As
filed with the SEC on December 11, 2003

SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549

FORM 10-KSB/A

AMENDMENT NO. 1 TO THE
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

|                                            | 
|------------------------------------------- | 
|For the Fiscal Year Ended December 31, 2002 | 

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



|                                | 
|------------------------------- | 
|California                      | 
|(State or other jurisdiction of | 
|incorporation or organization)  | 

7676 Hazard Center
Drive, Suite 1500
San Diego, CA 92108
(Address of principal executive offices)
Issuers telephone number: 619-881-2800

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

Securities to
be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(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:  $12,439,888.

At December 31, 2002, there were
3,154,257 outstanding shares of registrants Common Stock held by non-affiliates,
with an aggregate market value of approximately $16,591,392, based on the closing Nasdaq
price on that date.

At December 31, 2002, a total of
5,030,101 shares of registrants Common Stock were outstanding.

DOCUMENTS INCORPORATED BY
REFERENCE: None

Exhibit Index appears on
page 24.

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TABLE OF CONTENTS

|Part I               |  |                                                                          |  |     | 
|-------------------- |  | ------------------------------------------------------------------------ |  | --- | 
|Item 1.              |  | Description of Business                                                  |  | 1   | 
|                     |  | Plan of Business                                                         |  | 2   | 
|                     |  | Competition, Marets and Regulation                                       |  | 4   | 
|Item 2.              |  | Description of Property                                                  |  | 5   | 
|                     |  | Norther California                                                       |  | 6   | 
|                     |  | Developed and Undeveloped Leasehold Acreage                              |  | 6   | 
|                     |  | Drilling Activities                                                      |  | 6   | 
|                     |  | Production                                                               |  | 7   | 
|                     |  | Net Proved Oil and Natural Gas Reserves                                  |  | 7   | 
|Item 3.              |  | Legal Proceedings                                                        |  | 8   | 
|Item 4.              |  | Submission of Matters to a Vote of Security Holders                      |  | 9   | 
|                     |  |                                                                          |  |     | 
|Part II              |  |                                                                          |  |     | 
|Item 5.              |  | Market Price of Royale Energy's Common Stock and Related Stockholder     |  | 9   | 
|                     |  | Matters                                                                  |  |     | 
|                     |  | Dividends                                                                |  | 9   | 
|                     |  | No Recent Sales of Equity Securities                                     |  | 9   | 
|Item 6.              |  | Management's Discussion and Analysis of Financial Condition and Results  |  | 9   | 
|                     |  | of Operations                                                            |  |     | 
|                     |  | Critical Accounting Policies                                             |  | 10  | 
|                     |  | Results of Operations for the Twelve Months Ended December 31, 2001, as  |  | 11  | 
|                     |  | Compared to the Twelve Months Ebded Decenber 31, 2000                    |  | 9   | 
|                     |  | Capital Resources and Liquidity                                          |  | 13  | 
|Item 7.              |  | Financial Statements and Supplementary Data                              |  | 15  | 
|                     |  |                                                                          |  |     | 
|Part III             |  |                                                                          |  |     | 
|Item 9.              |  | Directors, Executive Officers, Promoters and Control Persons, Compliance |  | 15  | 
|                     |  | with Section 16(a) of the Exchange Act                                   |  |     | 
|                     |  | Compliance with Section 16(a) of the Exchange Act                        |  | 18  | 
|Item  10.            |  | Executive Compensation                                                   |  | 18  | 
|                     |  | No Stock Options Were Granted in 2001                                    |  | 19  | 
|                     |  | Aggregated 2001 Option Exercises and Year-End Values                     |  | 19  | 
|                     |  | Compensation of Directors                                                |  | 20  | 
|Item 11.             |  | Security Ownership of Certain Beneficial Owners and Management           |  | 20  | 
|                     |  | Common Stock                                                             |  | 20  | 
|                     |  | Preferred Stock                                                          |  | 21  | 
|Item 12.             |  | Certain Relationships and Related Transactions                           |  | 21  | 
|Item 13.             |  | Exhibits, Lists, and Reports on Form 8-K                                 |  | 23  | 
|Signatures           |  |                                                                          |  | 24  | 
|Certifications       |  |                                                                          |  | 25  | 
|Financial Statements |  |                                                                          |  | F-1 | 

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ROYALE ENERGY, INC.

PART  I

Item 1.
    Description of Business

Royale Energy, Inc. (Royale
Energy), is an independent oil and natural gas producer. Royale Energys
principal lines of business are the production and sale of natural gas, acquisition of oil
and gas lease interests and proved reserves, drilling of both exploratory and development
wells, and sales of fractional working interests in wells to be drilled by Royale Energy.
Royale Energy was incorporated in California in 1986 and began operations in 1988. Royale
Energys Common Stock is traded on the Nasdaq National Market System (symbol ROYL).
On March 1, 2003, Royale Energy had 20 full time employees.

Royale Energy owns wells and leases
located mainly in the Sacramento Basin and San Joaquin Basin in California. Royale Energy
usually sells a portion of the working interest in each lease that it acquires to third
party investors and retains a portion of the prospect for its own account. Selling part of
the working interest to others allows Royale Energy to reduce its drilling risk by owning
a diversified inventory of properties with less of its own funds invested in each drilling
prospect, than if Royale Energy owned the whole working interest and paid all drilling and
development costs of each prospect itself. Royale Energy generally sells working interests
in its prospects to accredited investors in exempt securities offerings. The prospects are
bundled into multi-well investments, which permits the third party investors to diversify
their investments by investing in several wells at once instead of investing in single
well prospects.

During its fiscal year ended December
31, 2002, Royale Energy continued to explore and develop natural gas properties in
northern California. Royale Energy drilled sixteen wells in 2002, thirteen of which are
currently commercially productive wells. One well is waiting on completion. In 2002, five
previously drilled wells were not producing because they were awaiting further equipment
or production arrangements to begin or recommence operations, such as production equipment
or pipeline easements. Royale Energys estimated total reserves increased from
approximately 13.2 Bcfe (billion cubic feet equivalent) at December 31, 2001 to
approximately 14.0 Bcfe at December 31, 2002. According to the reserve report furnished to
Royale Energy by WZI, Inc., Royale Energys independent petroleum engineers, the net
present value of its proved developed and undeveloped reserves was more than $24.6 million
at December 31, 2002, based on natural gas prices ranging from $3.26 per Mcf to $4.85 per
Mcf. Of course, net present value does not represent the fair market value of our reserves
on that date, and we cannot be sure what return we will eventually receive on our
reserves. The engineer determined our standard measure of discounted future net cash flows
at December 31, 2002, to be $17,214,894.

Royale Energy reported gross revenues
in connection with the drilling of wells on a turnkey contract basis, or sales
of fractional interests in undeveloped wells, in the amount of $6,890,431 for the year
ended December 31, 2002, which represents 55.4% of its total revenues for the year.

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In the year ended 2001, Royale Energy
reported $6,703,452 gross revenues from turnkey drilling operations for the year,
representing 42.3% of Royale Energys total revenues for that year. These amounts are
offset by drilling expenses and development costs of $4,156,239 in 2002, and $3,065,747 in
2001. In addition to Royale Energys own engineering staff, Royale Energy hires
independent contractors to drill, test, complete and equip the wells that it drills.

Approximately 39.6% of Royale
Energys total revenue for the year ended December 31, 2002 came from oil and natural
gas sales from production of its wells ($4,930,278). In 2001, this amount was $8,452,282,
which represented 53.3% of Royale Energys total revenues.

Plan of Business

Royale Energy acquires interests in
oil and natural gas reserves and sponsors private joint ventures. Royale Energy believes
that its shareholders are better served by diversification of its investments among
individual drilling prospects. Through its sale of joint ventures, Royale Energy can
acquire interests and develop oil and natural gas properties with greater diversification
of risk and still receive an interest in the revenues and reserves produced from these
properties. By selling some of its working interest in most projects, Royale Energy
decreases the amount of its investment in the projects and diversifies its oil and gas
property holdings, to reduce the risk of concentrating a large amount of its capital in a
few projects that may not be successful.

After acquiring the leases or lease
participation, Royale Energy drills or participates in the drilling of development and
exploratory oil and natural gas wells on its property. Royale Energy pays its
proportionate share of the actual cost of drilling, testing, and completing the project to
the extent that it retains all or any portion of the working interest.

Royale Energy also may sell
fractional interests in undeveloped wells to finance part of the drilling cost. A drilling
contract that calls for a company to drill a well, for a fixed price, to a specified depth
is called a turnkey contract. When Royale Energy sells fractional interests to
raise capital to drill oil and natural gas wells, generally it agrees to drill these wells
on a turnkey contract basis, so that the holders of the fractional interests prepay a
fixed amount for the drilling and completion of a specified number of wells. Under a
turnkey contract, Royale Energy recognizes gross revenue for the amount paid by the
purchaser and agrees to pay the expense of drilling and development of the well for the
participants. Sometimes the actual drilling and development costs are less than the fixed
amount that Royale Energy received from the fractional interest sale.

When Royale Energy authorizes a
turnkey drilling project for sale, a calculation is made to estimate the pre-drilling
costs and the drilling costs. A percentage for each is calculated. The turnkey drilling
project is then sold to investors who execute a contract with Royale Energy. In this
agreement, the investor agrees to share in the pre-drilling costs, which include lease
costs, geological and geophysical costs, and other costs as required so that the drilling
of the project can proceed. As stated in the contract, the percentage of the pre-drilling
costs that the investor

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contributes is non-refundable, and
thus on its financial statements, Royale Energy recognizes these non-refundable payments
as revenue since the pre-drilling costs have commenced. The remaining investment is held
and reported by Royale Energy as deferred revenue until the well is spudded (begun).
Drilling is generally completed within 7  14 days. The deferred revenue is referred
to as remaining funds in Royale Energys disclosure. See Note 1 to Royale
Energys Financial Statements on page F-7. Royale Energy maintains internal records
of the expenditure of each investors funds for drilling projects.

Royale Energy generally operates the
wells it completes. As operator, it receives fees set by industry standards from the
owners of fractional interests in the wells and from expense reimbursements. For the year
ended December 31, 2002, Royale Energy earned gross revenues from operation of the wells
in the amount of $619,179, representing 5.0% of its total revenues on a consolidated basis
for that year. In 2001, the amount was $702,539, which represented 4.4% of the
consolidated total revenues. As of December 31, 2002, Royale Energy holds working
interests in 78 gas wells in California, with locations ranging from Tehama County in the
north to Kern County in the south.

Royale Energys business does
not depend on a single customer or a few customers and Royale Energys management
does not believe this will change in the foreseeable future. Oil and natural gas
purchasers are readily available in todays markets, and Royale Energy does not
believe that the loss of any customer would materially affect its business or its ability
to find ready purchasers for its oil and gas production at current market prices.

Natural gas demand and the prices
paid for gas are seasonal. In recent years, natural gas demand and prices in Northern
California have decreased during the fall and winter and risen in the spring and summer,
reflecting increased electricity consumption. In the winter and spring of 2001, a gas
shortage in Northern California caused dramatic rises in the price Royale Energy received
for its gas production. The high prices in the first half of 2001 materially increased
Royale Energys revenues from gas production and sales in that period. Gas prices
fell again in the summer of 2001. In the second half of 2001 and for most of 2002, gas
prices receded to near historic levels. Gas prices rose again in late 2002, resulting in
increased production income to Royale Energy in the fourth quarter of 2002. Royale Energy
does not expect natural gas prices to return to their winter 2001 levels in the
foreseeable future.

Affiliated Entities

On December 31, 2002, Royale
Petroleum Corporation (RPC) owned 31.6% of Royale Energys Common Stock
(including rights to purchase shares pursuant to warrants). RPC is owned equally by Donald
H. Hosmer and Stephen M. Hosmer, who are brothers. Donald H. Hosmer is president and
director of Royale Energy, and Stephen Hosmer is executive vice president, chief financial
officer and director of Royale Energy. Donald H. and Stephen M. Hosmer are sons of Harry
E. Hosmer, chairman of Royale Energys board of directors. See, Security Ownership of
Certain Beneficial Owners and Management on page 20. RPC is a predecessor and affiliate of
Royale Energy. RPC is a Delaware corporation formed in 1985.

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Royale Energy had no subsidiaries at
December 31, 2002.

Competition, Markets and
Regulation

Competition

The exploration and production of oil
and natural gas is an intensely competitive industry. The sale of interests in oil and gas
projects, like those Royale Energy sells, is also very competitive. Royale Energy
encounters competition from other oil and natural gas producers, as well as from other
entities which invest in oil and gas for their own account or for others, and many of
these companies are substantially larger than Royale Energy.

Markets

Market factors affect the quantities
of oil and natural gas production and the price Royale Energy can obtain for the
production from its oil and natural gas properties. Such factors include: the extent of
domestic production; the level of imports of foreign oil and natural gas; the general
level of market demand on a regional, national and worldwide basis; domestic and foreign
economic conditions that determine levels of industrial 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.

