As filed with the SEC on December 11, 2003

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# SECURITIES AND
EXCHANGE COMMISSION  Washington, D.C. 20549

# FORM 10-KSB/A
Amendment No. 2 to
Form 10-KSB

# ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(D)OF THE SECURITIES
EXCHANGE ACT OF 1934

|                                            |                            
|------------------------------------------- | ---------------------------
|For the Fiscal Year Ended December 31, 2001 | Commission File No. 0-22750

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:  $15,858,273.

At December 31, 2001, there were
3,267,695 outstanding shares of registrants Common Stock held by non-affiliates
(after making adjustments for stock dividends distributed after December 31, 2001), with
an aggregate market value of approximately $18,103,030, based on the closing Nasdaq price
on that date.

At December 31, 2001, a total of
5,213,883 shares of registrants Common Stock were outstanding (after making
adjustments for stock dividends distributed after December 31, 2001).

DOCUMENTS INCORPORATED BY
REFERENCE: None

Exhibit Index appears on
page 23

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TABLE OF CONTENTS

|           |                                                                                                                               |    
|---------- | ----------------------------------------------------------------------------------------------------------------------------- | ---
|PART I     |                                                                                                                               | 1  
|Item 1     | Description of Business                                                                                                       | 1  
|           | Plan of Business                                                                                                              | 2  
|           | Competition, Markets and Regulation                                                                                           | 4  
|Item 2     | Description of Property                                                                                                       | 5  
|           | Northern California                                                                                                           | 5  
|           | 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                                                                           | 8  
|PART II    |                                                                                                                               | 8  
|Item 5     | Market Price of Royale Energy's Common Stock
and Related Stockholder Matters                                                  | 8  
|           | Dividends                                                                                                                     | 9  
|           | No Recent Sales of Equity Securities                                                                                          | 9  
|           | Critical Accounting Policies                                                                                                  | 10 
|           | Results of Operations for the Twelve Months Ended
December 31, 2001,
as Compared to the Twelve Months Ended December 31, 2000 | 11 
|           | Capital Resources and Liquidity                                                                                               | 14 
|Item 7     | Financial Statements and Supplementary Data                                                                                   | 16 
|PART III   |                                                                                                                               | 16 
|Item 8     | Directors, Executive Officers, Promoters and Control Persons,

Compliance with Section 16(a) of the Exchange Act              | 16 
|Item 8     | Compliance with Section 16(a) of the Exchange Act                                                                             | 18 
|Item 9     | 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 10    | Security Ownership of Certain Beneficial Owners and Management                                                                | 20 
|           | Common Stock                                                                                                                  | 20 
|           | Preferred Stock                                                                                                               | 22 
|Item 11    | Certain Relationships and Related Transactions                                                                                | 22 
|Item 12    | Exhibits, Lists, and Reports on Form 8-K                                                                                      | 23 
|Signatures
|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 23, 2002, Royale Energy had 17 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, 2001, Royale Energy continued to explore and develop natural gas properties in
northern California. Royale Energy drilled eleven wells in 2001, seven of which are
currently commercially productive wells. One well is waiting on completion. In 2001, four
previously drilled wells were shut-in, which means that the wellhead valves
were closed, shutting off production. The shut-in wells were awaiting further equipment or
production arrangements to begin or recommence operations, such as production equipment or
pipeline easements. Royale Energys estimated total natural gas reserves decreased
from approximately 16.7 Bcf (billion cubic feet) at December 31, 2000 to approximately
13.2 Bcf at December 31, 2001. 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 $13.6 million at December
31, 2001, based on natural gas prices ranging from $2.41 per Mcf to $2.85 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, 2001, to be $9,013,270.

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 $6,703,452 for the year
ended December 31, 2001, which represents 42.3% of its total revenues for the year.

In the year ended 2000, Royale Energy
reported $4,792,151 gross revenues for the year, representing 41.0% of Royale
Energys total revenues for that year. These amounts are offset by

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drilling expenses and development costs of $3,065,747 in 2001, and $1,975,242 in 2000. 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 53.3% of Royale
Energys total revenue for the year ended December 31, 2001 came from oil and natural
gas sales from production of its wells ($8,452,282). In 2000, this amount was $6,194,451,
which represented 53.0% 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 projects. 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 drilling contractor 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 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). The deferred revenue is
referred to as remaining funds in Royale Energys

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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, 2001, Royale Energy earned gross revenues from operation of the wells
in the amount of $702,539, representing 4.4% of its total revenues on a consolidated basis
for that year. In 2000, the amount was $700,750, which represented 6.0% of the
consolidated total revenues. As of December 31, 2001, Royale Energy holds working
interests in 69 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. Discussions of a few natural gas price regulations, including
price caps, have taken place at the state and federal levels. The fluctuations in gas
prices and possible new regulations create uncertainty about whether Royale Energy can
continue to produce gas for a profit. Royale Energy does not expect natural gas prices to
return to their winter 2001 levels in the foreseeable future.

Affiliated Entities

On December 31, 2001, Royale
Petroleum Corporation (RPC) owned 31.5% 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 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 21. RPC is a predecessor and affiliate of Royale Energy. RPC
is a Delaware corporation formed in 1985.

Royale Energy had no subsidiaries at
December 31, 2001.

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# 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.

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.

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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 2001, Royale Energy drilled eleven wells in northern
California, eight of which are currently commercially productive wells. There are nine
shut-in wells that Royale Energy plans to return to production. In 2001, Royale Energy
performed perforating programs in three wells to recover gas reserves that were previously
unrecoverable. There are plans to perforate four other wells to recover gas.

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,
2001, Royale Energy owed $2,000,000 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, 2001,
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, 2002 (the most recent report available).

# Northern California

Royale Energy owns lease interests in
12 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,
2001, Royale Energy operated 69 wells in Northern California, and its estimated total
proved developed and undeveloped gas reserves in Northern California were approximately
13.2 Bcf, according to Royale Energys independently prepared reserve report.

