary  earnings  per  share with a
presentation  of basic earnings per share based upon the weighted average number
of  common  shares  for the period.  It also requires dual presentation of basic
and  diluted  earnings  per  share  for  companies  with  complex structures.nds
invested  to  be  used

Basic  and  diluted  earnings  per  share  are  calculated  as  follows:

<TABLE>
<CAPTION>

                                                       For  the  Year  Ended  1997
                                               ---------------------------------------
                                                  Income        Shares      Per-Share
                                               (Numerator)   (Denominator)    Amount
                                               ------------  -------------  ----------
<S>                                            <C>           <C>            <C>
Basic EPS
  Income available to common stockholders . .  $  1,510,391      3,861,589  $      .39
                                                                            ==========
  Effect of dilutive securities stock options             -        244,006
                                               ------------  -------------            

Diluted EPS
  Income available to common stockholders . .  $  1,510,391      4,105,595  $      .37
                                               ============  =============  ==========
</TABLE>

<TABLE>
<CAPTION>

                                                     For  the  Year  Ended  1996
                                               ---------------------------------------
                                                  Income        Shares      Per-Share
                                               (Numerator)   (Denominator)    Amount
                                               ------------  -------------  ----------
<S>                                            <C>           <C>            <C>
Basic EPS
  Income available to common stockholders . .  $  1,398,807      3,909,277  $      .36
                                                                            ==========
  Effect of dilutive securities stock options             -        254,206
                                               ------------  -------------            

Diluted EPS
  Income available to common stockholders . .  $  1,398,807      4,163,483  $      .34
                                               ============  =============  ==========
</TABLE>

                                      F-12
<PAGE>  40

NOTE  1  -  SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES  (Continued)
             ----------------------------------------------

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.

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 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.

New  Accounting  Pronouncements
-------------------------------

In  June  1997,  the FASB issued Statement of Financial Accounting Standards No.
130  (SFAS  130),  Reporting Comprehensive Income.  This statement requires that
all  items  that  are  required  to  be recognized under accounting standards as
components  of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.  SFAS 130 will
be  adopted  by the Company  for the year ended December 31, 1998.  Prior period
financial  statements provided for comparative purposes will be reclassified, as
required.    Upon  adoption,  the  Company  does  not  expect SFAS 130 to have a
material affect upon the Company's financial condition or results of operations.

In  June  1997, the FASB issued Statements of Financial Accounting Standards No.
131  (SFAS  131),  Disclosures  about  Segments  of  an  Enterprise  and Related
Information.  The statement requires the Company to report income/loss, revenue,
expense  and  assets  by  business  segment  including information regarding the
revenues  derived from specific products and services and about the countries in
which  the  Company  is operating.  The Statement also requires that the Company
report  descriptive  information  about  the  way  that  operating segments were
determined,  the  products  and  services  provided  by  the operating segments,
differences  between  the measurements used in reporting segment information and
those used in the Company's general-purpose financial statements, and changes in
the  measurement  of  segment  amounts  from period to period.  SFAS 131 will be
adopted by the Company for the year ended December 31, 1998.  This statement has
no  affect  on  financial statements traditionally presented by the Company, but
increases  required  disclosures.

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,  1997  consist  of  $136,155  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 $22,869 secured
by Royale Covenant Security Corporation stock, bearing an interest rate of prime
plus  1.5%.

                                      F-13
<PAGE>  41

NOTE  3  -  OIL  AND  GAS  PROPERTIES,  EQUIPMENT  AND  FIXTURES
             ----------------------------------------------------

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

Oil  and  Gas
-------------

<TABLE>
<CAPTION>

                                                            1997          1996
                                                        ------------  ------------
<S>                                                     <C>           <C>
  Proved properties:
    Producing properties, including intangible
      drilling costs . . . . . . . . . . . . . . . . .  $ 9,384,604   $ 2,866,941 
    Lease and well equipment . . . . . . . . . . . . .    2,442,696     2,030,728 
                                                        ------------  ------------

                                                         11,827,300     4,897,669 
  Accumulated depletion, depreciation and amortization   (1,717,620)   (1,086,487)
  Reserve for lease impairment . . . . . . . . . . . .     (728,938)     (428,938)
                                                        ------------  ------------

                                                          9,380,742     3,382,244 
                                                        ------------  ------------
Commercial and Other
------------------------------------------------------                            