Regulation

Federal and state laws and
regulations affect, to some degree, the production, transportation, and sale of oil and
natural gas from Royale Energys operations. Many states in which Royale Energy
operates have statutory provisions regulating the production and sale of oil and natural
gas, including provisions regarding deliverability. These statutes, along with the
regulations interpreting the statutes, generally are intended to prevent waste of oil and
natural gas, and to protect correlative rights to produce oil and natural gas 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 increase the cost of doing business. These laws and regulations may
require: the acquisition of a permit by operators before drilling commences; the
prohibition of drilling activities on certain lands lying within wilderness areas or where
pollution arises; and the imposition of substantial liabilities for pollution resulting
from drilling operations, particularly operations in offshore waters or on submerged
lands. The cost of oil and natural gas development and production also may increase
because of the cost of compliance with such legislation and regulations, together with any
penalties resulting from failing to comply with the legislation and regulations.
Ultimately, Royale Energy may bear some of these costs.

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Presently, Royale Energy does not
anticipate that compliance with federal, state and local environmental regulations will
have a material adverse effect on capital expenditures, earnings, or its competitive
position in the oil and natural gas industry; however, changes in the laws, rules or
regulations, or the interpretation thereof, could have a materially adverse effect on
Royale Energys financial condition or results of operation.

Royale Energy files quarterly, yearly
and other reports with the Securities Exchange Commission. You may obtain a copy of any
materials filed by Royale Energy with the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 or by calling 1-800-SEC-0300. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC at http://www.sec.gov.

Item 2.
    Description of Property

Since 1993, Royale Energy has
concentrated on development of properties in the Sacramento Basin and the San Joaquin
Basin of Northern California. In 2002, Royale Energy drilled nine wells in northern and
central California, all of which were commercially productive wells. Royale Energy also
participated in drilling seven wells in Texas. One well was waiting on completion.

Following industry standards, Royale
Energy generally acquires oil and natural gas acreage without warranty of title except as
to claims made by, through, or under the transferor. In these cases, Royale Energy
attempts to conduct due diligence as to title before the acquisition, but it cannot assure
that there will be no losses resulting from title defects or from defects in the
assignment of leasehold rights. Title to property most often carries encumbrances, such as
royalties, overriding royalties, carried and other similar interests, and contractual
obligations, all of which are customary within the oil and natural gas industry.

In December of 2000, Royale Energy
entered into an agreement with BankOne, Texas, NA (Bank One), in which BankOne
assumed the revolving line of credit that was originally extended to Royale Energy by
Hibernia National Bank. Under the terms of the agreement, from time to time, Royale Energy
may borrow, repay, and reborrow money from Bank One with a total credit line of
$15,000,000. The maximum allowable amount of each credit request is governed by a formula
in the agreement. The initial maximum allowable amount was $6,000,000. At December 31,
2002, Royale Energy owed $3,500,000 under this credit line. In January 2003, Royale Energy
replaced its Bank One credit line with a credit agreement from Guaranty Bank, FSB, which
assumed the revolving line of credit from BankOne, on substantially similar terms.

Following is a discussion of Royale
Energys significant oil and natural gas properties. Reserves at December 31, 2002,
for each property discussed below, have been determined by WZI, Inc., registered
professional petroleum engineers, in accordance with its report submitted to Royale Energy
on March 6, 2003 (the most recent report available).

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Northern California

Royale Energy owns lease interests in
15 gas fields with locations ranging from Tehama County in the north to Kern County in the
south, in the Sacramento and San Joaquin Basins in northern California. At December 31,
2002, Royale Energy operated 79 wells in Northern California, and its estimated total
proved developed and undeveloped reserves in Northern California were approximately 14.0
Bcfe, according to Royale Energys independently prepared reserve report.

Developed and Undeveloped
Leasehold Acreage

As of December 31, 2002, Royale
Energy owned leasehold interests in the following developed and undeveloped properties in
both gross and net acreage.

|                 | Developed |  | Undeveloped
|---------------- | --------- |  | -----------
|
|California       |           |  |            
|All other States |           |  |            
|Total            |           |  |            

Drilling Activities

The following table sets forth Royale
Energys drilling activities during the years ended December 31, 2000, 2001 and 2002.
All wells are located in the Continental U.S., in California, Texas, and Oklahoma.

|Year | Type of Well  |   | Gross Wells |    | Net Wells
|---- | ------------- | - | ----------- | -- | ---------
|
|2000 | Exploratory   | 2 | 2           | -- | .4104    
|     | Developmental | 7 | 6           | 1  | 2.7971   
|     |               |   |             |    |          
|2001 | Exploratory   | 5 | 3           | 2  | 1.4311   
|     | Developmental | 6 | 5           | 1  | 1.8565   
|     |               |   |             |    |          
|2002 | Exploratory   | 8 | 5           | 3  | 1.5663   
|     | Developmental | 8 | 8           | -- | 3.1663   

(a)    
          An exploratory well is one that is drilled in search of new oil and natural gas
          reservoirs, or to test the boundary limits of a previously discovered reservoir.
          A developmental well is one drilled on a previously known productive area of an
          oil and natural gas reservoir with the objective of completing that reservoir.

(b)    
          Gross wells represent the number of actual wells in which Royale Energy owns an
          interest. Royale Energys interest in these wells may range from 1% to
          100%.

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

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the market.

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

(e)    
          One net well is deemed to exist when the sum of fractional ownership
          working interests in gross wells or acres equals one. The number of net wells is
          the sum of the fractional working interests owned in gross wells expressed as a
          whole number or a fraction.

As of December 31, 2002, Royale
Energy had 54 gross (29.59 net) currently producing natural gas wells.

Production

The following table summarizes, for
the periods indicated, Royale Energys net share of oil and natural gas production,
average sales price per barrel (Bbl), per thousand cubic feet (Mcf) of natural gas, and
the Mcf equivalent (Mcfe) for the barrels of oil based on a 10 to 1 ratio of the price per
barrel of oil to the price per Mcf of natural gas. Net production is
production that Royale Energy owns either directly or indirectly through partnership or
joint venture interests produced to its interest after deducting royalty, limited partner
or other similar interests. Royale Energy generally sells its oil and natural gas at
prices then prevailing on the spot market and does not have any material long
term contracts for the sale of natural gas at a fixed price.

|                             | 2002 |  | 2001 |           | 2000 |  
|---------------------------- | ---- |  | ---- | --------- | ---- | -
|NET VOLUME                   |      |  |      |           |      |  
|Oil (Bbl)                    |      |  |      | 8,0853    |      |  
|Gas (Mcf)                    |      |  |      | 1,602,780 |      |  
|Mcfe                         |      |  |      | 1,683,630 |      |  
|                             |      |  |      |           |      |  
|AVERAGE SALES PRICE          |      | 
|                             |      |  | $    | 22.84     |      | $
|Gas (Mcf)                    |      |  | $    | 2.95      |      | $
|                             |      |  |      |           |      |  
|Net Production Costs & Taxes |      |  | $    | 1,450,893 |      | $
|                             |      |  |      |           |      |  
|Lifting Costs (per Mcfe)     |      |  | $    | 0.86      |      | $

Net Proved Oil and
Natural Gas Reserves

As of December 31, 2002, Royale
Energy had proved developed reserves of 9,719 MMcf and total proved reserves of 12,785
MMcf of natural gas on all of the properties Royale Energy leases. For the same period,
Royale Energy also had proved developed oil reserves of 50 Mbbl and total proved oil
reserves of 124 Mbbl.

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Oil and gas reserve estimates and the
discounted present value estimates associated with the reserve estimates are based on
numerous engineering, geological and operational assumptions that generally are derived
from limited data.

Future Development Costs

In order to realize future revenues
from our proved reserves estimated in our reserve report, it will be necessary to incur
future costs to develop and produce the proved reserves. The following table estimates the
costs to develop and produce our proved reserves in the years 2003 through 2005.

|                              |  |  |  
|----------------------------- |  |  | -
|Future Development Cost of:   |  |  |  
|Proved developed reserves     |  |  | $
|Proved non-producing reserves |  |  | $
|Proved undeveloped reserves   |  |  | $
|Total                         |  |  | $

Common assumptions include such
matters as the real extant and average thickness of a particular reservoir, the average
porosity and permeability of the reservoir, the anticipated future production from
existing and future wells, future development and production costs and the ultimate
hydrocarbon recovery percentage. As a result, oil and gas reserve estimates and discounted
present value estimates are frequently revised in subsequent periods to reflect production
data obtained after the date of the original estimate. If the reserve estimates are
inaccurate, production rates may decline more rapidly than anticipated, and future
production revenues may be less than estimated.

Additional data relating to Royale
Energys oil and natural gas properties is disclosed in Supplemental Information
About Oil and Gas Producing Activities (Unaudited), attached to Royale Energys
Financial Statements, beginning on page F-1. 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, 2002 and 2001, prepared by Royale Energys
independent reserve engineering consultants.

Item 3.
    Legal Proceedings

Buck, et al., v. Royale Energy, et
al., No. C 00-CV-1499-K (NLS), U.S. District Court, Southern District of California. On
December 10, 1999, a suit was filed against Royale Energy and certain of its officers and
former officers in U.S. District Court for the Northern District of California. In July
2000, the court granted Royale Energys motion to transfer the case to the US
District Court for the Southern District of California. In May 2002, the Court dismissed
the case in its entirety. Some, but not all, of the former plaintiffs chose to appeal the
dismissal. The appeal is pending in the Ninth Circuit Court of Appeal. A number of the
original plaintiffs have dismissed their appeal, and Royale Energy expects that additional
plaintiffs will also dismiss

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their appeal. If one or more former
plaintiffs elect to pursue this appeal, Royale Energy will vigorously oppose the appeal.

Blue Star Resources, et al., v.
Royale Energy, Inc., No. 49460, Superior Court of Tehama County, California. On October
12, 2001, Blue Star Resources, Inc. and other related entities filed suit against Royale
Energy over whether plaintiffs failed to consent to drilling operations that resulted in
commercially productive wells drilled by Royale Energy and thereby lost their rights to
working interests in the wells. On April 9, 2001, Royales motion to dismiss the
breach of fiduciary duty and slander of title claims for relief was granted by the
Honorable Edward J. Garcia. On May 7, 2002, Judge Garcia granted Royales motion for
partial summary judgment regarding one particular well, which was a substantial portion of
Blue Stars claims. On August 26, 2002, Judge Garcia granted Royales motion for
partial summary judgment as to other claims. In April 2003, the parties agreed to a
confidential settlement in which plaintiffs remaining claims would be dismissed.

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

No matters were submitted to a vote
of security holders during the fourth quarter of 2002.

PART II

Item 5.          

            Market Price of Royale Energy's Common Stock and Related
                      
Stockholder Matters

Since 1997 Royale Energys
Common Stock has been traded on the Nasdaq National Market System under the symbol
ROYL. As of December 31, 2002, 5,030,101 shares of Royale Energys Common
Stock were held by approximately 2,800 shareholders. The following table reflects high and
low quarterly sales prices from January 2001 through December 2002.

|     | 1st Quarter |  | 2nd Quarter |    | 3rd Quarter |  | 4th Quarter
|---- | ----------- |  | ----------- | -- | ----------- |  | -----------
|     |             |  |             | H  | igh         |  | L          
|2001 |             |  |             | 7  | .88         |  | 5          
|2002 |             |  |             | 12 | .36         |  | 4          

Dividends

On
March 18, 2002, Royale Energys board of directors declared a 15% stock dividend to
its security holders of record as of May 31, 2002. The dividend increased the number of
shares of common stock outstanding and those issuable on exercise of all outstanding
warrants and options and on conversion of all outstanding shares. The dividend increased
the number of outstanding common shares by 652,959 shares to 5,029,473 shares (not
including shares that may be issued on the exercise of options and warrants and on the
conversion of preferred stock).

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Recent Sales of Equity
Securities

In March 2002, Royale Energy granted
6,900 shares (as adjusted for the stock dividend issued in May 2002) of restricted stock
to its employees as compensation for services. The stock was issued in reliance on the
exemption contained in 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 Royale Energys Financial Statements and Notes thereto and
other financial information relating to Royale Energy included elsewhere in this document.

For the past nine years, Royale
Energy has primarily acquired and developed producing and non-producing natural gas
properties in Northern California. The most significant factors affecting the results of
operations are (i) changes in the sales price of natural gas, (ii) recording of turnkey
drilling revenues and the associated drilling expense, and (iii) the change in natural gas
reserves owned by Royale Energy.

Critical Accounting
Policies

Royale Energys financial
statements include its pro rata ownership of wells. Royale Energy usually sells a portion
of the working interest in each lease that it acquires to third party investors and
retains a portion of the prospect for its own account. Royale Energy generally retains
about a 50% working interest. All results, successful or not, are included at its pro rata
ownership amounts: revenue, expenses, assets, and liabilities.

Royale Energy has developed two
profit-oriented segments of business: marketing direct working interests (DWI), and
producing oil and gas.