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Developed and Undeveloped
Leasehold Acreage

As of December 31, 2001, Royale
Energy owned leasehold interests in the following developed and undeveloped properties in
both gross and net acreage.

|                 | Developed |           | Undeveloped |          
|---------------- | --------- | --------- | ----------- | ---------
|
|California       |           | 15,817.56 |             | 11,582.27
|All other States |           | 875.00    |             | 455.50   
|Total            |           | 16,692.56 |             | 12,037.77

# Drilling Activities

The following table sets forth Royale
Energys drilling activities during the years ended December 31, 1999, 2000, and
2001. All wells are located in the Continental U.S., in California, Texas, and Oklahoma.

|Year | Type of Well(a)          |       | Gross Wells(b) |        | Net Wells(e)
|---- | ------------------------ | ----- | -------------- | ------ | ------------
|     |                          | Total | Producing(c)   | Dry(d) | Producing(c)
|1999 | ExploratoryDevelopmental | 39    | 16             | 2 3    | .43201.8156 
|     |                          |       |                |        |             
|2000 | ExploratoryDevelopmental | 27    | 26             | -- 1   | .4104--     
|     |                          |       |                |        |             
|2001 | ExploratoryDevelopmental | 56    | 35             | 2 1    | 1.4311.6682 

(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 is producing oil and/or natural gas that is being
          purchased on the market.

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

(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, 2001, Royale
Energy had 52 gross (30.57 net) currently producing natural gas wells.

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# 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.

|                             | 2001 |           | 2000 |           | 1999 |          
|---------------------------- | ---- | --------- | ---- | --------- | ---- | ---------
|NET VOLUME                   |      |           |      |           |      |          
|Oil (Bbl)                    |      | 1,893     |      | 596       |      | 2,215    
|Gas (Mcf)                    |      | 1,371,286 |      | 1,161,513 |      | 1,331,887
|Mcfe                         |      | 1,390,216 |      | 1,167,473 |      | 1,354,037
|                             |      |           |      |           |      |          
|AVERAGE SALES PRICE          |     
|Oil (Bbl)                    | $    | 26.55     | $    | 23.59     | $    | 16.30    
|Gas (Mcf)                    | $    | 6.12      | $    | 5.32      | $    | 2.34     
|                             |      |           |      |           |      |          
|Net Production Costs &
Taxes | $    | 1,266,245 | $    | 936,841   | $    | 896,321  
|                             |      |           |      |           |      |          
|Lifting Costs (per Mcfe)     | $    | 0.91      | $    | 0.60      | $    | 0.49     

# Net Proved Oil and
Natural Gas Reserves

As of December 31, 2001, Royale
Energy had proved developed reserves of 11,245 MMcf and total proved reserves of 13,161
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 8 Mbbl and total proved oil
reserves of 8 Mbbl on the same properties.

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.

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.

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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, 2001 and 2000, 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 group of 16 investors in drilling projects sponsored by Royale
Energy from 1994 to 1998 filed suit against Royale Energy and certain of its officers and
former officers in U.S. District Court for the Northern District of California, alleging
fraud, negligent misrepresentation, breach of fiduciary duties and other related claims in
connection with the sales of working interests in those projects. The complaint generally
states that the defendants failed to adequately disclose the companys track record
regarding previously drilled wells and makes other general statements about misconduct
which are not, in Royale Energys view, supported by specific factual allegations.
The suit seeks an unspecified amount of damages, restitution of amounts the plaintiffs
invested, and punitive damages. In July 2000, the court granted Royale Energys
motion to transfer the case to the U.S. District Court for the Southern District of
California. No discovery has been conducted in the case. No discovery has ever been
conducted in the case since it was filed in December 1999. If the plaintiffs elect to
pursue this case, Royale Energy will contend that the plaintiffs suffered no damages, that
their claims are completely without merit and that the complaint fails to state a claim on
which relief can be based.

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 others filed suit against Royale Energy
for declaratory relief, money damages, and imposition of a constructive trust, seeking a
working interest and drilling rights to certain properties covered by a joint operating
agreement between plaintiffs and Royale Energy. The dispute is over whether plaintiffs
failed to consent to drilling operations that resulted in a commercially productive well
drilled by Royale Energy and thereby lost their rights to working interests in the well.
The case is set for trial in January 2003. In March 2001, the court dismissed the
plaintiffs motion for partial summary judgment. Royale Energy has sought leave of
the court to file a partial summary judgment of its own. The Plaintiffs alleged money
damages of more than $1,000,000.

# 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 2001.

# 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, 2001, 5,213,883 shares (after making

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adjustments for
stock dividends paid after December 31, 2001) 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 2000 through December 2001 (as adjusted for subsequent
stock dividends).

|     | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter
|---- | ----------- | ----------- | ----------- | -----------
|     | High        | Low         | High        | Low        
|2000 | 2.72        | 1.85        | 2.89        | 1.96       
|2001 | 6.85        | 4.78        | 18.26       | 5.70       

# Dividends

On June 15, 2001, Royale Energy paid
a 15% stock dividend to its security holders of record on May 25, 2001. All common
shareholders received the dividend in common shares, equal to 15% of their share holdings
as of the record date. The dividend also increased by 15%, the number of shares of common
stock issuable on exercise of all outstanding warrants and options and on conversion of
all outstanding preferred shares. As a result of the dividend, the number of outstanding
common shares increased by 569,147 shares (not including shares that may be issued on the
exercise of options and warrants and on the conversion of preferred stock).

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 655,959 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).

On May 18, 2003, Royale Energys
board of directors announced a stock dividend payable to holders of record in four
installments of 3.75% each to holders of record on the last day of June 30, September 30,
and December 31, 2003, and March 31, 2004. The first of these dividends was paid on June
30, 2003, and increased the number of outstanding shares by 191,652 shares to 5,221,753
shares (not including shares that may be issued on the exercise of options and warrants
and on the conversion of preferred stock).

# No Recent Sales of
Equity Securities

Royale Energy sold no equity
securities in the fourth quarter of 2001.