  Furniture and equipment. . . . . . . . . . . . . . .      282,153       214,800 
  Accumulated depreciation . . . . . . . . . . . . . .     (153,481)      118,337 
                                                        ------------  ------------

                                                            128,672        96,463 
                                                        ------------  ------------

                                                        $ 9,509,414   $ 3,478,707 
                                                        ============  ============
</TABLE>

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

<TABLE>
<CAPTION>

                  1997       1996
               ----------  --------
<S>            <C>         <C>
  Acquisition  $3,999,087  $138,409
  Development  $5,150,617  $592,806
</TABLE>

In  July  1997,  the  Company acquired additional working interests in producing
wells  and properties with development potential.  In exchange for these working
interests  and  properties,  the Company gave consideration of cash by utilizing
their  credit  line  and  cash  in  the  bank.

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>

                                               1997         1996
                                            -----------  -----------
<S>                                         <C>          <C>
  Oil and gas sales. . . . . . . . . . . .  $2,992,679   $1,267,919 
  Production related costs . . . . . . . .    (611,437)    (340,331)
  Depreciation, depletion and amortization    (631,133)    (458,951)
                                            -----------  -----------

  Results of operations from producing
    and exploration activities . . . . . .  $1,750,109   $  468,637 
                                            ===========  ===========
</TABLE>

                                      F-14
<PAGE>  42

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, 1997 and 1996, the Company had
recorded  deferred  turnkey  drilling revenue associated with undrilled wells of
$1,735,826  and  $1,504,041,  respectively,  as  a  current  liability.

NOTE  5  -  LONG-TERM  DEBT
            ---------------

<TABLE>
<CAPTION>

                                                              1997       1996
                                                           ----------  --------
<S>                                                        <C>         <C>
  Revolving line of credit with a maximum available
  of $5,000,000 for working capital purposes,
  acquisitions, and development of oil and gas
  properties. Interest at New York prime plus 137.5
  and 150 basis points, resulting in rates of 9.875%
  and 9.75% at December 31, 1997 and 1996, respectively.
  Interest payable monthly, with the outstanding
  principal due at maturity on May 30, 1999. Secured
  by property and assignment of production. . . . . . . .  $3,900,000  $300,000

  Less current portion. . . . . . . . . . . . . . . . . .           -         -
                                                           ----------  --------

                                                           $3,900,000  $300,000
                                                           ==========  ========
</TABLE>

Maturities  of  long-term  debt for years subsequent to December 31, 1997 are as
follows:

<TABLE>
<CAPTION>

December 31,
------------
<S>           <C>
1999          $3,900,000
              ==========
</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
and  1997.

NOTE  6  -  INCOME  TAXES
            -------------

The  provisions  for income taxes for the years ended December 31, 1997 and 1996
represents  minimum  state  taxes.

As  of  December  31,  1997,  the  Company  had  federal  net  operating  loss
carryforwards  as  indicated:
<TABLE>
<CAPTION>


Year          Year of    Net Operating
Originated   Expiration       Loss
-----------              --------------
<S>          <C>         <C>
1988. . . .        2004  $      127,792
1989. . . .        2005         885,795
1990. . . .        2006         970,101
1991. . . .        2007       1,654,713
1992. . . .        2008         227,241
                         --------------

                              3,865,642
                         ==============
</TABLE>

                                      F-15
<PAGE>  43

NOTE  6  -  INCOME  TAXES  (Continued)
           ---------------

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

<TABLE>
<CAPTION>

                                           1997          1996
                                       ------------  ------------
<S>                                    <C>           <C>
  Deferred Tax Assets:
    Net operating loss carryforwards.  $ 1,314,318   $ 1,288,197 
    Statutory depletion carryforwards      182,622       182,622 
    Accumulated depreciation. . . . .       94,487        94,487 
                                       ------------  ------------

  Total Deferred Tax Assets . . . . .    1,591,427     1,565,306 
                                       ------------  ------------

  Valuation Allowance . . . . . . . .   (1,591,427)   (1,565,306)
                                       ------------  ------------

  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.

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,  1997  and  1996,  respectively,  to  pretax income is as follows:

<TABLE>
<CAPTION>

                                                   1997        1996
                                                ----------  ----------
<S>                                             <C>         <C>
  Tax computed at 34%, respectively. . . . . .  $ 513,533   $ 476,138 

  Increase (decrease) in taxes resulting from:
    Net operating loss carryforwards . . . . .   (513,533)   (476,138)
    State taxes. . . . . . . . . . . . . . . .    101,551       1,600 
                                                ----------  ----------

                                                $ 101,551   $   1,600 
                                                ==========  ==========

  Effective Tax Rate . . . . . . . . . . . . .        5.6%        0.1%
                                                ==========  ==========
</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  1996  or  1997.