Revenue Recognition

Royale Energy derives DWI revenue
from sales of working interests to high net worth individuals. The DWI revenue is divided
into payments for pre-drilling costs and for drilling costs. DWI investments are
non-refundable. Royale Energy recognizes the pre-drilling revenue portion when the
investor deposits money with Royale Energy. The company holds the remaining investment in
trust as deferred revenue until the well is spudded (begun). Occasionally, spudding is
delayed due to the permitting process, or drilling rig availability. At December 31, 2002
and 2001, Royale Energy had deferred drilling revenue of $2,566,188 and $2,740,991,
respectively. Gross profit from this line of business declined from 54% in the fiscal year
ended December 31, 2001, to 37% in the nine months ended September 30, 2002.

The second business segment is oil
and gas production. Over 80% of Royale Energys successful wells produce gas in
Northern California. Natural gas flows from the wells into

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gathering line systems, which are
equipped occasionally with compressor systems, which in turn flow into metered customer
pipelines. Monthly, price data and daily production are used to compute the compensation
due to Royale Energy and other working interest owners. Royale Energy operates virtually
all of its own wells and receives industry standard operator fees.

Royale Energy follows the successful
efforts method of accounting for oil and gas properties. Costs are accumulated on a field
by field basis. These costs include pre-drilling activities such as delay and leasing
rents paid, drilling costs, and post-drilling tangible costs. Costs of unproved properties
are excluded from amortization until the properties are evaluated. Royale Energy regularly
evaluates its unproved properties on a field by field basis for possible impairment. Due
to the unpredictable nature of exploration drilling activities, the amount and timing of
impairment expenses are difficult to predict with any certainty.

The successful efforts method of
accounting uses proved reserves in the calculation of depletion, depreciation and
amortization. Proved reserves are estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable from known reservoirs under existing economic and operating
conditions. Proved reserves cannot be measured exactly, and the estimation of reserves
involves judgment determinations. Reserve estimates must be reviewed and adjusted
periodically to reflect additional information gained from reservoir performance, new
geological and geophysical data and economic changes. The estimates are based on current
technology and economic conditions, and Royale Energy considers such estimates to be
reasonable and consistent with current knowledge of the characteristics and extent of
production. The estimates include only those amounts considered to be proved reserves and
do not include additional amounts which may result from new discoveries in the future, or
from application of secondary and tertiary recovery processes where facilities are not in
place or for which transportation and/or marketing contracts are not in place. Changes in
previous estimates of proved reserves result from new information obtained from production
history and changes in economic factors.

Impairment Of Assets

Producing property costs are
evaluated for impairment and reduced to fair value if the sum of expected undiscounted
future cash flows is less than net book value pursuant to Statement of Financial
Accounting Standard No. 121 (SFAS 121, as amended by SFAS 144) Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of.
Impairment of non-producing leasehold costs and undeveloped mineral and royalty interests
are assessed periodically on a property-by-property basis, and any impairment in value is
currently charged to expense.

The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant estimates pertain to proved
oil,

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plant products and gas reserve
volumes and the future development costs. Actual results could differ from those
estimates.

Deferred income taxes reflect the net
tax effects, calculated at currently enacted rates, of (a) future deductible/taxable
amounts attributable to events that have been recognized on a cumulative basis in the
financial statements or income tax returns, and (b) operating loss and tax credit carry
forwards. A valuation allowance for deferred tax assets is recorded when it is more likely
than not that the benefit from the deferred tax asset will not be realized.

Results of Operations for the Twelve
Months Ended December 31, 2002, as Compared to the Twelve Months Ended December 31, 2001

For the year ended December 31, 2002,
we had a net loss of $137,036, a $3,883,560 decrease compared to the net profit of
$3,746,524 achieved during the year in 2001. Total revenues for the year in 2002 were
$12,439,888, a decrease of $3,418,385 or 21.6% from the total revenues of $15,858,273 in
2001. We attribute this reduction in revenues to a decrease in oil and gas sales resulting
from lower natural gas prices received during the year in 2002 when compared to 2001. For
the year in 2002, revenues from oil and gas production decreased by 41.7% from $8,452,282
to $4,930,278, as natural gas prices in California decreased, compared to the high prices
received in early 2001. The net sales volume for the year ended December 31, 2002, was
1,602,780 Mcf with an average price of $2.95 per Mcf, versus 1,371,286 Mcf with an average
price of $6.12 per Mcf for 2001, which represents an increase in net sales volume of
231,494 Mcf or 16.9%. The net sales volume for oil and condensate (natural gas liquids)
production was 8,085 barrels with an average price of $22.84 per barrel for the period
ended December 31, 2002, compared to 1,893 barrels at an average price of $26.55 per
barrel for the same period in 2001, which represents an increase in net sales volume of
6,192 barrels or 327.1%.

Oil and gas lease operating expenses
increased by 14.6% or $184,648, to $1,450,893 for the year ended December 31, 2002, from
$1,266,245 for the same period in 2001, primarily because we plugged and abandoned five
non-producing wells during the year in 2002. In addition, the number of wells we operated
increased during 2002 when compared to 2001, due to the successful wells being drilled and
placed into production during 2001 and 2002. When measuring lease operating costs on a
production or lifting cost basis, in 2002, the $1,450,893 equates to a $0.86 per mcfe
lifting cost versus a $0.91 per mcfe lifting cost in 2001, a 5.5% decrease. For 2002, our
gross margin, or profit, on oil and gas production (excluding drilling and development
costs) was 70.6%, compared to 85% in 2001.

For the year ended December 31, 2002,
turnkey drilling revenues increased $186,979, to $6,890,431 in 2002 from $6,703,452 in
2001, or 2.8% for the year. We also had a $1,090,492 or 35.6% increase in turnkey drilling
and development costs from $3,065,747 in 2001 to $4,156,239 in 2002. This increase in
turnkey revenues and costs was due to drilling sixteen wells during the year in 2002 while
we drilled eleven during the year in 2001. Our gross margins, or profits, on drilling
depend on our ability to accurately estimate the costs associated with the development of
projects in which we sell working interests. Costs associated with contract drilling
depend on

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location, well depth, weather, and
availability of drilling contractors and equipment. Our gross margin on drilling was 39.7%
and 54.3% for the years ended December 31, 2002 and 2001, respectively.

The aggregate of supervisory fees and
other income was $619,179 for the year ended December 31, 2002, a decrease of $83,360
(11.9%) from $702,539 during 2001. This decrease was mainly attributable to a decrease in
interest income received during the year in 2002 when compared to the same period in 2001.
We had less cash and cash equivalents on hand to earn interest during 2002, because of
decreased revenue from gas sales and increased expenditures for drilling. Supervisory fees
are charged in accordance with the Council for Petroleum Accountants Societies (COPAS)
policy for reimbursement of expenses associated with the joint accounting for billing,
revenue disbursement, and payment of taxes and royalties. These charges are reevaluated
each year and adjusted up or down as deemed appropriate by a published report to

the industry by Ernst & Young,
Public Accountants. Supervisory fees increased $64,606 or 17.1%, from $377,908 in 2001 to
$442,514 in 2002.

Depreciation, depletion and
amortization expense increased to $1,694,027 from $1,282,640, an increase of $411,387
(32.1%) for 2002, compared to 2001. The depletion rate is calculated using production as a
percentage of reserves, and the increase in depletion was mainly due to the increase in
gas production during 2002.

Impairment losses of $596,222 and
$2,062,028 were recorded in 2002 and 2001, respectively. We periodically review for
impairment proved properties on a field by field basis. Unamortized capital costs are
measured on a field basis and are reduced to fair value if it is determined that the sum
of expected future net cash flows are less than the net book value. We determine if an
impairment has occurred through either adverse changes or as a result of its periodic
review for impairment. Impairment is measured on discounted cash flows utilizing a
discount rate appropriate for risks associated with the related properties or based on
fair market values.

We also reevaluated our inventory of
geological lease and land costs, which had been previously capitalized, in order to write
off those prospects which may be no longer viable. As a result, $28,566 of previously
capitalized costs were written off and recorded as geological and geophysical expense
during 2002 compared with $56,806 written off in 2001, a $28,240 or 49.7% decrease.

General and administrative expenses
increased by $367,220, or 14.9%, from $2,459,758 for the year ended December 31, 2001 to
$2,826,978 for the same period in 2002. We can attribute this increase to higher employee
salaries management compensation and related expenses. Legal and accounting expense
increased to $1,055,244 for the year, compared to $644,812 for 2001, a $410,432 (63.7%)
increase. The increase can be attributed to the higher litigation costs during the year in
2002 when compared to 2001. Marketing expense for the year ended December 31, 2002,
decreased $129,882 or 15.3%, to $718,841, compared to $848,723 for 2001. Marketing

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expense varies from period to period
according to the number of marketing events attended by personnel and their associated
costs.

During the year in 2002, due to an
increase in borrowings under our commercial bank credit line, interest expense increased
to $105,405 for the year ended December 31, 2002 from $54,455 for the same period in 2001,
a $50,950 or 93.6% increase.

Capital Resources and
Liquidity

At December 31, 2002, Royale Energy
had current assets totaling $7,849,092 and current liabilities totaling $8,597,234, a
$748,142 working capital deficit, exclusive of unused credit. We had cash and cash
equivalents at December 31, 2002 of $2,229,944 compared to $3,131,859 at December 31,
2001.

Our capital expenditure commitments
occur as we decide to drill wells to develop our prospects. We generally do not decide to
drill any prospect until we have sold enough of the working interest in a prospect to
third parties to assure that we have sufficient funds on hand to drill each prospect. We
place funds that we receive from third party investors into a separate cash account until
they are required for expenditures on each well. We have only negligible capital
expenditure needs in addition to those needs that are satisfied from selling part of the
working interest in prospects. We have not, in past years, experienced shortages of funds
needed to satisfy our capital expenditure requirements. We expect that our available
credit and cash flows from operations will be sufficient for capital expenditure needs
beyond those satisfied from sales of working interests.

We ordinarily fund our operations and
cash needs from current revenues from operations. During the fourth quarter of each year,
we receive a large percentage of the revenue generated by our sales of working interests
to third parties, as individual high net worth investors make investments according to
their own year end financial planning. We also incur a large percentage of our costs for
drilling activities in the third and fourth quarters of each year. We believe that we have
sufficient liquidity for the remainder of 2003 and do not foresee any liquidity demands
that cannot be met from cash flow from operations.

Occasionally we borrow from banks,
using our oil and gas properties as security. In 2002, we drew $1,500,000 from our credit
line to meet our drilling schedule. We also borrow for the purpose of acquiring oil and
gas properties. We have repaid such borrowings from operating income. Unused available
credit from our bank totaled approximately $1,065,000 at December 31, 2002.

Accounts receivable rose only
slightly in 2002, from $3,525,038 at December 31, 2001, to $3,736,236 at December 31,
2002. Our accounts receivable consist mainly of amounts due to us from sales of natural
gas. So long as prices remain fairly stable, our accounts receivable tend to remain
stable.

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In 2000, 2001 and 2002, we had a
revolving line of credit under a loan agreement with Bank One, Texas, N. A. We had
outstanding indebtedness under this agreement of $2,000,000 at December 31, 2001 and
$3,500,000 at December 31, 2002. It was secured by all of our oil and gas properties. The
loan agreement also contained certain restrictive covenants, including the prohibition of
payment of dividends on our stock (other than dividends paid in stock). The loan agreement
contained covenants that, among other things, we must:

| | o | maintain a minimum ratio of earnings before interest, taxes, depreciation and amortization
to debt service requirements of at least 1.25 to 1.00;                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o | current assets to current liabilities of at least 1.00 to 1.00; and                                                                                                        
| | o | maintain a tangible net worth as of the close of each fiscal quarter of at least
$6,086,850 as of September 30, 2000, plus 50% of positive quarterly net income thereafter.

In January 2003, Royale Energy
replaced the BankOne credit agreement with one from Guaranty Bank, FSB. The new credit
agreement contains the same restrictive covenants as the prior agreement, except that the
minimum tangible net worth requirement has been raised to at least $8,188,000 as of
September 30, 2002, plus 50% of positive quarterly net income thereafter. Royale Energy was
in compliance with all covenants at March 31, 2003.

Operating
Activities. For the year ended December 31, 2002, cash provided by operating activities
totaled $2,838,968 compared to $7,828,340 provided by operations for 2001 which represents
a $4,989,372 or 63.7% decrease, mainly because of decreased natural gas prices and sales
during the year in 2002.

Investing Activities. Net cash used
by investing activities, primarily in capital acquisitions of oil and gas properties,
amounted to $5,240,883 for the period in 2002, compared to $3,851,233 used by investing
activities for 2001. The increase in cash used was mainly due to the drilling of sixteen
wells during the year in 2002, when compared to the drilling of eleven wells during the
year in 2001.

Financing Activities. For the year
ended December 31, 2002, net cash provided by financing activities was $1,500,000, which
we drew from our bank credit line, compared cash used by financing activities for the year
in 2001 of $2,952,089. Cash used during 2001 resulted from reducing our bank borrowings.