# 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 seven years, Royale
Energy has primarily acquired and developed producing and non-producing natural gas
properties in Northern California. The most significant factors

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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 30% 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 June 30, 2002 and
December 31, 2001, Royale Energy had deferred drilling revenue of $1,890,675 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 gathering line systems, which
are equipped occasionally with compressor systems, which in turn flow into metered
customer pipelines. Monthly, customers measure and price gas flows and compute the
compensation due to Royale Energy and other working interest owners. Royale Energy
operates virtually all of its own wells and receives industry approved 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

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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) 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, 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, 2001, as Compared to the Twelve Months Ended December 31,
2000

For the year ended December 31, 2001,
Royale Energy achieved a net profit of $3,746,524, a $945,533 or 33.8% increase over the
net profit of $2,800,991 achieved during the year in 2000. Royale Energys management
attribute this to an increase in oil and gas sales resulting from increased production and
higher natural gas prices, and an increase in turnkey drilling revenues. Total revenues
for the year ended December 31, 2001 were $15,858,273, a $4,170,921 or 35.7% increase from
the total revenues in 2000 of $11,687,352, again as a result of higher turnkey drilling
revenues and natural gas sales. For the year in 2001, Royale Energys net operating
profit was $4,171,514, an increase of $864,765 or 26% over the net operating profit of
$3,306,749 during the year in 2000.

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Oil and gas revenues for the year
ended December 31, 2001, were $8,452,282 compared to $6,194,451 for the same period in
2000, which represents a $2,257,831 or 36.5% increase. This increase in revenues was
mainly due to an increase in production and price Royale Energy received for its natural
gas production during the year in 2001. The net sales volume for the year ended December
31, 2001, was 1,371,286 Mcf with an average price of $6.12 per Mcf, versus 1,161,513 Mcf
with an average price of $5.32 per Mcf for 2000, which represents an increase in net sales
volume of 209,773 Mcf or 18.1%. The net sales volume for oil and condensate (natural gas
liquids) production was 1,893 barrels with an average price of $26.55 per Bbl for the
period ended December 31, 2001, compared to 596 barrels at an average price of $23.59 per
Bbl for the same period in 2000, which represents an increase in net sales volume of 1,297
barrels or 217.6%.

Royale Energys oil and gas
lease operating expenses increased by 35.2% or $329,404, to $1,266,245 for the year ended
December 31, 2001, from $936,841 for the same period in 2000. This can be attributed to
the increase in the number of wells operated by Royale Energy during the year in 2001 when
compared to 2000, due to the wells drilled and placed into production during 2000 and
2001. For 2001, Royale Energys gross margin on oil and gas production (excluding
drilling and development costs) was 85%, compared to 84.9% in 2000.

For the year ended December 31, 2001,
turnkey drilling revenues increased $1,911,301, to $6,703,452 in 2001 from $4,792,151 in
2000, or 39.9% for the year. Royale Energy also experienced a $1,090,505 or 55.2% increase
in turnkey drilling and development costs from $1,975,242 in 2000 to $3,065,747 in 2001.
This increase in turnkey revenues and costs was due to the drilling of more wells and
higher drilling costs per well during the year in 2001 when compared to 2000.

Royale Energys 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 location, well depth, weather, and availability of drilling
contractors and equipment. Royale Energys gross margin on drilling was 54.3% and
58.8% for the years ended December 31, 2001 and 2000, respectively.

Royale Energys aggregate of
supervisory fees and other income was $702,539 for the year ended December 31, 2001, an
increase of $1,789 (.26%) from $700,750 during 2000. 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 $27,537 or 7.9%, from
$350,371 in 2000 to $377,908 in 2001.

In fiscal 2001, Royale Energy
restated its 1997  2000 financial statements because it changed the method of
reviewing for impairment of proved oil and gas properties from a region by region to field
by field basis. When the impairment analysis method was changed, Royale Energy determined
to write off certain oil and gas properties in 1998, 1999 and 2000 because their expected
future net cash flows on a field basis were less than the net book value, though the
future net cash flows in the region where they were located had previously been viewed as

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supporting a higher value when taken as a whole. The impairment change caused restatements
reducing income in each of these years, as described in Note 2, Restatements, of
our financial statements. These restatements reduced the depreciation, depletion and
amortization expenses we reported for 2000.

Impairment losses of $2,062,028 and
$1,540,845 were recorded in 2001 and 2000, respectively. 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.

Effective December 31, 1998, Royale
Energy began to perform a periodic review for impairment on a region by region basis, and
our annual reports for the fiscal years ended December 31, 1998, 1999 and 2000 reflected
this impairment procedure. In 2001, after the Royale Energy filed its annual report for
December 31, 2000, the company determined that it is more appropriate to conduct the
impairment analysis on a field by field basis. When the impairment analysis method was
changed, Royale Energy determined to write down certain proved oil and gas properties in
1998, 1999 and 2000 because their expected future net cash flows on a field basis were
less than the net book value, though the future net cash flows in the region where they
were located previously had been viewed as supporting a higher value when taken as a
whole. This resulted in a restatement that increased the amount of impaired properties in
1998, 1999, and 2000, and in the additional impairment of properties in 2001. See, Note
2, Restatements, to our financial statements.

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 the basis of the lowest available unit,
either field by field or property-by-property as appropriate, 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.

Depreciation, depletion and
amortization expense increased to $1,282,640 from $846,051, an increase of $436,589
(51.6%) for 2001, compared to 2000. The depletion rate increased from 8.37% in 2000 to
10.85% in 2001, as a result of increased production. This increased the amount of
depletion. In addition, the depletable basis or our proven oil and gas properties
increased from 2000 to 2001.

This Amendment No. 2 to the Form
10-KSB for 2001 also restates the amount of depreciation, depletion and amortization
expense for 2000, increasing it from $586,907 to $846,051, a

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$309,069 increase. The
restatement is necessary because in Amendment No. 1, depreciation was incorrectly reduced
when an adjustment for data library expenses was incorrectly deducted from this
deprecation.

Royale Energy also reevaluated its
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, $56,806 of
previously capitalized costs were written off and recorded as geological and geophysical
expense during 2001 compared with $22,337 written off in 2000, a $34,469 or 154.3%
increase.

General and administration expenses
increased by $508,580, or 29.3%, from $1,737,201 for the year ended December 31, 2000 to
$2,245,781 for the same period in 2001. We attribute the increase to higher employee
salary costs and related expenses, and management bonuses paid in 2001. We also had an
increase in fees related to our bank credit line. Legal and accounting expense increased
to $644,812 for the year, compared to $635,893 for 2000, an $8,919 (1.4%) increase. The
increase can be attributed to the higher litigation costs during the year in 2001 when
compared to 2000. Marketing expense for the year ended December 31, 2001, increased
$376,507 or 54.9%, to $1,062,700, compared to $686,193 for 2000. Royale Energys
marketing expense varies from period to period according to the number of marketing events
attended by personnel and associated travel costs.