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).

                                      F-16
<PAGE>  44

NOTE  7  -  REDEEMABLE  PREFERRED  STOCK  (Continued)
           ------------------------------

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,  1997,  217,375  shares  of Series A Convertible
Preferred  Stock  had  been  converted  to  194,875  shares  of  common  stock.

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.  The Series AA Convertible Preferred Stock
does  not  have  the  right  of  redemption  at the shareholders' option.  As of
December  31,  1997  and  1996,  there were 50,000 and 115,000 shares issued and
outstanding, respectively.  The dividend has been paid on all shares outstanding
at  December  31,  1997.

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 canceled.  Additionally
in  1996,  10,000  shares  were issued and donated to a charitable organization.

During  1997, 32,501 shares of common stock were issued for conversion of 65,000
Series AA Preferred Stock, and 3,750 common shares were issued for conversion of
7,500  shares  of  Series  A  Preferred Stock.  Also, in 1997, 6,000 shares were
canceled  as  a  result  of  a  settlement  agreement  executed  in  1996.  This
settlement  agreement  was  not  material  to  the  Company  as  a  whole.

NOTE  10  -  STOCK  WARRANTS
             ---------------

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

<TABLE>
<CAPTION>

                                              Year Ended    Year Ended
                                             December 31,  December 31,
                                                 1997          1996
                                             ------------  ------------
<S>                                          <C>           <C>
Outstanding warrants at beginning of period       230,555       480,555
Additional warrants issued
  -  Exercise of stock warrants . . . . . .             -             -
  -  Warrants expired or ineligible . . . .             -       250,000
                                             ------------  ------------

Outstanding warrants at end of period . . .       230,555       230,555
                                             ============  ============
</TABLE>

                                      F-17
<PAGE>  45

NOTE  10  -  STOCK  WARRANTS  (Continued)
              ---------------

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.  The expiration date to purchase the remaining 55,555
additional  shares pursuant to this grant has been extended through December 31,
2002.

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.  The expiration
date  of  this  grant  has  been  extended  through  December  31,  2002.

NOTE  11  -  OPERATING  LEASES
             -----------------

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,  1997  are  as  follows:

<TABLE>
<CAPTION>

Year Ended December 31,
-----------------------
<S>                           <C>
         1998            $141,013
         1999             145,359
         2000              86,275
                         --------

                          372,647
                         ========
</TABLE>

Rental  expense for the years ended December 31, 1997 and 1996, was $138,664 and
$132,911,  respectively.

NOTE  12-  RELATED  PARTY  TRANSACTIONS
           ----------------------------

Significant  Ownership  Interests
---------------------------------

On  December  31, 1997, 27.14% 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.

Harry  E.  Hosmer,  the  Company's  former  president and former chief executive
officer, is principal adviser to trusts which own 10.35% of the Company's common
stock at December 31, 1997. 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.

Related  Party  Receivables
---------------------------

Amounts  due  from  officers  were  $34,218 and $34,897 at December 31, 1997 and
1996,  respectively.  Receivables  from other related parties amounted to $9,652
and  $3,535  on  December  31,  1997  and  1996,  respectively.

                                      F-18
<PAGE>  46

NOTE  12-  RELATED  PARTY  TRANSACTIONS  (Continued)
            ----------------------------

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 and
contractors  based  on performance. The full authorization of 15,000 shares have
been  awarded  to  Jack  Conley.

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. The Company did not
grant  stock  options  during  1997  or  1996.

A  summary  of  the status of the Company's stock option plan as of December 31,
1997  and  1996, and changes during the years ending on those dates is presented
below:

<TABLE>
<CAPTION>

                                      1997                      1996
                            -------------------------  ------------------------
                                        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  214,000  $          1.79
  Granted. . . . . . . . .         -                         -
  Exercised. . . . . . . .         -                         -
                            --------                   -------
Outstanding at end of year   214,000                   214,000
                            ========                   =======
Options exercisable at
  year end . . . . . . . .   214,000                    60,000
                            ========                    ======

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

The following table summarizes information about fixed stock options outstanding
at  December  31,  1997:

<TABLE>
<CAPTION>

                                   1997                                     1996
                                   ----                                     ----
                                   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  214,000  $          1.79
  Granted. . . . . . . . .         -                -
  Exercised. . . . . . . .         -                -
                            --------  ---------------                          
Outstanding at end of year   214,000          214,000
                            ========  ===============                          
Options exercisable at
  year end . . . . . . . .   214,000           60,000
                            ========  ===============                          

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


The following table summarizes information about fixed stock options outstanding
at  December  31,  1997:

<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             1997              Life (Years)      Exercise Price       1996        Exercise Price
---------  --------------------  --------------------  --------------  ---------------  ---------------
<S>        <C>                   <C>                   <C>             <C>              <C>
$    1.50                60,000                   5.0  $         1.50           60,000              6.0
$    1.90               154,000                   7.2  $         1.90          154,000              8.2
           --------------------                                        ---------------

1.50 to
$    1.90               214,000                   6.6  $1.50 to $1.90          214,000              7.6
           ====================                                        ===============

                                      F-19
<PAGE>  47

NOTE  12  -  RELATED  PARTY  TRANSACTIONS  (Continued)
              ----------------------------

The  Board  of  Directors  adopted  a  policy in 1989 that permits directors and
officers  of  the  Company to purchase from the Company, at the Company's actual
cost,  up  to  one percent of a fractional interest in any well to be drilled by
the Company.  Current and former officers and directors received as compensation
or  were  billed  $35,475  and  $21,774  for their interests for the years ended
December  31,  1997  and  1996,  respectively.

NOTE  13  -  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  1997  or  1996.

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  14  -  COMMITMENTS  AND  CONTINGENCIES
           ---------------------------------

In  1996,  the Company agreed to purchase 37,500 shares of its common stock from
an  investor  as  part  of  a  mediated settlement of litigation.  The stock was
purchased  at  a total price of $187,500 with 4,200 shares purchased in December
of  1996  for  $21,000  and  the  remaining 33,300 shares purchased for $166,500
during  1997.    As  of  December  31,  1997,  the  Company  had satisfied their
obligation  under  the  agreement,  however, 18,900 or the 37,500 shares had not
been  received  by  the  Company  from  the  investor.

In  October  1997,  the  Company  settled  its  litigated issues with Stanley L.
Worthington.  To  avoid further litigation on this matter, the Company agreed to
re-purchase  Mr.  Worthington's  oil  and gas working interests. The re-purchase
amount,  although  material  to the financial statements, remains confidentially
sealed  in  the  court  approved  agreement.

On or about May 21, 1997 an action was brought against the Company by Lucille F.
Biegel,  et  al.,  San Diego Superior Court Case 710630.  In the action thirteen
present or former shareholders of the Company and direct working interest owners
in  various  Royale Energy drilling programs from 1989 through 1994 have alleged
breach  of  contract  and  fraud,  among  other claims, in connection with their
purchase  of  stock  and  direct  working  interests.    At  present  there  are
twenty-seven  defendants  including  Royale  Energy,  Inc.

It  is  anticipated  that  the  case  may  be  scheduled for trial in October or
November  of  1998.  Management has and will continue to vigorously contest this
case.    No  settlement  discussions  are  occurring at this time.  Based on the
advice  of  legal  counsel, management is unable to predict the likelihood of an
unfavorable  outcome  and  a range of potential loss, if any.  Additionally, the
Company believes that the defendants have one or more defense actions, including
but  not  limited  to,  the  statute  of  limitations.

                                      F-20
<PAGE>  48

NOTE  15  -  QUARTERLY  FINANCIAL  DATA  (UNAUDITED)
              ---------------------------------------

Operating  revenues, operating income, net income, and earnings per common share
by quarters from 1997 and 1996 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>
<TABLE>
<CAPTION>

                                                               Basic    Weighted-
                                                    Net       Earnings   Average
                                                   Income   Per Common   Shares
Quarter Ended         Net Sales   Gross Profit     (Loss)      Share   Outstanding
--------------------  ----------  -------------  -----------  -------  -----------
<S>                   <C>         <C>            <C>          <C>      <C>
  December 31, 1997.  $2,687,906  $   1,316,638  $   471,094     0.12    3,861,589
               1996    3,008,221      1,299,194      538,377     0.14    3,909,277

  September 30, 1997   2,314,392      1,366,755      522,926     0.13    3,853,569
                1996   2,860,866      1,029,360      440,803     0.11    3,962,359

  June 30, 1997        2,520,193      1,258,232      448,332     0.12    3,845,062
           1996        2,333,053      1,215,756      382,653     0.10    3,960,299

  March 31, 1997       1,543,635        659,684       68,039     0.02    3,837,555
            1996       1,795,454        496,414       36,974     0.01    3,982,570
</TABLE>

                                      F-21
<PAGE>  49



                                      F-22
<PAGE>  50

                               ROYALE ENERGY, INC.