Item 7.
         Financial Statements and Supplementary Data

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

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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 Royale Energys current directors and executive officers. 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 Royale Energy, its subsidiaries and affiliated
companies.

|Name                   | Age | First Became 
Director or  Executive Officer | Positions Held                   
|---------------------- | --- | -------------------------------------------- | ---------------------------------
|Harry E. Hosmer*       | 71  | 1986                                         | Chairman of the Board            
|Donald H. Hosmer+      | 48  | 1987                                         | President, Secretary and Director
|                       |     |                                              | Chairman of the Board and        
|                       |     |                                              | President of Royale Petroleum    
|                       |     |                                              | Corporation ("RPC")              
|Stephen M. Hosmer+     | 35  | 1996                                         | Executive Vice President, Chief  
|                       |     |                                              | Financial Officer and Director   
|                       |     |                                              | Secretary and Director of RPC    
|Oscar A. Hildebrandt*+ | 66  | 1995                                         | Director                         
|Rodney Nahama          | 70  | 1994                                         | Director                         
|Gilbert Kemp           | 68  | 1998                                         | Director                         
|George M. Watters*+    | 82  | 1991                                         | Director                         

* Member of the audit committee.
+ Member of the compensation committee.

Following is a summary of the
business experience of each director and executive officer for the past five years.

HARRY E. HOSMER is the Chairman of
the Board of Royale Energy. He has served as Chairman since Royale Energy began in 1986,
and from inception in 1986 until June 1995, he also served as President and Chief
Executive Officer. In October 1985, Mr. Hosmer and his sons founded Royale Petroleum
Corporation, an affiliate of Royale Energy.

DONALD H. HOSMER is President, Chief
Executive Officer, Secretary, and Director of Royale Energy. He has served as an executive
officer and Director of Royale Energy since its inception in 1987, and in June 1995 he
became President and Chief Executive Officer. Prior to becoming President, he was
Executive Vice President, responsible for marketing working interests in oil

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and gas
projects developed by Royale Energy.  He was also responsible for investor relations and
communications.  Donald H. Hosmer is the son of Harry E. Hosmer and brother of Stephen M.
Hosmer.

STEPHEN M. HOSMER is Executive Vice
President, Chief Financial Officer and Director of Royale Energy. Mr. Hosmer joined Royale
Energy as the Management Information Systems Manager in May 1988, responsible for
developing and maintaining Royale Energys computer software. Mr. Hosmer developed
programs and software systems used by Royale Energy. From 1991 to 1995, he served as
president of Royale Operating Company, Royale Energys operating

subsidiary.    
          In 1995, he became Chief Financial Officer fo Royale Energy. In 1996, he was
          elected to the board of directors of Royale Energy. Mr. Hosmer serves on the
          board of directors of Youth for Christ, a charitable organization in San Diego,
          California. Stephen M. Hosmer is the son of Harry E. Hosmer and brother of
          Donald H. Hosmer. He has a B.S. degree from Oral Roberts University in Business
          Administration and a Master of Business Administration from Pepperdine
          University.

OSCAR HILDEBRANDT, D.V.M., is a
Director and is Chairman of Royale Energys Compensation Committee. From 1994 to 1995
he served as an advisory member of Royale Energy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.

GILBERT C. L. KEMP has since 2002
served as an independent consultant for seismic operations in the oil and gas industry. He
managed the California operations of Western Atlas, Inc., a New York Stock Exchange
company from 1998 until 2002. Mr. Kemp was a founding member of 3-D Geophysical, Inc.,
where he served as Vice President from 1996 until March 1998. In March 1998 3-D
Geophysical, whose stock had been listed on the Nasdaq National Market System since
February 1996, merged with Western Atlas, Inc. During the years 1987 to 1995, Mr. Kemp
served as President and CEO of Kemp Geophysical Corporation, which owned and operated
seismic crews in the United States and Canada.

RODNEY NAHAMA, a Director of Royale
Energy, 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 Royale
Energy. 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

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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 Petroleum Association and the
Independent Petroleum Association of America.

GEORGE M. WATTERS has been retired
from full time employment during the last five years. Mr. Watters retired from AMOCO
Corporation in 1983 after serving for 24 years in senior management positions with AMOCO
Corporation and its affiliates. From 1987 to the present Mr. Watters has managed his
personal investments. Mr. Watters received his B.S. 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
Royale Energys directors, certain officers, and greater than 10 percent shareholders
file reports of ownership and changes in ownership with the SEC and the NASD and furnish
Royale Energy with copies of all such reports they file. One director, Harry E. Hosmer,
filed a late report on Form 5 of his reacquisition of 392,500 shares of Royale
Energys common stock from two charitable trusts in May 2000.

Based solely upon a review of the
copies of the forms furnished to Royale Energy, or representations from certain reporting
persons that no reports were required, Royale Energy believes that no other persons failed
to file required reports on a timely basis during or in respect of 2001.

Item 10.
         Executive
Compensation

The following table summarizes the
compensation of the chief executive officer and the other most highly compensated
executive officers of Royale Energy and its subsidiaries during the past year.

|               | Annual Compensation |  | Long Term
Compensation
|-------------- | ------------------- |  | ----------------------
|
|Donald Hosmer  |                     |  | 2002                  
|President      |                     |  | 2001                  
|               |                     |  | 2000                  
|               |                     |  |                       
|Stephen Hosmer |                     |  | 2002                  
|Exec. V.P. and |                     |  | 2001                  
|CFO            |                     |  | 2000                  

(1)    
          Under the terms of a plan adopted by the board of directors in 1989, each of the
          listed

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executives has elected to participate
in wells drilled by Royale Energy. See, Certain Relationships and Related Transactions on
page 22. The costs that they incurred 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.
Although the difference between the executives actual cost and the cost incurred by
outside investors possibly could be considered as additional compensation to them, Royale
Energys management does not believe that the amount of such difference should be
treated as compensation. At any rate, management believes that the amount of the
difference is insignificant. In addition, Royale Energy advanced funds to the executives
to pay for their well participation interests. After adoption of the Sarbanes-Oxley Act of
2002, the Company discontinued making such advances and
required the directors to repay all outstanding amounts advanced. The Other Annual
Compensation in the foregoing table consists of the amounts which the management believes
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. Royale Energy used the imputed interest rate of 7%
simple interest per annum.

(2)    
          Includes Royale Energys matching contribution in 2002 for Stephen Hosmer
          ($5,340) to Royale Energys retirement savings plan initiated in April
          1998. For year ending 2001, includes matching contribution for Donald Hosmer
          ($4,000) and Stephen Hosmer ($3,500) and for the year ending 2000, includes
          matching contribution for Donald Hosmer ($2,400) and Stephen Hosmer ($3,300).

Royale Energy does not have
employment agreements with any of its executives.

No Stock Options Were
Granted in 2002

Royale Energy did not grant any stock
options or stock appreciation rights or Long-Term Incentive Plan Awards to its officers or
employees during 2002.

Aggregated 2002 Option
Exercises and Year-End Values

None of the executive officers named
in the Summary Compensation Table exercised any stock options or stock appreciation rights
in 2002, 2001, or 2000. The following table summarizes the number and value of all
unexercised stock options held by those executive officers at the end of 2001.

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|(a)                     |  | (b) |                             | (c) |  | (d)
Number of Securities Underlying
Unexercised Options/SARs atFY-End |  | (e)
Value of Unexercised In-the-
Money Options/SARs at FY-End(1)
|----------------------- |  | --- | --------------------------- | --- |  | --------------------------------------------------------------------- |  | ----------------------------------------------------------------
|Name                    |  |     | Shares
Acquired on Exercise |     |  | ValueRealized                                                         |  |                                                                 
|Donald
Hosmer,President |  |     | -                           |     |  | -                                                                     |  |                                                                 
|                        |  |    
|                        |  |     |                             |     |  |                                                                       |  |                                                                 
|StephenHosmer,CFO       |  |     | -                           |     |  | -                                                                     |  |                                                                 

(1)    
          Based on a fair market value of $5.26 per share, which was the closing price of
          Royale Energys Common Stock in the Nasdaq National Market System on
          December 31, 2002.

Compensation of Directors

Each director who is not an employee
of Royale Energy receives a quarterly fee for his services, which in 2002 was set at
$2,500. In addition, Royale Energy reimburses directors for the expenses they incur for
their service. No directors received any stock options or stock appreciation rights in
2002.

Item 11.
          Security
Ownership of Certain Beneficial Owners and Management

The following tables set forth
certain information regarding the ownership of Royale Energys voting securities as
of December 31, 2002, by: (i) each person Royale Energy knows to own beneficially more
than 5% of the outstanding shares of each class of equity securities, (ii) each of Royale
Energys directors, and (iii) all of Royale Energys directors and officers 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, 2002, 5,030,101
shares of Royale Energys Common Stock were outstanding.

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|                           | Shares Owned (1)
|-------------------------- | ----------------
|Shareholder (2)            | Number          
|                           |                 
|Donald H. Hosmer           | 863,643         
|                           |                 
|Harry E. Hosmer            | 510,888         
|                           |                 
|Oscar A. Hildebrandt       | 54,781          
|                           |                 
|Stephen M. Hosmer          | 857,242         
|                           |                 
|Gilbert C. L. Kemp         | 6,613           
|                           |                 
|Rodney Nahama              | 18,515          
|                           |                 
|George M. Watters          | 39,675          
|                           |                 
|All directors and officers
|as a group (7 persons)     | 2,698,473       

(1)    
          Includes shares which the listed shareholder has the right to acquire before
          March 1, 2003, from options or warrants, as follows: Royale Petroleum
          Corporation 304,909, Donald H. Hosmer 19,838, Harry E. Hosmer
52,900, Stephen M. Hosmer 13,225, Oscar Hildebrandt 26,450, Rodney Nahama 18,515, George
M. Watters 39,675, and all officers and directors as a group (excluding Royale Petroleum
Corporation) 170,603.

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

(3)    
          The shares owned by Donald and Stephen Hosmer each include shares owned by
          Royale Petroleum Corporation (RPC). RPC owns 1,684,966 shares
          (31.58%) of Royale Energy. Donald and Stephen Hosmer each own and have power to
          vote 50% of RPCs equity securities, so each of them may be deemed to be
          the beneficial owner of the Common Stock owned by RPC pursuant to Rule 13d-3
          promulgated under the Securities Exchange Act of 1934, as amended. To illustrate
          the relative economic and voting interests owned by the directors, the above
          table attributes 50% of the Royale Energy shares owned by RPC to each of Donald
          and Stephen Hosmer. The total number of Royale Energy shares owned by RPC
          (1,684,966 shares) are included in the number of shares both Donald and Stephen
          Hosmer own 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.

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(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.

Preferred Stock

Holders of each series of Convertible
Preferred Stock 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, 2002, there were 5,068 shares of Series A and 48,581
shares of Series AA Convertible Preferred Stock outstanding. The shares of each series of
Preferred shares are convertible into shares of Royale Energys Common Stock at the
option of the security holder, at the rate of two shares of Convertible Preferred Stock
for each share of Common Stock. The Preferred Stock is not registered under the Securities
Exchange Act of 1934, and no market exists for the Preferred Stock. The total number of
shares of Common Stock issuable on conversion of all outstanding shares of Preferred Stock
equals less than 1% of the outstanding Common Stock of Royale Energy. To Royale
Energys knowledge, none of the Preferred shareholders would own more than 1% of
Royale Energys Common Stock, if their Preferred shares were converted to Common
shares.

Item 12.           Certain
Relationships and Related Transactions

In 1989, the board of directors
adopted a policy (the 1989 policy) that permits each director and officer of
Royale Energy to purchase from Royale Energy, at its cost, up to one percent (1%) fractional interest in any well to be
drilled by Royale Energy. When an officer or director elects to make such a purchase, the
amount charged per each percentage working interest is equal to Royale Energys
actual pro rata cost of drilling and completion, rather than the higher amount that Royale
Energy charges to working interest holders for the purchase of a percentage working
interest in a well. Of the current officers and directors, Donald Hosmer, Stephen Hosmer,
Harry E. Hosmer, George Watters and Oscar Hildebrandt at various times have elected under
the 1989 policy to purchase interests in certain wells Royale Energy has drilled.



Under the 1989 policy, officers and
directors may elect to participate in wells at any time up until drilling of the prospect
begins. Participants are required to pay all direct costs and expenses through completion
of a well, whether or not the well drilling and completion expenses exceed Royale
Energys cost estimates, instead of paying a set, turnkey price (as do outside
investors who purchase undivided working interests from Royale Energy). Thus, they
participate on terms similar to other oil and gas industry participants or joint
venturers. Participants are invoiced for their share of direct costs of drilling and
completion as Royale Energy incurs expenses.

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

-22-

---

drilling and completion stage.
Accordingly, Royale Energys management believes that its officers and directors who
participate in wells under the Board of Directors policy do so on terms the same as
could be obtained by unaffiliated oil and gas industry participants in arms-length
transactions, albeit those terms are different than the turnkey agreement under which
outside investors purchase fractional undivided working interests from Royale Energy.