During the year in 2000, Royale
Energy extended an existing credit line from a major commercial bank. Because of a marked
decrease in borrowings pursuant to this credit line, interest expense decreased to $54,455
for the year ended December 31, 2001, from $427,304 for the same period in 2000, a
$372,849 or 87.3% decrease.

# Capital Resources and
Liquidity

At December 31, 2000, Royale Energy
had current assets totaling $9,055,604 and current liabilities totaling $8,275,108, a
$780,496 working capital reserve. 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 any capital expenditure needs that are not
satisfied from sales of working interests.

We ordinarily fund our operations and
cash needs from current revenues from operations. We receive a large percentage of the
revenue generated by our sales of working interests to third parties during the fourth
quarter of each year, 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

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believe that we have
sufficient liquidity for the remainder of 2001 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. We usually borrow for the purpose of
acquiring oil and gas properties. We have repaid such borrowings from operating income.

At the end of 2000, our accounts
receivable totaled $6,407,397, compared to $1,745,408 at December 31, 1999, a $4,661,898
(267%) increase. Most of the increase in accounts receivable occurred during the fourth
quarter of 2000. The vast majority of the increase in accounts receivable resulted from
the sudden spike in gas prices at the end of 2000, which lasted through the first quarter
of 2001. Some of the increase also occurred because of slower payments by our gas
purchasers at the end of 2000. We view this increase in accounts receivable as temporary.
Subsequently, in 2001, our accounts receivable decreased to $3,867,003 at March 31, 2001,
and $2,921,527 at June 30, 2001. This decrease appears to be in line with the fall in gas
prices in 2001. We have not experienced a long term increase in account payment problems
from our gas purchasers.

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
$3,750,000 at September 30, 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
amortizationto debt service requirements of at least 1.25 to 1.00;                           
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o |  | maintain a ratio of 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 January 31, 2003.

Operating Activities. For the year
ended December 31, 2001, cash provided by operating activities totaled $7,705,142 or $1.85
per basic share compared to $3,415,118 or $0.82 per basic share provided by operations for
2000 which represents a $4,290,024 or 125.6% increase. This increase in cash provided in
2001 can be mainly attributed to increased oil and gas sales during the year in 2001.

Investing Activities. Net cash used
by investing activities, primarily in capital acquisitions of oil and gas properties,
amounted to $3,728,035 for the period in 2001, compared to $2,234,845 used by investing
activities for 2000. The increase in cash used by investing activities can be

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primarily
attributable to the drilling of eleven wells during the year in 2001 versus the drilling
of nine wells during the year in 2000.

Financing Activities. Net cash used
by financing activities for the year ended December 31, 2001, was $2,952,089, compared to
cash used by financing activities during the year in 2000 of $90,411. The increase in net
cash used by financing activities was mainly due to the decrease in the use of Royale
Energys credit facility during the period in 2001 when compared to 2000.

# Item 7. Financial
Statements and Supplementary Data

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

# PART III

# Item 8.
          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                                       | 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.

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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 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 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 for
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.

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 currently manages
the California operations of Western Atlas, Inc., a New York Stock Exchange company. 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

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University of California, Los
Angeles, and an M.A. degree in geology from the University of Southern California. He was
an independent exploration geologist from 1965 to 1971 and prior to that served as a
geologist with Franco Western Oil Company from 1963 to 1965. Between 1957 and 1963, Mr.
Nahama worked as an exploration geologist with Honolulu Oil Company, Getty Oil Company,
and Sunray Oil Company. Mr. Nahama is a member of the American Association of Petroleum
Geologists, the San Joaquin Geological Society, the California Independent 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 9. 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.

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|               | Annual
Compensation | Long Term
Compensation
|-------------- | ------------------- | ----------------------
|(a)Name        | (b)Year             | (c)Salary             
|               |                     |                       
|Donald Hosmer  | 2001                | $143,289              
|President      | 2000                | $135,046              
|               |                     | 1999                  
|               |                     |                       
|Stephen Hosmer | 2001                | $119,656              
|CFO            | 2000                | $112,539              
|               |                     | 1999                  

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

# No Stock Options Were
Granted in 2001

Royale Energy did not grant any stock
options or stock appreciation rights or Long-Term Incentive Plan Awards to its officers or
employees during 2001.

# Aggregated 2001 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 2001, 2000, or 1999. The following table summarizes the number and value of all
unexercised stock options held by those executive officers at the end of 2001.

_________________

1 Under the terms of a plan adopted
by the board of directors in 1989, each of the listed executives has elected to
participate in wells drilled by Royale Energy. See, Certain Relationships and Related
Transactions on page 23. 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. The difference between the executives actual cost and the cost incurred
by outside investors could be considered as additional compensation to them. However,
Royale Energys management does not believe that the amount of such difference is
significant. In addition, prior to June 1995, Royale Energy advanced funds to the
executives to pay for their well participation interests. To the extent that the advances
amount to interest free loans, the executives could also be considered to have received
additional compensation. 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. In June 1995, Royale
Energys policy regarding advancement of funds was changed. The current policy
requires that all such purchases of interests in wells must be paid in cash.

2 Includes Royale Energys
matching contribution in 2001 for Donald Hosmer ($4,000) and Stephen Hosmer ($3,500) to
Royale Energys retirement savings plan initiated in April 1998. For year ending
2000, includes matching contribution for Donald Hosmer ($2,400) and Stephen Hosmer
($3,300) and for the year ending 1999, includes matching contribution for Donald Hosmer
($2,400) and Stephen Hosmer ($3,300).

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|(a)             | (b)                                             | (c)            | (d)
Number of Securities Underlying
Unexercised Options/SARs at
FY-End (1) | (e)Value of Unexercised In-the-
Money Options/SARs at FY-End (2)
|--------------- | ----------------------------------------------- | -------------- | -------------------------------------------------------------------------- | ----------------------------------------------------------------
|Name            | Shares
                    Acquired
on Exercise | Value
Realized | Exercisable                                                                | Unexercisable                                                   
|Donald Hosmer,  |                                                 |                |                                                                            |                                                                 
|President       | 0                                               | $0             | 20,581                                                                     | 0                                                               
|                |                                                 |                |                                                                            |                                                                 
|Stephen Hosmer,
|CFO             | 0                                               | $0             | 13,721                                                                     | 0                                                               

(1)    
          The number and price of shares has been adjusted for stock dividends distributed
          after December 31, 2003.