SUPPLEMENTAL  INFORMATION  ABOUT  OIL  AND  GAS PRODUCING ACTIVITIES (UNAUDITED)

The  following  estimates  of  proved  oil  and gas reserves, both developed and
undeveloped,  represent  interests  owned  by 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, 1997 and
1996.    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-23
<PAGE>  51

Changes  in  Estimated  Reserve  Quantities
-------------------------------------------

The  net  interest in estimated quantities of proved developed reserves of crude
oil and natural gas at December 31, 1997 and 1996 and changes in such quantities
during  each  of  the  years  then  ended,  were  as  follows:

<TABLE>
<CAPTION>

                                             1997                  1996
                                     --------------------  ---------------------
                                       Oil        Gas         Oil        Gas
                                      (BBL)      (MCF)       (BBL)      (MCF)
                                     -------  -----------  --------  -----------
<S>                                  <C>      <C>          <C>       <C>
Proved developed and
 undeveloped reserves:

   Beginning of period. . . . . . .   1,647   12,909,322    22,401    9,383,850 
   Revisions of previous estimates.   3,730   (5,522,625)  (20,732)   2,071,879 
   Production . . . . . . . . . . .    (679)  (1,365,562)      (22)    (672,383)
   Extensions, discoveries and
     improved recovery. . . . . . .       -    8,087,987         -    2,125,976 
   Purchase of minerals in place. .       -    2,773,577         -            - 
   Sale of minerals in place. . . .       -            -         -            - 
                                     -------  -----------  --------  -----------

Proved reserves end of period . . .   4,698   16,882,699     1,647   12,909,322 
                                     =======  ===========  ========  ===========

Gas equivalent reserve. . . . . . .  46,980                 16,470 
                                     =======               ========

Proved developed reserves:

  Beginning of period . . . . . . .   1,647    6,978,805     1,852    4,121,616 
                                     =======  ===========  ========  ===========

  End of period . . . . . . . . . .   4,698    8,606,456     1,647    6,978,805 
                                     =======  ===========  ========  ===========
</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,  1997.

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-24
<PAGE>  52

<TABLE>
<CAPTION>

                                                             1997          1996
                                                         ------------  -------------
<S>                                                      <C>           <C>
Future cash inflows . . . . . . . . . . . . . . . . . .  $37,322,465   $ 45,882,082 
Future production costs . . . . . . . . . . . . . . . .   (8,721,586)   (11,985,243)
Future development costs. . . . . . . . . . . . . . . .   (2,706,685)    (2,263,988)
Future income tax expenses. . . . . . . . . . . . . . .   (7,782,165)    (9,489,856)
                                                         ------------  -------------

Future net cash flows . . . . . . . . . . . . . . . . .   18,112,029     22,142,995 

10% annual discount for estimated timing of cash flows.   (5,125,811)   (10,121,742)
                                                         ------------  -------------

Standardized measure of discounted future net cash flow  $12,986,218   $ 12,021,253 
                                                         ============  =============
</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>

                                                     1997          1996
                                                 ------------  ------------
<S>                                              <C>           <C>
  Standardized measure - beginning of year. . .  $12,021,253   $ 2,697,415 
                                                 ------------  ------------

  Sales of oil and gas produced,
    net of production costs . . . . . . . . . .   (1,515,072)     (970,483)

  Purchase of minerals in place . . . . . . . .    2,662,529             - 

  Revisions of estimates of reserves provided
    in prior years:
    Net changes in prices and production costs.   (9,799,460)   10,634,281 

  Sales of minerals in place. . . . . . . . . .            -             - 

  Extensions, discoveries and improved recovery   10,422,897     3,722,480 

  Accretion of discount . . . . . . . . . . . .     (392,373)      (57,512)

  Net change in income taxes. . . . . . . . . .     (413,556)   (4,004,928)
                                                 ------------  ------------

  Net increase. . . . . . . . . . . . . . . . .      964,965     9,323,838 
                                                 ------------  ------------

  Standardized measure - end of year. . . . . .  $12,986,218   $12,021,253 
                                                 ============  ============
</TABLE>

                                      F-25
<PAGE>  53