Donald and Stephen Hosmer each have
participated individually in 83 wells under the 1989 policy. The Hosmer Trust, a trust for
the benefit of family members of Harry E. Hosmer, has participated in 82 wells.

Donald Hosmers 2002 investments
in wells under the 1989 policy totaled $53,853 in fractional interests in 16 wells. In
2002, Stephen Hosmer purchased fractional interests in 16 wells under the 1989 policy, for
a total investment of $51,578.

The Hosmer Trust purchased fractional
interests in 16 wells during 2002 for a total investment of $54,565.

Prior to June 1995, Royale Energy had advanced
to the participants under the 1989 policy the funds with which to purchase their
interests, and the funds would be repaid from future production from the working interests
and advances 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 Royale Energy has a single account to which all charges and
income from all wells is credited. Current and former officers and directors were billed
$238,502 and $97,261 for their interests for the years ended December 31, 2002 and 2001,
respectively. Under the Sarbanes-Oxley Act of 2002, these amounts can no longer be billed
to officers and directors. Instead, these amounts are either collected in advance or paid
to officers as compensation. Receivables grand fathered (outstanding prior to July 30,
2002) were $243,608 at December 31, 2002. The outstanding amounts have since been repaid.

Royale Energys Chairman of the
Board and former President, Harry E. Hosmer, renders management consulting services to
Royale Energy on an ongoing basis. Royale Energy compensated Mr. Hosmer $120,000 for his
consulting services in 2002 and pays his medical insurance costs. Mr. Hosmers
consulting services are in conjunction with his service on the board of directors, for
which he receives reimbursement of expenses to attend meetings.

-23-

---

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 Royale Energy'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 Royale Energy's Form 8-K dated October 31, 1994
|     |                                                                                                                                                                                                                                                                     
|3.3  | Bylaws of Royale Energy, Inc., incorporated by reference to Exhibit 3.2 of Royale Energy'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 Royale Energy'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 Royale Energy's Form 10-SB Registration Statement                                                                                            
|     |                                                                                                                                                                                                                                                                     
|10.1 | Form of Indemnification Agreement, incorporated by reference to Exhibit 10.3 of Royale Energy's Form 10-SBRegistration Statement                                                                                                                                    
|     |                                                                                                                                                                                                                                                                     
|99.1 | Officers' Certifications Pursuant to 18 U.S.C.ss.1350                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                     
|(b)  | Reports on Form 8-K                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                     
|     | Royale Energy filed no Reports on Form 8-K during the last fiscal quarter of 2002                                                                                                                                                                                   

Signatures

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

|                           | ROYALE ENERGY, INC                                   
|-------------------------- | -----------------------------------------------------
|                           |                                                      
|Date:    December 11, 2003 | Stephen M. Hosmer                                    
|                           | Stephen M. Hosmer, Executive Vice President and Chief
|                           | Financial Officer                                    

-24-

---

Certification

I, Donald H. Hosmer, Chief Executive
Officer of Royale Energy, Inc., certify that:

1.    
          I have reviewed this annual report on Form 10-KSB of Royale Energy, Inc.

2.    
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report.

3.    
          Based on my knowledge, the financial statements and other financial information
          included in this annual report fairly present, in all material respects, the
          financial condition, results of operations and cash flows of Royale Energy, Inc.
          as of, and for, the periods presented in this annual report.

4.    
          Royale Energy, Inc.s other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          the Exchange Act Rules 13a-14 and 15d-14) for Royale Energy, Inc. and we have:

a.       
          designed such disclosure controls and procedures to ensure that material
          information relating to Royale Energy, Inc., including its consolidated
          subsidiaries, is made known to us by others within those entities, particularly
          during the period in which this annual report is being prepared;

b.       
          evaluated the effectiveness of Royale Energy, Inc.s disclosure controls
          and procedures as of a date within 90 days prior to the filing date of this
          annual report (the Evaluation Date); and

c.       
          presented in this annual report our conclusions about the effectiveness of the
          disclosure controls and procedures based on our evaluation as of the Evaluation
          Date.

5.    
          Royale Energy, Inc.s other certifying officers and I have disclosed, based
          on our most recent evaluation, to our auditors and the audit committee of Royale
          Energy, Inc.s board of directors:

a.       
          all significant deficiencies in the design or operation of internal controls
          which could adversely affect Royale Energy, Inc.s ability to record,
          process, summarize and report financial data and have identified for Royale
          Energy, Inc.s auditors any material weaknesses in internal controls; and

b.       
          any fraud, whether or not material, that involves management or other employees
          who have a significant role in Royale Energy, Inc.s internal controls.

-25-

---

6.    
          Royale Energy, Inc.s other certifying officers and I have indicated in
          this annual report whether or not there were significant changes in internal
          controls or in other factors that could significantly affect internal controls
          subsequent to the date of our most recent evaluation, including any corrective
          actions with regard to significant deficiencies and material weaknesses.

|Date:    December 11, 2003 | By:                Donald H. Hosmer                    
|-------------------------- | -------------------------------------------------------
|                           | Donald H. Hosmer, President and Chief Executive Officer

Certification

I, Stephen M. Hosmer, Executive Vice President and Chief
Accounting Officer of Royale Energy, Inc., certify that:

1.    
          I have reviewed this Annual Report on Form 10-KSB of Royale Energy, Inc.;

2.    
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report.

3.    
          Based on my knowledge, the financial statements and other financial information
          included in this annual report fairly present, in all material respects, the
          financial condition, results of operations and cash flows of Royale Energy, Inc.
          as of, and for, the periods presented in this annual report.

4.    
          Royale Energy, Inc.s other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          the Exchange Act Rules 13a-14 and 15d-14) for Royale Energy, Inc. and we have:

a.       
          designed such disclosure controls and procedures to ensure that material
          information relating to Royale Energy, Inc., including its consolidated
          subsidiaries, is made known to us by others within those entities, particularly
          during the period in which this annual report is being prepared;

b.       
          evaluated the effectiveness of Royale Energy, Inc.s disclosure controls
          and procedures as of a date within 90 days prior to the filing date of this
          annual report (the Evaluation Date); and

c.       
          presented in this annual report our conclusions about the effectiveness of the
          disclosure controls and procedures based on our evaluation as of the Evaluation
          Date.

-26-

---

5.    
          Royale Energy, Inc.s other certifying officers and I have disclosed, based
          on our most recent evaluation, to our auditors and the audit committee of Royale
          Energy, Inc.s board of directors:

a.       
          all significant deficiencies in the design or operation of internal controls
          which could adversely affect Royale Energy, Inc.s ability to record,
          process, summarize and report financial data and have identified for Royale
          Energy, Inc.s auditors any material weaknesses in internal controls; and

b.       
          any fraud, whether or not material, that involves management or other employees
          who have a significant role in Royale Energy, Inc.s internal controls.

6.    
          Royale Energy, Inc.s other certifying officers and I have indicated in
          this annual report whether or not there were significant changes in internal
          controls or in other factors that could significantly affect internal controls
          subsequent to the date of our most recent evaluation, including any corrective
          actions with regard to significant deficiencies and material weaknesses.

|Date:    December 11, 2003 | By:          Stephen M. Hosmer                       
|-------------------------- | -----------------------------------------------------
|                           | Stephen M. Hosmer, Executive Vice President
and Chief
|                           | Financial Officer                                    

-27-

---

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

|                                                                                  |     
|--------------------------------------------------------------------------------- | ----
|Index to Financial Statements                                                     | F-1 
|                                                                                  |     
|Report of Brown Armstrong Paulden McCown Starbuck & Keeter,                      
|Independent Auditors                                                              | F-2 
|                                                                                  |     
|Balance Sheets at December 31, 2002 and 2001                                      | F-3 
|                                                                                  |     
|Statements of Income for the Years Ended December 31, 2002 and 2001               | F-4 
|                                                                                  |     
|Statements of Stockholders' Equity for the Years Ended December 31, 2002 and 2001 | F-5 
|                                                                                  |     
|Statements of Cash Flows for the Years Ended December 31, 2002 and 2001           | F-6 
|                                                                                  |     
|Notes to the Financial Statements                                                 | F-7 
|                                                                                  |     
|Supplemental Information About Oil and Gas Producing Activities (Unaudited)       | F-21

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

F-1

---

REPORT OF INDEPENDENT
AUDITOR

| | 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, 2002 and 2001, and the related statements of operations, stockholders equity
and cash flows for the years then ended. These financial statements are the
responsibility of Royale Energys management. Our responsibility is to express an
opinion on these financial statements based on our audit.                                                                                                                                                                                                                                               
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | We conducted
our audits in accordance with auditing standards generally accepted in the Untied States
of America. 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, 2002 and
2001, and the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States of
America.                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | BROWN ARMSTRONG PAULDEN 
| | ------------------------
| | McCOWN STARBUCK & KEETER
| | ACCOUNTANCY CORPORATION 

Bakersfield, California
March 28, 2003

F-2

---

ROYALE ENERGY, INC.
BALANCE SHEETS DECEMBER 31, 2002 AND
2001ASSETS

|                                                             | 2002 |  | 2001 |           
|------------------------------------------------------------ | ---- |  | ---- | ----------
|Current Assets                                               |      |  |      |           
|Cash and Cash Equivalents                                    |      |  | $    | 2,229,944 
|Accounts Receivable                                          |      |  |      | 3,736,236 
|Prepaids                                                     |      |  |      | 1,819,764 
|Inventory                                                    |      |  |      | 63,148    
|                                                             |      |  |      |           
|Total Current Assets                                         |      |  |      | 7,849,092 
|                                                             |      |  |      |           
|Investments                                                  |      |  |      | 275,000   
|                                                             |      |  |      |           
|Oil and Gas Properties (successful efforts basis), Equipment |      | 
|and Fixtures                                                 |      |  |      | 15,176,635
|                                                             |      |  |      |           
|Total Assets                                                 |      |  | $    | 23,300,727

# LIABILITIES AND
STOCKHOLDERS' EQUITY

|                                                      |  | 
|----------------------------------------------------- |  | 
|Current Liabilities                                   |  | 
|Accounts Payable and Accrued Expenses                 |  | 
|Deferred Revenue from Turnkey Drilling                |  | 
|                                                      |  | 
|Total Current Liabilities                             |  | 
|                                                      |  | 
|Long-Term Debt, Net of Current Portion                |  | 
|                                                      |  | 
|Total Liabilities                                     |  | 
|                                                      |  | 
|Redeemable Preferred Stock                            |  | 
|Series A, Convertible Preferred Stock, No Par Value,  |  | 
|59,250 Shared Authorized; 5,068 and 12,256 Shares     |  | 
|Issued and Outstanding                                |  | 
|                                                      |  | 
|Stockholders' Equity                                  |  | 
|Common Stock, No Par Value, 10,000,000 Shares         |  | 
|Authorized; 5,030,101 and 5,026,004 Shares            |  | 
|Issued and Outstanding                                |  | 
|Convertible Preferred Stock, Series AA, No Par Value, |  | 
|147,500 Shares Authorized; 48,581 and 49,583          |  | 
|Shares Issued and Outstanding                         |  | 
|Accumulated (Deficit)                                 |  | 
|                                                      |  | 
|Total Paid in Capital and Accumulated Deficit         |  | 
|                                                      |  | 
|Less Cost of Treasury Stock, 20,000 and 26,000 Shares |  | 
|                                                      |  | 
|Paid in Capital, Treasury Stock                       |  | 
|                                                      |  | 
|Total Stockholders' Equity                            |  | 
|                                                      |  | 
|Total Liabilities and Stockholders' Equity            |  | 

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

F-3

---

ROYALE ENERGY, INC.
STATEMENTS OF OPERATIONSFOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001

|                                         | 2002 |  | 2001 |  
|---------------------------------------- | ---- |  | ---- | -
|Revenues                                 |      |  |      |  
|Sale of Oil and Gas                      |      |  |      | $
|Turnkey Drilling                         |      |  |      |  
|Supervisory Fees and Other               |      |  |      |  
|                                         |      |  |      |  
|Total Revenues                           |      |  |      |  
|                                         |      |  |      |  
|Costs and Expenses                       |      | 
|General and Administrative               |      |  |      |  
|Geological and Geophysical Expenses      |      |  |      |  
|Turnkey Drilling Development             |      |  |      |  
|Lease Operating                          |      |  |      |  
|Lease Impairment                         |      |  |      |  
|Legal and Accounting                     |      |  |      |  
|Marketing                                |      |  |      |  
|Depreciation, Depletion and Amortization |      |  |      |  
|                                         |      |  |      |  
|Total Costs and Expenses                 |      |  |      |  
|                                         |      |  |      |  
|Income from Operations                   |      |  |      |  
|                                         |      |  |      |  
|Other Expenses                           |      | 
|Interest Expense                         |      |  |      |  
|                                         |      |  |      |  
|Income Before Income Tax Expense         |      |  |      |  
|                                         |      |  |      |  
|Income Tax Expense (Benefit)             |      |  |      |  
|                                         |      |  |      |  
|Net Income (Loss)                        |      |  |      | $
|                                         |      |  |      |  
|Basic Earnings Per Share                 |      |  |      | $
|                                         |      |  |      |  
|Diluted Earnings Per Share               |      |  |      | $