(2)    
          Based on a fair market value of $5.54 per share, which was the closing bid price
          of Royale Energys Common Stock in the Nasdaq National Market System on
          Friday, December 29, 2001 (as adjusted for stock dividends distributed after
          December 31, 2001).

# Compensation of Directors

Each director who is not an employee
of Royale Energy receives a quarterly fee for his services, which in 2001 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
2001.

# Item 10. 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, 2001, 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, 2001, 5,213,883
shares of Royale Energys Common Stock were outstanding, as adjusted for stock
dividends distributed after December 31, 2001.
All share figures in the following table
were adjusted to account for the dividends distributed after December 31, 2001.

-20-

---

|                                                  | Shares Owned(1)
|------------------------------------------------- | ---------------
|Shareholder(2)                                    | Number         
|                                                  |                
|Donald H. Hosmer                                  | 896,029        
|                                                  |                
|Harry E. Hosmer                                   | 530,046        
|                                                  |                
|Oscar A. Hildebrandt                              | 56,835         
|                                                  |                
|Stephen M. Hosmer                                 | 889,388        
|                                                  |                
|Gilbert C. L. Kemp                                | 6,860          
|                                                  |                
|Rodney Nahama                                     | 19,209         
|                                                  |                
|George M. Watters                                 | 41,163         
|                                                  |                
|All directors and officers
as a group (7 persons) | 2,799,666      

(1)    
          Includes shares which the listed shareholder has the right to acquire before
          March 1, 2001, from options or warrants, as follows: Royale Petroleum
          Corporation 316,343, Donald H. Hosmer 20,581, Harry E. Hosmer 54,884, Stephen M.
          Hosmer 13,721, Oscar Hildebrandt 27,442, Rodney Nahama 19,209, George M. Watters
          41,163, and all officers and directors as a group (excluding Royale Petroleum
          Corporation) 177,000.

(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 1,748,152 shares
          (31.61%) 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% (732,594) shares 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 (1,748,152 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.

(5)    
          Includes shares held by two family trusts of which Harry. E. Hosmer and his wife
          are beneficiaries.

(6)    
          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.

-21-

---

# 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, 2001, there were 10,780 shares of Series A and 43,125
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. 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 11. 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, 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 do not pay a set, turnkey price (as do outside investors who purchase
undivided working interests from Royale Energy), but they are liable for 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. 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 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 67 wells under the 1989 policy. The Hosmer Trust, a trust for
the benefit of family members of Harry E. Hosmer, has participated in 66 wells.

-22-

---

Donald Hosmers 2001 investments
in wells under the 1989 policy totaled $23,092 in fractional interests in 11 wells. In
2001, Stephen Hosmer purchased fractional interests in 11 wells under the 1989 policy, for
a total investment of $21,466.

The Hosmer Trust purchased .003%
interest in 11 wells during 2001 for a total investment of $21,794.

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. In June 1995, Royale Energy changed its
policy regarding the advancement of funds. Current policy requires that all such purchases
of interests in wells must be paid in cash. At December 31, 2001, the following executive
officers and their affiliates owed the following amounts on advances for well
participations: Donald Hosmer $43,501; Stephen Hosmer $28,972; RPC $527; the Hosmer Trust
$93,851.

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 annually
for his consulting services in 2001 and pays his medical insurance costs. Mr.
Hosmers consulting services are in addition to his service on the board of
directors, for which he receives no compensation other than reimbursement of expenses to
attend meetings.

# Item 12.
            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                                                                                            

-23-

---

|10.1 | Form of Indemnification Agreement, incorporated by reference to Exhibit 10.3 of Royale
Energy's Form 10-SB
Registration Statement
|---- | ---------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                  
|     |                                                                                                                                  
|(b)  | Reports on Form 8-K                                                                                                              
|     |                                                                                                                                  
|     | Royale Energy filed no Reports on Form 8-K during the last fiscal quarter of 2001                                                

# 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-

---

# 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, 2001 and 2000                                      | F-3 
|                                                                                  |     
|Statements of Income for the Years Ended December 31, 2001 and 2000               | F-4 
|                                                                                  |     
|Statements of Stockholders' Equity for the Years Ended December 31, 2001 and 2000 | F-5 
|                                                                                  |     
|Statements of Cash Flows for the Years Ended December 31, 2001 and 2000           | 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, 2001
and 2000, and the related statements of income, 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 United 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, 2001 and 2000, 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

January 27, 2003

F-2

---

# ROYALE ENERGY, INC.
 BALANCE SHEETS
DECEMBER 31, 2001 and
2000

ASSETS

|                                                                   | 2001 |  | 2000 |           
|------------------------------------------------------------------ | ---- |  | ---- | ----------
|Current Assets                                                     |      |  |      |           
|Cash and cash equivalents                                          |      |  | $    | 3,131,859 
|Accounts receivable                                                |      |  |      | 3,525,038 
|Other current assets                                               |      |  |      | 695,461   
|                                                                   |      | 
|Total Current Assets                                               |      |  |      | 7,352,358 
|                                                                   |      | 
|Oil and Gas Properties (successful efforts basis), Equipment       |      | 
|and Fixtures, net                                                  |      |  |      | 12,226,001
|                                                                   |      | 
|                                                                   |      |  | $    | 19,578,359
|                                                                   |      | 
|LIABILITIES AND STOCKHOLDERS' EQUITY                               |      | 
|                                                                   |      | 
|Current Liabilities                                                |      | 
|Accounts payable and accrued expenses                              |      |  | $    | 3,543,001 
|Deferred revenue from turnkey drilling                             |      |  |      | 2,740,991 
|                                                                   |      | 
|Total Current Liabilities                                          |      |  |      | 6,283,992 
|                                                                   |      | 
|Long-Term Debt, net of current portion                             |      |  |      | 2,000,000 
|                                                                   |      | 
|Redeemable Preferred Stock                                         |      | 
|Series A, convertible preferred stock, no par value, 59,250 shares |      | 
|authorized; 12,445 and 12,445 shares issued and outstanding        |      |  |      | 30,140    
|                                                                   |      | 
|Stockholders' Equity                                               |      | 
|Common stock, no par value, 10,000,000 shares authorized;          |      | 
|5,213,883 and 5,210,289 shares issued and outstanding,             |      | 
|respectively                                                       |      |  |      | 17,687,905
|Convertible preferred stock, Series AA, no par value, 147,500      |      | 
|shares authorized; 51,409 and 58,596  shares issued and            |      |  |      | 205,152   
|outstanding                                                        |      | 
|Accumulated (deficit)                                              |      |  |      | (6,501,524
|                                                                   |      | 
|Total paid in capital and accumulated deficit                      |      |  |      | 11,391,533
|                                                                   |      | 
|Less cost of treasury stock, 26,000 shares                         |      |  |      | (127,306  
|                                                                   |      | 
|Total Stockholders' Equity                                         |      |  |      | 11,265,227
|                                                                   |      | 
|                                                                   |      |  | $    | 19,578,359
|                                                                   |      | 

F-3

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

---

# ROYALE ENERGY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31, 2001 and 2000

|                                         | 2001 |  | 2000
As Restated |           
|---------------------------------------- | ---- |  | ---------------- | ----------
|Revenues                                 |      |  |                  |           
|Oil and gas production                   |      |  | $                | 8,452,282 
|Turnkey drilling                         |      |  |                  | 6,703,452 
|Supervisory fees and other               |      |  |                  | 702,539   
|                                         |      | 
|Total Revenues                           |      |  |                  | 15,858,273
|                                         |      | 
|Costs and Expenses                       |      | 
|General and administrative               |      |  |                  | 2,245,781 
|Geological and geophysical expense       |      |  |                  | 56,806    
|Turnkey drilling and development         |      |  |                  | 3,065,747 
|Lease operating                          |      |  |                  | 1,266,245 
|Lease impairment                         |      |  |                  | 2,062,028 
|Legal and accounting                     |      |  |                  | 644,812   
|Marketing                                |      |  |                  | 1,062,700 
|Depreciation, depletion and amortization |      |  |                  | 1,282,640 
|                                         |      | 
|Total Costs and Expenses                 |      |  |                  | 11,686,759
|                                         |      | 
|Income from Operations                   |      |  |                  | 4,171,514 
|                                         |      | 
|Other Expense                            |      | 
|Interest expense                         |      |  |                  | 54,455    
|                                         |      | 
|Income Before Income Tax Expense         |      |  |                  | 4,117,059 
|                                         |      | 
|Income Tax Provision                     |      |  |                  | 370,535   
|                                         |      | 
|Net Income                               |      |  | $                | 3,746,524 
|                                         |      | 
|                                         |      | 
|Basic Earnings Per Share                 |      |  | $                | 0.72      
|                                         |      | 
|Diluted Earnings Per Share               |      |  | $                | 0.68      
|                                         |      | 
|                                         |      | 

F-4

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

---

# ROYALE ENERGY, INC.
STATEMENTS OF
STOCKHOLDERS EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000

|                                          | Common Stock      | Preferred Stock Series AA | Treasury Stock   
|----------------------------------------- | ----------------- | ------------------------- | -----------------
|                                          | SharesOutstanding | Amount                    | SharesOutstanding
|Balance at January 1, 2000,               |                   |                           |                  
|as restated                               | 5,205,289         | $17,655,405               | 58,596           
|                                          |                   |                           |                  
|Shares issued                             | 5,000             | 7,500                    
|                                          |                   |                           |                  
|Net income for the year                   | --                | --                        | --               
|                                          |                   |                           |                  
|Balance at December 31, 2000, as restated | 5,210,289         | 17,662,905                | 58,596           
|                                          |                   |                           |                  
|Conversion of Preferred AA to            
|common stock                              | 3,594             | 25,000                    | (7,187)          
|                                          |                   |                           |                  
|Net income for the year                   | --                | --                        | --               
|                                          |                   |                           |                  
|Balance at December 31, 2001              | 5,213,883         | $17,687,905               | 51,409           

F-5

The accompanying
notes are an integral part of these financial statements

---

# ROYALE ENERGY, INC.
STATEMENTS OF CASH
FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2001 and 2000

|                                                   | 2001 |    | 2000As Restated |           
|-------------------------------------------------- | ---- | -- | --------------- | ----------
|CASH FLOWS FROM OPERATING ACTIVITIES               |      |    |                 |           
|Net income                                         |      |    | $               | 3,746,524 
|Adjustment to reconcile net income to net cash     |      |   
|provided by operating activities:                  |      |   
|Depreciation, depletion and amortization           |      |    |                 | 1,282,640 
|Lease impairment                                   |      |    |                 | 2,062,028 
|(Increase) decrease in:                            |      |   
|Accounts receivable                                |      |    |                 | 2,955,369 
|Prepaid expenses and other assets                  |      |    |                 | (227,105  
|Increase (decrease) in:                            |      |   
|Accounts payable and accrued expenses              |      |    |                 | (3,096,807
|Deferred revenues - DWI                            |      |    |                 | 1,105,691 
|                                                   |      |   
|Net Cash Provided by Operating Activities          |      |    |                 | 7,828,340 
|                                                   |      |   
|CASH FLOWS FROM INVESTING ACTIVITIES               |      |   
|Expenditures for oil and gas properties            |      |    |                 | (3,267,284
|Other capital expenditures                         |      |    |                 | (583,949  
|                                                   |      |   
|Net Cash Provided (Used) by Investing Activities   |      |    |                 | (3,851,233
|                                                   |      |   
|CASH FLOWS FROM FINANCING ACTIVITIES               |      |   
|Principal payments on long-term debt               |      |    |                 | (4,952,089
|Proceeds from long-term debt                       |      |    |                 | 2,000,000 
|Common stock issued                                |      | -- |                 | 7,500     
|                                                   |      |   
|Net Cash Provided (Used) by Financing Activities   |      |    |                 | (2,952,089
|                                                   |      |   
|Net Increase in Cash and Cash Equivalents          |      |    |                 | 1,025,018 
|                                                   |      |   
|Cash at beginning of year                          |      |    |                 | 2,106,841 
|                                                   |      |   
|Cash at end of year                                |      |    | $               | 3,131,859 
|                                                   |      |   
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |      |   
|                                                   |      |   
|Cash paid for interest                             |      |    | $               | 54,455    
|                                                   |      |   
|Cash paid for taxes                                |      |    | $               | 533,661   

F-6

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

---

# 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. 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 Royale Energy 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, 2001 and 2000, 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, Royale Energy
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). If costs exceed revenues and Royale Energy participates as a working interest
owner, Royale Energys proportional share of the excess is capitalized as the cost of
Royale Energys 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

F-7

---

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 $2,062,028 and $1,540,845 were recorded
in 2001 and 2000, 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.