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

F-4

---

ROYALE ENERGY, INC.
STATEMENTS OF
STOCKHOLDERS EQUITY 
FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001

|                                            | Common Stock      | Preferred Stock Series AA | Treasury Stock   
|------------------------------------------- | ----------------- | ------------------------- | -----------------
|                                            | SharesOutstanding | Amount                    | SharesOutstanding
|Balance at                                  |                   |                           |                  
|December 31, 2000                           | 5,022,410         | $16,646,480               | 56,780           
|                                            |                   |                           |                  
|Conversion of Preferred                    
|AA to common stock                          | 3,594             | 25,000                    | (7,187)          
|                                            |                   |                           |                  
|Net income for the year                     | --                | --                        | --               
|                                            |                   |                           |                  
|Balance at                                 
|December 31, 2001                           | 5,026,004         | 16,671,480                | 49,593           
|                                            |                   |                           |                  
|Conversion of Preferred                    
|A to common stock                           | 3,594             | 17,101                    | --               
|                                            |                   |                           |                  
|Conversion of Preferred  AA to common stock | 503               | 3,514                     | (1,012)          
|                                            |                   |                           |                  
|Net loss for the year                       | --                | --                        | --               
|                                            |                   |                           |                  
|                                           
|Balance at  December 31, 2002               | 5,030,101         | $16,692,095               | 48,581           

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

F-5

---

ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER
31, 2002 AND 2001

|                                                     | 2002 |  | 2001 |           
|---------------------------------------------------- | ---- |  | ---- | ----------
|CASH FLOWS FROM OPERATING ACTIVITIES                 |      |  |      |           
|Net Income (Loss)                                    |      |  | $    | (137,036  
|Adjustments to Reconcile Net Income to Net Cash      |      | 
|Provided by Operating Activities:                    |      | 
|Depreciation, Depletion, and Amortization            |      |  |      | 1,694,028 
|Compensation Expense - Stock Grants                  |      |  |      | 46,161    
|Lease Impairment                                     |      |  |      | 596,222   
|(Increase) Decrease in:                              |      | 
|Accounts Receivable                                  |      |  |      | (211,198  
|Prepaid Expenses and Other Assets                    |      |  |      | (1,462,451
|Increase (Decrease) in:                              |      | 
|Accounts Payable and Accrued Expenses                |      |  |      | 2,488,045 
|Deferred Revenues - DWI                              |      |  |      | (174,803  
|                                                     |      | 
|Net Cash Provided by Operating Activities            |      |  |      | 2,838,968 
|                                                     |      | 
|CASH FLOWS FROM INVESTING ACTIVITIES                 |      | 
|Expenditures for Oil and Gas Properties              |      |  |      | (5,240,883
|Other Capital Expenditures                           |      |  |      | --        
|                                                     |      |  |      |           
|Net Cash Used by Investing Activities                |      |  |      | (5,240,883
|                                                     |      |  |      |           
|CASH FLOWS FROM FINANCING ACTIVITIES                 |      | 
|Principal Payments on Long-Term Debt                 |      |  |      | --        
|Proceeds from Long-Term Debt                         |      |  |      | 1,500,000 
|                                                     |      |  |      |           
|Net Cash Provided (Used) by Financing Activities     |      |  |      | 1,500,000 
|                                                     |      | 
|Net Increase (Decrease) in Cash and Cash Equivalents |      |  |      | (901,915  
|                                                     |      |  |      |           
|Cash at Beginning of Year                            |      |  |      | 3,131,859 
|                                                     |      |  |      |           
|Cash at End of Year                                  |      |  | $    | 2,229,944 
|                                                     |      |  |      |           
|SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:  |      | 
|                                                     |      |  |      |           
|Cash Paid for Interest                               |      |  | $    | 105,405   
|                                                     |      |  |      |           
|Cash Paid for Taxes                                  |      |  | $    | --        

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

F-6

---

ROYALE ENERGY, INC.
 NOTES TO FINANCIAL
STATEMENTS

NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

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

Description of Business

Royale Energy is an independent oil
and gas producer which also has operations in the area of turnkey drilling. Royale Energy
owns wells and leases in major geological basins located in California and Texas. Royale
Energy 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.

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 proven reserves.
Estimated reserves are used in the calculation of depletion, depreciation and amortization
unevaluated property costs, estimated future net cash flows, taxes, and contingencies.

Joint Ventures

The accompanying financial statements
as of December 31, 2002 and 2001, include the accounts of Royale Energy and its
proportionate share of the assets, liabilities and results of operations. Royale Energy
generally retains an ownership interest of approximately 30% in its joint venture
projects. Royale Energy is the operator of the majority of properties in which it has an
ownership interest. In connection with the drilling and operation of wells, the Company
receives management fees, which are recorded as supervisory fee income.

Revenue Recognition

Royale Energy recognizes revenues
from the sales of oil and gas in the period of delivery.

Royale Energy enters into turnkey drilling
agreements with investors to develop leasehold acreage acquired by Royale Energy. When
Royale Energy authorizes a turnkey drilling project for sale, a calculation is made to
estimate the pre-drilling costs and the drilling costs. A percentage for each is
calculated. The turnkey drilling project is then sold to investors who enter a signed
contract with Royale Energy. In this agreement, the investor agrees to share in the
pre-drilling costs, which include lease costs, intangible drilling costs, and other costs
as required so that the drilling of the project can proceed. As stated in the contract,
the percentage of the pre-drilling costs that the investor contributes is non-refundable,
and thus on its financial statements, Royale Energy recognizes these non-refundable
payments as revenue since the pre-drilling costs have commenced. The remaining investment
is held and reported by Royale Energy as deferred revenue until the well is spudded
(begun). Drilling is generally completed within 7-14 days. If costs exceed revenues and
Royale Energy participates as a working interest owner, Royales proportional share
of the excess is capitalized as the cost of Royale Energys

F-7

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition
(Continued)

working interest. If Royale Energy is
unable to drill the wells, and a suitable replacement well is not found, the deferred
funds received would be returned to the investors. If the drilling effort is successful,
each investor receives a working interest in the wells, and Royale Energy, along with the
investors, receive an assignment of working interests. 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)

Royale Energy accounts for its oil
and gas exploration and development costs using the successful efforts method. Leasehold
acquisition costs are capitalized. If proved reserves are found on an undeveloped
property, leasehold cost is transferred to proved properties. Significant undeveloped
leases are reviewed periodically and a valuation allowance is provided for any estimated
decline in value. Cost of other undeveloped leases is expensed over the estimated average
life of the leases. Cost of exploratory drilling is initially capitalized. In the absence
of a determination that proved reserves are found, the costs of drilling such exploratory
wells is charged to expense. Royale Energy makes this determination within one year
following the completion of drilling. Other exploratory costs are charged to expense as
incurred. Development costs, including unsuccessful development wells, are capitalized.
Depletion, depreciation and amortization of oil and gas producing properties are computed
on an aggregate basis using the units-of-production method.

Financial Accounting Standards Board
(FASB), 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,
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, Royale Energy 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.

Royale Energy performs a periodic
review for impairment of proved properties on a field-by-field basis. Unamortized capital
costs are measured on a field basis and are reduced to fair value if it is determined that
the sum of expected future net cash flows are less than the net book value. Royale Energy
determines if an impairment has occurred through either adverse changes or as a result of
its periodic review for impairment. Impairment is measured on discounted cash flows
utilizing a discount rate appropriate for risks associated with the related properties or
based on fair market values. Impairment losses of $596,222 and $2,062,028 were recorded in
2002 and 2001, respectively.

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. Impairment of
unproved properties are assessed periodically on a property-by-property basis, and any
impairment in value is currently charged to expense. In addition, capitalized costs of
unproved properties are assessed periodically to determine whether their value has been
impaired below the capitalized costs. Loss is recognized to the extent that such
impairment is indicated. In making these assessments, factors such as exploratory drilling
results, future drilling plans, and lease expiration terms are considered. When an entire
interest in an unproved property is sold, gain or loss is recognized, taking into
consideration any recorded impairment. Upon abandonment of properties, the reserves are
deemed fully depleted and any unamortized costs are recorded in the statement of income
under impairment expense.

Cash and Cash Equivalents

Cash and cash equivalents include
cash on hand and on deposit, and highly liquid debt instruments with maturities of three
months or less.

F-8

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

Accounts Receivable

Management believes that all accounts
receivable as of December 31, 2002 and 2001 are fully collectible. Therefore, no allowance
for doubtful accounts is recorded.

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.

Earnings (Loss) Per Share
(SFAS 128)

Basic and diluted earnings (loss) per
share are calculated as follows:

|                                                | For the Year Ended December 31, 2002
|----------------------------------------------- | ------------------------------------
|
|Basic Earnings Per Share:                       |                                     
|Net loss available to common stock              |                                     
|Diluted Earnings Per Share:                     |                                     
|                                                |                                     
|Effect of dilutive securities and stock options |                                     
|Net loss available to common stock              |                                     

|                                                | For the Year Ended December 31, 2001
|----------------------------------------------- | ------------------------------------
|
|Basic Earnings Per Share:                       |                                     
|Net loss available to common stock              |                                     
|                                                |                                     
|Diluted Earnings Per Share:                     |                                     
|Effect of dilutive securities and stock options |                                     
|                                                |                                     
|Net income available to common stock            |                                     

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.

F-9

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Values of Financial
Instruments (Continued)

Royale Energy includes fair value in
the notes to financial statements when the fair value of its financial instruments is
different from the book value. Royale Energy assumes that the book value of financial
instruments that are classified as current approximate fair value because of the short
maturity of these instruments. For noncurrent financial instruments, Royale Energy uses
quoted market prices or, to the extent that there are no available quoted market prices,
market prices for similar instruments.

Treasury Stock

The Company records acquisition of
its capital stock for treasury at cost. Differences between proceeds for reissuance of
treasury stock and average cost are charged to retained earnings or credited thereto to
the extent of prior charges and thereafter to capital in excess of par value.

Recently Issued
Accounting Pronouncements

In June 2001, the Financial
Accounting Standards Board (FASB) issued Statements of Financial Accounting
Standards No. 141 Business Combinations (SFAS 141) and No. 142
Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for under the
purchase method. For all business combinations for which the date of acquisition is after
June 30, 2001, SFAS 141 also establishes specific criteria for the recognition of
intangible assets separately from goodwill. SFAS 141 also requires unallocated negative
goodwill (in a case where the purchase price is less than fair market value of the
acquired assets) to be written off immediately as an extraordinary gain, rather than
deferred and amortized. SFAS 142 changes the accounting for goodwill and other intangible
assets after an acquisition. The most significant changes made by SFAS 142 are: 1)
goodwill and intangible assets with indefinite lives will no longer be amortized; 2)
goodwill and intangible assets with indefinite lives must be tested for impairment at
least annually; and 3) the amortization period for intangible assets with finite lives
will no longer be limited to 40 years.

Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement No. 142. Statement No. 141 will require, upon
adoption of Statement No. 142, that the Company evaluate its existing intangible assets
and goodwill that were acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria in Statement No. 141
for recognition apart from goodwill. Upon adoption of Statement No. 142, the Company will
be required to reassess the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition, to the
extent an intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with the
provisions of Statement No. 142 within the first interim period. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative effect of a change
in accounting principle in the first interim period. In connection with the transitional
goodwill impairment evaluation, Statement No. 142 will require the Company to perform an
assessment, by reporting unit, of whether there is an indication that goodwill is impaired
as of the date of adoption. Management believes the Company has one reporting unit. The
Company will then have up to six months from the date of adoption to determine the fair
value of its reporting unit and compare it to the reporting units carrying amount.
To the extent the reporting units carrying amount exceeds its fair value, an
indication exists that the reporting units goodwill may be impaired and the Company
must perform the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting units goodwill,
determined by allocating the reporting units fair value to all of it assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with Statement No. 141, to its carrying amount, both of which
would be measured as of the date of adoption.

The Company does not believe that the
adoption of these statements will have a material effect on its financial position,
results of operations or cash flows.

F-10

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)

Recently Issued
Accounting Pronouncements(Continued)

In June 2001, the FASB also approved
for issuance SFAS 143 Asset Retirement Obligations. SFAS 143 establishes
accounting requirements for retirement obligations associated with tangible long-lived
assets such as wells and production facilities. SFAS 143 guidance covers (1) the timing of
the liability recognition, (2) initial measurement of the liability, (3) allocation of
asset retirement cost to expense, (4) subsequent measurement of the liability and (5)
financial statement disclosures. SFAS 143 requires that an asset retirement cost should be
capitalized as part of the cost of the related long- lived asset and subsequently
allocated to expense using a systematic and rational method. The adoption of SFAS 143
could result in (1) an increase of total liabilities, because more retirement obligations
are required to be recognized, (2) an increase in the recognized cost of assets, because
the retirement costs are added to the carrying amount of the long-lived asset and (3) an
increase in operating expense because of the accretion of the retirement obligation and
additional depreciation and depletion. The Company adopted the statement on January 1,
2003. The transition adjustment resulting from the adoption of SFAS 143 will be reported
as a cumulative effect of a change in accounting principle in January 2003. The adoption
of this standard had no material impact on its financial position, results of operations,
or cash flows.