Accounts Receivable

Management believes
that all accounts receivable as of December 31, 2001 and 2000, are fully collectible.
Therefore, no allowance for doubtful accounts is recorded.

F-8

---

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 2001 |  
|----------------------------------------------- | ----------------------- | -
|
|Basic Earnings Per Share:                       |                         |  
|Net income available to common stock            |                         | $
|                                                |                         |  
|Diluted Earnings Per Share:                     |                         |  
|Effect of dilutive securities and stock options |                         |  
|                                                |                         |  
|Net income available to common stock            |                         | $

|                                                | For the Year Ended 2000 |  
|----------------------------------------------- | ----------------------- | -
|
|Basic Earnings Per Share:                       |                         |  
|Net income 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.

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

F-9

---

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.

New Accounting Standards

In April 2000, the FASB issued
Financial Interpretation Number (FIN) 44, Accounting for Certain Transactions Involving
Stock Compensation  an Interpretation of Accounting Principles Board No. 25. FIN 44
clarifies the application of Opinion No. 25. This Interpretation was effective immediately
and all issues are to be handled prospectively. The adoption of FIN 44 did not have a
material impact on Royale Energys financial position or results of operations.

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 an entity 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. The adoption of Statement No. 142, did not have a
material impact on Royale Energys financial position or results of operations.

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. Royale Energy will adopt the
statement effective no later than January 1, 2003, as required. The transition adjustment
resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a
change in accounting principle. At this time, Royale Energy cannot reasonably estimate the
effect of the adoption of this statement on its financial position, results of operations
or cash flows.

In August 2001, the FASB also
approved SFAS 144, Accounting for the Impairment of Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 replaces SFAS 121, Accounting for the
Impairment of Long-Lived Assets to Bed 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, generally are to be applied prospectively. At this
time, Royale Energy cannot estimate the effect of this statement on its financial
position, results of operations, or cash flows.

F-10

---

Reclassification

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

# NOTE 2 - RESTATEMENTS

Change in Method of
Reviewing for Impairment

Company management continually
reviews its use of generally accepted accounting principles, and occasionally adjusts
their selection of accounting principles to more realistic, conservative methods.

Effective January 1, 1998, the
Company reinstated its method of reviewing for impairment of its oil and gas properties
from a region by region basis to a field by field basis. The Company believes that
evaluating impairment on a field by field is a better measure of impairment than the
region by region basis, and is consistent with the practice of the majority of oil and gas
companies in industry for evaluating impairment. Before 1998, the Company had used a field
cost center impairment measure, and changed to a regional method for 1998, 1999, and 2000,
and throughout the first three quarters of 2001. Significant downward revisions to
reserves were realized due to this change. All of these reporting periods have been
restated.

Change in Accounting for
Other Capitalized Costs

Effective December 31, 1998, the
Company changed its method of accounting for the costs of 3D Seismic studies performed by
independent Geophysical and Geological companies on its behalf. Previously, the Company
capitalized these costs as inventoriable expenditures recoverable by sale or by
development. Portions of the database used for Company projects have been capitalized as
part of the carrying costs of proved properties. The Company has had prospective buyers of
this data in the past, but to date has not sold any portions of the data to outside
parties.

The Company has evaluated whether it
is appropriate to report these costs as inventoriable expenditures and has determined that
in the absence of sales, these costs are more appropriately reported as exploration
geological and geophysical to be expensed when incurred. Accordingly, the Company has
restated its financial statements to reflect the effect of expensing these costs in 1998
when the database was originally acquired.

Change in Accounting for
Other Capitalized Costs

The following tables reconcile the
effects of the restatements for the fiscal years ended December 31, 1998, 1999 and 2000:

|                                                                | 1998 |  | 1999 |            | 2000 |  
|--------------------------------------------------------------- | ---- |  | ---- | ---------- | ---- | -
|Income from operations as previously reported                   |      |  | $    | 1,162,647  |      | $
|Effect of change in method of reviewing for impairment          |      |  |      | (1,149,310 | )    |  
|Effect of change in accounting for other capitalized costs      |      |  |      | (927,208   | )    |  
|Income (Loss) from operations as restated                       |      |  |      | (913,871   | )    |  
|                                                                |      |  |     
|Net Income as previously reported                               |      |  |      | 774,406    |      |  
|Effect of change in method of reviewing for impairment          |      |  |      | (1,120,233 | )    |  
|Effect of change in accounting for other capitalized costs      |      |  |      | (903,417   | )    |  
|Net Income (Loss) as restated                                   |      |  |      | (1,249,244 | )    |  
|                                                                |      |  |     
|Net Income per share (basic) as previously reported             |      |  |      | 0.20       |      |  
|Effect of change in method of reviewing for impairment          |      |  |      | (0.29      | )    |  
|Effect of change in accounting for other capitalized costs      |      |  |      | (0.24      | )    |  
|Effect of increase in outstanding shares due to stock dividends |      |  |      | --         |      |  
|Net Income (Loss) per share (basic) operations as restated      |      |  |      | (0.33      | )    |  

F-11

---

|                                                                |  |  | 
|--------------------------------------------------------------- |  |  | 
|Net Income (Loss) per share (diluted) as previously reported    |  |  | 
|Effect of change in method of reviewing for impairment          |  |  | 
|Effect of change in accounting for other capitalized costs      |  |  | 
|Effect of increase in outstanding shares due to stock dividends |  |  | 
|Net Income (Loss) per share (diluted) as restated               |  |  | 