In August 2001, the FASB also
approved SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 replaces SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The new
accounting model for long-lived assets to be disposed of by sale applies to all long-lived
assets, including discontinued operations, and replaces the provisions of APB Opinion No.
30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment
of a Business, for the disposal of segments of a business. SFAS 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred. SFAS 144 also broadens
the reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal transaction. The
provisions of SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and therefore were adopted by the Company in 2002. The
adoption of this statement did not impact the Companys financial position, results
of operations, or cash flows.

In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections. SFAS 145, which is effective for fiscal years
beginning after May 15, 2002, provides guidance for income statement classification of
gains and losses on extinguishment of debt and accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. The adoption
of this statement did not impact the Companys financial position, results of
operations, or cash flows.

In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS 146 nullifies the guidance of the Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
requires that a liability for a cost that is associated with an exit or disposal activity
be recognized when the liability is incurred. SFAS 146 also establishes that fair value is
the objective for the initial measurement of the liability. The provisions of SFAS 146 are
required for exit or disposal activities that are initiated after December 31, 2002. The
adoption of this statement did not impact the Companys financial position, results
of operations, or cash flows.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure. SFAS 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the

F-11

---

NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued
Accounting Pronouncements (Continued)

effect of the method used on the
reported results. The provisions of SFAS 148 are effective for financial statements for
fiscal years ending after December 15, 2002. The adoption of this statement did not impact
the Companys financial position, results of operations, or cash flows.

Reclassification

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

NOTE 2  INVESTMENTS

The Company owns 27,500 shares of
C&K Capital Corporation Series A preferred stock. This investment does not have a
readily determinable market price and is thus carried at cost.

NOTE 3  OIL AND GAS
PROPERTIES, EQUIPMENT AND FIXTURES

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

|                                                          | 2002 |  | 2001 |           
|--------------------------------------------------------- | ---- |  | ---- | ----------
|Oil and Gas                                               |      |  |      |           
|                                                          |      |  |      |           
|Producing properties, including intangible drilling costs |      |  | $    | 12,072,748
|Undeveloped properties                                    |      |  |      | 2,457,642 
|Lease and well equipment                                  |      |  |      | 5,481,318 
|                                                          |      |  |      |           
|                                                          |      |  |      | 20,011,708
|Accumulated depletion, depreciation and amortization      |      |  |      | (5,218,769
|                                                          |      |  |      |           
|                                                          |      | 
|                                                          |      |  |      | 14,792,939
|                                                          |      | 
|Commercial and Other                                      |      | 
|                                                          |      |  |      |           
|Furniture and equipment                                   |      |  |      | 825,133   
|Accumulated depreciation                                  |      |  |      | (441,437  
|                                                          |      |  |      |           
|                                                          |      | 
|                                                          |      |  |      | 383,696   
|                                                          |      |  |      |           
|                                                          |      |  | $    | 15,176,635

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

|            | 2002 |  | 2001 |           | 2000 |  
|----------- | ---- |  | ---- | --------- | ---- | -
|Acquisition |      |  | $    | 824,537   |      | $
|Development |      |  | $    | 2,484,994 |      | $
|Exploration |      |  | $    | 4,359,792 |      | $

F-12

---

NOTE 3 - OIL AND GAS
PROPERTIES, EQUIPMENT AND FIXTURES (Continued)

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:

|                                         | 2002 |  | 2001 |           
|---------------------------------------- | ---- |  | ---- | ----------
|Oil and gas sales                        |      |  | $    | 4,930,278 
|Production related costs                 |      |  |      | (1,450,893
|Geological and geophysical expense       |      |  |      | (28,566   
|Depreciation, depletion and amortization |      |  |      | (1,694,027
|                                         |      | 
|Results of operations from producing and |      | 
|exploration activities                   |      |  | $    | 1,756,792 

NOTE 4  TURNKEY
DRILLING CONTRACTS

Royale Energy receives funds under
turnkey drilling contracts which require Royale Energy to drill oil and gas wells within a
reasonable time period from the date of receipt of the funds. As of December 31, 2002 and
2001, Royale Energy had recorded deferred turnkey drilling revenue associated with
undrilled wells of $2,566,188 and $2,740,991, respectively, as a current liability.

NOTE 5  FINANCIAL
INFORMATION RELATING TO INDUSTRY SEGMENTS

Royale Energy adopted SFAS No. 131,
Disclosure About Segments of an Enterprise and Related Information in 1998 which changes
the way Royale Energy reports information about its operating segments.

Royale Energy identifies reportable
segments by product and country, although Royale Energy currently does not have foreign
country segments. Royale Energy includes revenues from both external customers and
revenues from transactions with other operating segments in its measure of segment profit
or loss. Royale Energy also includes interest revenue and expense, DD&A, and other
operating expenses in its measure of segment profit or loss.

The accounting policies of the
reportable segments are the same as those described in the Summary of Significant
Accounting Principles (see Note 1).

F-13

---

NOTE 5 - FINANCIAL
INFORMATION RELATING TO INDUSTRY SEGMENTS (Continued)

Royale Energy's operations
are classified into two principal industry segments. Following is a summary of
segmented information for 2002 and 2001:

|                                                | Oil and
      GasProducingandExploration |   | TurnkeyDrillingServices |   | Total
|----------------------------------------------- | ---------------------------------------- | - | ----------------------- | - | -----
|                                                |                                          |   |                         |   |      
|Year Ended December 31,
      2002              |                                          |   |                         |   |      
|Revenues from External Customers                |                                          | $ | 4,930,278               |   |      
|                                                |                                          |   |                         |   |      
|Supervisory Fees                                |                                          | $ | 583,637                 |   |      
|                                                |                                          |   |                         |   |      
|Interest
      Revenue                          |                                          | $ | 35,543                  |   |      
|                                                |                                          |   |                         |   |      
|Interest
      Expense                          |                                          | $ | 52,703                  |   |      
|                                                |                                          |   |                         |   |      
|Expenditures for Segment
      Assets           |                                          | $ | 3,769,970               |   |      
|                                                |                                          |   |                         |   |      
|Depreciation, Depletion, and
      Amortization |                                          | $ | 1,615,130               |   |      
|                                                |                                          |   |                         |   |      
|Lease Impairment                                |                                          | $ | 298,111                 |   |      
|                                                |                                          |   |                         |   |      
|Income Tax (Benefit)                            |                                          | $ | (27,745                 | ) |      
|                                                |                                          |   |                         |   |      
|Total Assets                                    |                                          | $ | 23,300,727              |   |      
|                                                |                                          |   |                         |   |      
|Net Income (Loss)                               |                                          | $ | (158,711                | ) |      
|                                                |                                          |   |                         |   |      
|
|Year Ended December 31,
    2001                |                                          |  
|Revenues from External Customers                |                                          | $ | 8,452,282               |   |      
|                                                |                                          |   |                         |   |      
|Supervisory
      Fees                          |                                          | $ | 604,736                 |   |      
|                                                |                                          |   |                         |   |      
|Interest Revenue                                |                                          | $ | 97,803                  |   |      
|                                                |                                          |   |                         |   |      
|Interest
      Expense                          |                                          | $ | 27,228                  |   |      
|                                                |                                          |   |                         |   |      
|Expenditures for Segment
      Assets           |                                          | $ | 3,030,565               |   |      
|                                                |                                          |   |                         |   |      
|Depreciation, Depletion, and
      Amortization |                                          | $ | 1,223,588               |   |      
|                                                |                                          |   |                         |   |      
|Lease Impairment                                |                                          | $ | 1,031,014               |   |      
|                                                |                                          |   |                         |   |      
|Income Tax                                      |                                          | $ | 185,268                 |   |      
|                                                |                                          |   |                         |   |      
|Total Assets                                    |                                          | $ | 19,578,359              |   |      
|                                                |                                          |   |                         |   |      
|Net Income                                      |                                          | $ | 3,657,158               |   |      
|                                                |                                          |   |                         |   |      

F-14

---

NOTE 6 - LONG-TERM
DEBT

|                                                                           | 2002 |  | 2001
|-------------------------------------------------------------------------- | ---- |  | ----
|                                                                           |      |  |     
|Revolving line of
      credit secured by oil and gas properties, with a   |      |  |     
|maximum available of $6,000,000
      issued by Bank One Service           |      | 
|Corporation for the purposes of
      refinancing Royale's existing debt   |      | 
|and to fund development,
      exploration and acquisition activities as   |      | 
|well as other general Corporate
      purposes. The agreement was entered  |      | 
|into on December 1, 2000. Interest
      at New York prime plus            |      | 
|100.00 basis points, resulting in a
      rate of 5.25% at December 31,    |      | 
|2002 and 5.75% at December 31,
      2001, payable monthly with            |      | 
|borrowing base reductions of
      $100,000 commencing on February         |      | 
|1, 2001. All unpaid principal and
      interest is payable at maturity on |      | 
|December 21, 2003                                                          |      |  | $   
|                                                                           |      |  |     

Under the terms of the agreement, the Company is
required to have a positive net worth not less than $6,086,850, debt service
coverage not less than 1.25:1, current ratio not less than 1:1, debt and lien
restrictions, no changes in senior management without bank consent, and dividend
and distribution restrictions. The Company was in compliance with the terms of
this agreement at December 31, 2002.

On January 21, 2003 the Company executed a promissory
note with Guaranty Bank, FSB for $15,000,000. Proceeds from the note were used
to pay in full the outstanding balance on the Bank One Service Corporation note.
The note is secured by the Company's oil and gas properties. Interest is at
Guaranty Bank's base rate plus 0.75% payable monthly. The note matures on
January 21, 2006.

Maturities of long-term debt
for years subsequent to December 31, 2002 are as follows:

|             | 
|------------ | 
|Year Ended   | 
|December 31, | 
|2006         | 

NOTE 7 - INCOME
TAXES

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

|                                         | 2002 |  | 2001
|---------------------------------------- | ---- |  | ----
|                                         |      |  |     
|Deferred Tax
      Assets:               |      |  |     
|Statutory depletion
      carry forwards |      |  | $   
|                                         |      |  |     
|Total Deferred Tax
      Assets          |      |  |     
|Valuation
      Allowance                |      |  |     
|                                         |      |  |     
|Net Deferred Tax
      Assets            |      |  | $   
|                                         |      |  |     

The Company has approximately $1,500,000 of unused
statutory percentage depletion, eligible to be used by the Company in future
years to reduce federal taxable income. This depletion has no expiration date. A
full valuation allowance has been established for the deferred tax assets
generated by this depletion carryforward due to the uncertainty of future
utilization.

F-15

---

NOTE 7  INCOME
TAXES (Continued)

A reconciliation of Royale Energys
provision for income taxes and the amount computed by applying the U.S. statutory federal
income tax rate of 34% at December 31, 2002 and 2001, respectively, to pretax income is as
follows:

|                                                  | 2002 |  | 2001 |         
|------------------------------------------------- | ---- |  | ---- | --------
|Tax computed at 34%, respectively                 |      |  | $    | (65,459)
|                                                  |      |  |      |         
|Increase (decrease) in taxes resulting from:      |      | 
|Net operating loss carryforwards used             |      |  |      | --      
|State tax                                         |      |  |      | 800     
|Percentage depletion carryforwards made available |      |  |      | 9,168   
|(used)                                            |      |  |      |         
|                                                  |      |  |      |         
|Provision (benefit)                               |      |  | $    | (55,491 
|                                                  |      |  |      |         
|Effective Tax Rate                                |      |  |      | 0.0     

NOTE 8  REDEEMABLE
PREFERRED STOCK

In 1993, Royale Energy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. Royale Energy 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 2002 or 2001.

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. Royale
Energy has the option to call, at any time, the Series A Convertible Preferred Stock at
either the issue price of $4 per share plus 10%, if called within one year after issuance,
or $4 per share thereafter. (Subject to the holders conversion rights outlined
above).

Upon the sale of 50% of the units of
beneficial interest in Royal Energy Income Trust, a holder of Series A Convertible
Preferred Stock may require Royale Energy 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, Royale
Energy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, 2002 and 2001, 232,003 shares of Series A Convertible Preferred Stock
had been converted to 202,219 shares of common stock.

F-16

---

NOTE 9  SERIES AA
PREFERRED STOCK

In April 1992, Royale Energys
Board of Directors authorized the sale of Series AA Convertible Preferred Stock. Holders
of Series AA Convertible Preferred Stock have dividend, conversion and preference rights
identical to Series A Convertible Preferred Stockholders. The Series AA Convertible
Preferred Stock does not have the right of redemption at the shareholders option. As
of December 31, 2002 and 2001, there were 48,581 and 43,125 shares issued and outstanding.
The dividend has been paid on all shares outstanding at December 31, 2002 and 2001.

NOTE 10  COMMON
STOCK

Royale Energys Board of
Directors, at its December 1997 meeting, authorized the repurchase and cancellation of up
to 15% of the outstanding common stock of Royale Energy. In addition, on March 26, 2001
the Board of Directors authorized a 15% stock dividend to shareholders of record on May
25, 2001. The number of common shares increased by 555,838 shares. The effect of the stock
dividend decreased retained earnings by $3,925,606. The Board also authorized a 15% stock
dividend to shareholders of record on May 31, 2002. The number of common shares increased
by 652,959 shares. The effect of the stock dividend decreased retained earnings by
$4,472,769.

The financial statements have been
retroactively restated to reflect these dividends.

NOTE 11  STOCK
WARRANTS

Changes in Royale Energys
common stock warrants were as follows at December 31:

|                                            | 2002 |         | 2001 |        
|------------------------------------------- | ---- | ------- | ---- | -------
|Outstanding Warrants at Beginning of Period |      | 265,138 |      | 230,555
|                                            |      |         |      |        
|15% Stock Dividend                          |      | 39,771  |      | 34,583 
|Warrants Expired or Ineligible              |      | (73,471 | )    | --     
|                                            |      |         |      |        
|Outstanding Warrants at End of Period       |      | 231,438 |      | 265,138

Royale Energys affiliate, RPC,
acquired 111,111 shares of Royale Energy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 Royale Energy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 remaining warrants of 55,555 increased
to 73,471 warrants due to the declarations of the two stock dividends. The expiration date
of these warrants was extended, by action of the Board of Directors, to December 31, 2004.

At the November 3, 1993 Board of
Directors meeting, the Board of Directors granted RPC additional warrants to purchase
175,000 shares of Royale Energys common stock at prices ranging from $1.50 to $3.00
per share. The 175,000 warrants increase to 231,438 warrants due to the declaration of the
two stock dividends. The remaining warrants expire on November 3, 2003.

Due to the declarations of the two
15% stock dividends the number of warrants increased by 74,354, with a corresponding
decrease in prices ranging from $2.21 to $1.15 per share.

F-17

---

NOTE 12  OPERATING
LEASES

Royale Energy occupies office space
under a sixty-month noncancellable lease, which expires in July 2005. The lease calls for
monthly payments ranging from $16,675 to $17,762. Future minimum lease obligations as of
December 31, 2002 are as follows:

|Year EndedDecember 31, |  |                | 
|---------------------- |  | -------------- | 
|2003                   |  | $      206,263 | 
|2004                   |  | 210,612        | 
|2005                   |  | 124,338        | 
|                       |  |                | 
|                       |  | $     541,213  | 

Rental expense for the years ended
December 31, 2002 and 2001, was $206,601 and $186,474, respectively.

NOTE 13  RELATED
PARTY TRANSACTIONS

Significant Ownership
Interests

On December 31, 2002,  31.6% of
Royale Energy's common stock was owned by Royale Petroleum  Corporation  (RPC). RPC is
owned equally by Donald H. Hosmer and Stephen M. Hosmer.

Harry E. Hosmer, Royale Energys
former president and former chief executive officer, owns 10.6% of Royale Energy common
stock. Donald H. and Stephen M. Hosmer are sons of Harry E. Hosmer. Donald H. Hosmer and
Stephen M. Hosmer are also officers and directors of Royale Energy.

Stock Compensation Plan

At the March 10, 1995 Board of
Directors meeting, directors and executive officers of Royale Energy 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. Royale Energy applies APB Opinion 25 and related interpretations
in accounting for its plans. Royale Energy did not grant stock options during 2002 or
2001.

On March 26, 2001, the number of
remaining options of 99,000 increased to 113,850 outstanding and the price decreased from
$1.90 per share to $1.65 per share due to the declaration of the 15% stock dividend.

On March 18, 2002, the number of
remaining options of 113,850 increased to 130,928 outstanding and the price decreased from
$1.65 per share to $1.44 per share due to the declaration of the 15% stock dividend.

F-18

---

NOTE 13  RELATED
PARTY TRANSACTIONS(Continued)

Stock Compensation Plan
(Continued)

A summary of the status of Royale
Energys stock option plan as of December 31, 2002 and 2001, and changes during the
years ending on those dates is presented below:

|                                       | 2002 |  | 2001 |        
|-------------------------------------- | ---- |  | ---- | -------
|                                       |      |  |      | Shares 
|Fixed Options                          |      |  |      |        
|Outstanding at Beginning of Year       |      |  |      | 148,350
|15% of Stock Dividends                 |      |  |      | 18,802 
|Expired or Ineligible                  |      |  |      | (62,675
|                                       |      | 
|Outstanding at End of Year             |      |  |      | 104,477
|                                       |      | 
|Options Exercisable at Year End        |      |  |      | 104,477
|                                       |      | 
|Weighted-average Fair Value of Options |      | 
|Granted During the Year                |      |  |      | --     

The following table summarizes
information about fixed stock options outstanding at December 31, 2002 and 2001:

|                        |                                      |                                                 |                                |                                      |                                                
|----------------------- | ------------------------------------ | ----------------------------------------------- | ------------------------------ | ------------------------------------ | -----------------------------------------------
|Range ofExercise Prices | NumberOutstanding atDecember 31,2002 | Weighted-AverageRemainingContractualLife(Years) | Weighted-AverageExercise Price | NumberOutstanding atDecember 31,2001 | Weighted-AverageRemainingContractualLife(Years)
|$
            
2.27     | --                                   | --                                              | $             
2.60            | 34,500                               | 1                                              
|1.44                    | 104,477                              | 2.2                                             | $             
1.65            | 113,850                              | 3.2                                            
|                        |                                      |                                                 |                                |                                      |                                                
|$1.44 to $2.27          | 104,477                              | 2.2                                             | $1.65 to $2.60                 | 148,350                              | 2.7                                            

The Board of Directors adopted a
policy in 1989 that permits directors and officers of the Company to purchase from the
Company, at the Companys actual costs, up to one percent of a fractional interest in
any well to be drilled by the Company. Current and former officers and directors were
billed $238,502 and $97,261 for their interests for the years ended December 31, 2002 and
2001, respectively. Under the Sarbanes-Oxley Act of 2002, these amounts can no longer be
billed to officers and directors. Instead, these amounts are either collected in advance
or paid to officers as compensation. Receivables grand fathered (outstanding prior to July
30, 2002) were $243,608 at December 31, 2002.

NOTE 14  SIMPLE IRA
PLAN

In April 1998, the Company
established a Simple IRA pension plan covering all employees. The Company will contribute
a matching contribution to each eligible employees Simple IRA equal to the

F-19

---

NOTE 14  SIMPLE IRA
PLAN (Continued)

employees salary reduction
contributions up to a limit of 3% of the employees compensation for the year. The
employer contribution for the years ending December 31, 2002 and 2001 were $33,940 and
$34,606, respectively.

NOTE 15 
ENVIRONMENTAL MATTERS

Royale Energy has established
procedures for the continuing evaluation of its operations to identify potential
environmental exposures and assure compliance with regulatory policies and procedures.
Management monitors these laws and regulations and periodically assesses the propriety of
its operational and accounting policies related to environmental issues. The nature of
Royale Energys business requires routine day-to-day compliance with environmental
laws and regulations. Royale Energy incurred no material environmental investigation,
compliance and remediation costs in 2002 or 2001.

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

NOTE 16 
COMMITMENTS AND CONTINGENCIES

On December 10, 1999, a suit was
filed against Royale Energy and certain of its officers and former officers in U.S.
District Court for the Northern District of California entitled Buck, et al., v. Royale
Energy, et al., No. C 99 5236. In July 2000, the court granted Royale Energys motion
to transfer the case to the US District Court for the Southern District of California. In
May 2002, the Court dismissed the case in its entirety. Some, but not all, of the former
plaintiffs chose to appeal the dismissal. The appeal is pending in the Ninth Circuit Court
of Appeal. Royale Energy expects that some or all, of the former plaintiffs will drop
their appeal. If former plaintiffs elect to pursue this appeal, Royale Energy will
vigorously oppose the appeal.

On October 12, 2001, Blue Star
Resources, Inc. and others filed suit against Royale Energy. The dispute is over whether
plaintiffs failed to consent to drilling operations that resulted in commercially
productive wells drilled by Royale Energy and thereby lost their rights to working
interests in the wells. On April 9, 2001, Royales motion to dismiss the breach of
fiduciary duty and slander of title claims for relief was granted by the Honorable Edward
J. Garcia. On May 7, 2002, Judge Garcia granted Royales motion for partial summary
judgment regarding one particular well, which was a substantial portion of Blue
Stars claims. On August 26, 2002, Judge Garcia granted Royales motion for
partial summary judgment as to other claims. Other portions of the case have been
voluntarily dropped. The plaintiffs expert recently decreased the amount of damages
claimed in the remaining portion of the case. The remaining claims are expected to go to
trial in late summer or early fall, 2003. The Company will continue to vigorously defend
the case.

NOTE 17  SUBSEQUENT
EVENTS

In February 2003, the Company sold
their interest in the Hastings Ranch wells, which are part of the Lindsey Slough fields.
The wells were sold for approximately $250,000. The net book value of these wells was
written down to net realizable value in 2002.

In 2003, Royale refinanced its
revolving line with Bank One, with a similar instrument from Guaranty Bank. The new line
has a maximum available amount of $15,000,000.

F-20

---

ROYALE ENERGY, INC.
 SUPPLEMENTAL INFORMATION ABOUT OIL
AND GAS PRODUCING ACTIVITIES (UNAUDITED)

The following estimates of proved oil
and gas reserves, both developed and undeveloped, represent interests owned by Royale
Energy 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, 2002 and 2001. 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 Royale
Energy. 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.

Changes in Estimated
Reserve Quantities

The net interest in estimated
quantities of proved developed reserves of crude oil and natural gas at December 31, 2002
and 2001 and changes in such quantities during each of the years then ended, were as
follows:

|                                              | 2002 |         | 2001
|--------------------------------------------- | ---- | ------- | ----
|
|Proved developed and undeveloped reserves:    |      |         |     
|                                              |     
|Beginning of period                           |      | 8,000   |     
|Revisions of previous estimates               |      | (4,790  | )   
|Production                                    |      | (7,617  | )   
|Extensions, discoveries and improved recovery |      | --      |     
|Purchase of minerals in place                 |      | 129,407 |     
|                                              |     
|Proved reserves end of period                 |      | 125,000 |     
|                                              |     
|Proved developed reserves:                    |     
|                                              |     
|Beginning of period                           |      | 8,000   |     
|                                              |     
|End of period                                 |      | 50,000  |     

These estimates were determined using
gas prices at December 31, 2002 ranging from $3.26 per MCF to $4.85 per MCF as applied on
a field-by-field basis.

F-21

---

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,
2002.

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.
                    Estimated future development cost by year are as follows:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           | 
|---------- | 
|2003       | 
|2004       | 
|2005       | 
|Thereafter | 
|           | 
|Total      | 

| | (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.

|                                                         | 2002 |  | 2001 |            
|-------------------------------------------------------- | ---- |  | ---- | -----------
|Future cash inflows                                      |      |  | $    | 58,935,000 
|Future production costs                                  |      |  |      | (15,772,000
|Future development costs                                 |      |  |      | (5,759,000 
|Future income tax expenses                               |      |  |      | (11,221,200
|                                                         |      |  |      |            
|Future net cash flows                                    |      |  |      | 26,182,800 
|                                                         |      |  |      |            
|10% annual discount for estimated timing of cash flows   |      |  |      | (8,967,906 
|                                                         |      |  |      |            
|Standardized measure of discounted future net cash flows |      |  | $    | 17,214,894 

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.

F-22

---

Changes in standardized measure of
discounted future net cash flow from proved reserve quantities (Continued)

|                                                       | 2002 |  | 2001 |           
|------------------------------------------------------ | ---- |  | ---- | ----------
|Standardized measure - beginning of year               |      |  | $    | 9,013,270 
|                                                       |      |  |      |           
|Sales of oil and gas produced, net of production costs |      |  |      | (3,354,837
|                                                       |      |  |      |           
|Revisions of previous quantity estimates               |      |  |      | (8,166,182
|Net changes in prices and production costs             |      |  |      | 13,271,000
|                                                       |      |  |      |           
|Sales of minerals in place                             |      |  |      | (19,000   
|                                                       |      |  |      |           
|Extensions, discoveries and improved recovery          |      |  |      | 6,847,748 
|                                                       |      |  |      |           
|Accretion of discount                                  |      |  |      | 3,118,824 
|                                                       |      |  |      |           
|Net change in income tax                               |      |  |      | (3,495,929
|                                                       |      |  |      |           
|Net increase (decrease)                                |      |  |      | 8,201,624 
|                                                       |      |  |      |           
|Standardized measure - end of year                     |      |  | $    | 17,214,894

F-23