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

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

|                                                          | 2001 |  | 2000 |           
|--------------------------------------------------------- | ---- |  | ---- | ----------
|Oil and Gas                                               |      |  |      |           
|Producing properties, including intangible drilling costs |      |  | $    | 9,189,884 
|Undeveloped properties                                    |      |  |      | 1,939,338 
|Lease and well equipment                                  |      |  |      | 4,563,115 
|                                                          |      | 
|                                                          |      |  |      | 15,692,337
|Accumulated depletion, depreciation and amortization      |      |  |      | (3,701,773
|                                                          |      | 
|                                                          |      |  |      | 11,990,564
|Commercial and Other                                      |      | 
|Furniture and equipment                                   |      |  |      | 597,977   
|Accumulated depreciation                                  |      |  |      | (362,540  
|                                                          |      | 
|                                                          |      |  |      | 235,437   
|                                                          |      | 
|                                                          |      |  | $    | 12,226,001

F-12

---

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

|            | 2001 |  | 2000 |           | 1999 |  
|----------- | ---- |  | ---- | --------- | ---- | -
|            |      |  |     
|Acquisition |      |  | $    | 94,174    |      | $
|Development |      |  | $    | 2,552,193 |      | $
|Exploration |      |  | $    | 221,207   |      | $

Results of Operations
from Oil and Gas Producing and Exploration Activities

The results of operations from oil
and gas producing and exploration activities (excluding corporate overhead and interest
costs) for the two years ended December 31, are as follows:

|                                                                | 2001 |  | 2000
|--------------------------------------------------------------- | ---- |  | ----
|Oil and gas sales                                               |      |  | $   
|Production related costs                                        |      |  |     
|Geological and geophysical expense                              |      |  |     
|Depreciation, depletion and amortization                        |      |  |     
|Results of operations from producing and exploration activities |      |  | $   

# 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, 2001
and 2000, Royale Energy had recorded deferred turnkey drilling revenue associated with
undrilled wells of $2,740,991 and $1,635,300, 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).

Royale Energys operations are
classified into two principal industry segments. Following is a summary of segmented
information for 2001 and 2000:

|                                          | Oil and Gas  
Producing andExploration |  | Turnkey
DrillingServices |           | Total |  
|----------------------------------------- | -------------------------------------- |  | ------------------------ | --------- | ----- | -
|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 |       | $

F-13

---

|Lease Impairment                          |  |  | $ | 1,031,014  |  | $ | 1,031,014 |  | $ | 2,062,028  | 
|----------------------------------------- |  |  | - | ---------- |  | - | --------- |  | - | ---------- | 
|                                          |  |  |  
|Income Tax                                |  |  | $ | 185,268    |  | $ | 185,267   |  | $ | 370,535    | 
|                                          |  |  |  
|Total Assets                              |  |  | $ | 19,578,359 |  | $ | --        |  | $ | 19,578,359 | 
|                                          |  |  |  
|Net Income                                |  |  | $ | 3,657,158  |  | $ | 89,366    |  | $ | 3,746,524  | 
|                                          |  |  |  
|Year Ended December 31, 2000              |  | 
|Revenues from External Customers          |  |  | $ | 6,194,451  |  | $ | 4,792,151 |  | $ | 10,986,602 | 
|Supervisory Fees                          |  |  | $ | 668,361    |  | $ | --        |  | $ | 668,361    | 
|Interest Revenue                          |  |  | $ | 32,389     |  | $ | --        |  | $ | 32,389     | 
|Interest Expense                          |  |  | $ | 213,652    |  | $ | 213,652   |  | $ | 427,304    | 
|                                          |  |  |  
|Expenditures for Segment Assets           |  |  | $ | 2,264,380  |  | $ | 3,729,327 |  | $ | 5,993,707  | 
|                                          |  |  |  
|Depreciation, Depletion, and Amortization |  |  | $ | 846,050    |  | $ | 49,926    |  | $ | 895,976    | 
|Lease Impairment                    $     |  |  |   | 1,129,077  |  | $ | 411,768   |  | $ | 1,540,845  | 
|                                          |  |  |  
|Income Tax                                |  |  | $ | 38,454     |  | $ | 40,000    |  | $ | 78,545     | 
|                                          |  |  |  
|Total Assets                              |  |  | $ | 20,775,040 |  | $ | --        |  | $ | 20,775,040 | 
|                                          |  |  |  
|Net Income                                |  |  | $ | 2,403,588  |  | $ | 347,478   |  | $ | 2,751,066  | 

# NOTE 6 - LONG-TERM
DEBT

|                                                                       |  |           
|---------------------------------------------------------------------- |  | ----------
|                                                                       |  | 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 Energy's existing debt and to   | 
|fund development, exploration and acquisition activities as well as    | 
|other general corporate purposes.  Agreement was entered into on       | 
|December 1, 2002, 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                   |  | $2,000,000
|                                                                       |  | $2,000,000

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 management without bank consent, and dividend and distribution
restrictions. The Company was in compliance with the terms of this agreement at December
31, 2001.

Maturities of long-term debt for
years subsequent to December 31, 2001 are as follows:

|             | 
|------------ | 
|Year Ended   | 
|December 31, | 
|             | 
|2003         | 

F-14

---

# NOTE 7 - INCOME
TAXES

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

|                                  | 2001 |  | 2000 |         
|--------------------------------- | ---- |  | ---- | --------
|Deferred Tax Assets:              |      |  |      |         
|Net operating loss carryforwards  |      |  | $    | --      
|Statutory depletion carryforwards |      |  |      | 342,000 
|                                  |      |  |     
|Total Deferred Tax Assets         |      |  |      | 342,000 
|                                  |      |  |     
|Valuation Allowance               |      |  |      | (342,000
|                                  |      |  |     
|Net Deferred Tax Assets           |      |  | $    | --      

Royale Energy has approximately
$1,500,000 of unused statutory percentage depletion, eligible to be used by Royale Energy
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.

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, 2001 and 2000, respectively, to
pretax income is as follows:

|                                             | 2001 |  | 2000 |          
|-------------------------------------------- | ---- |  | ---- | ---------
|Tax computed at 34%, respectively            |      |  | $    | 1,399,800
|                                             |      |  |     
|Increase (decrease) in taxes resulting from: |      | 
|Net operating loss carryforwards used        |      |  |      | (932,118 
|State tax                                    |      |  |      | 244,553  
|Percentage depletion carryforwards used      |      |  |      | (341,700 
|                                             |      |  |     
|                                             |      |  | $    | 370,535  
|                                             |      |  |     
|Effective Tax Rate                           |      |  |      | 9.0%     

# 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.

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).

F-15

---

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, 2001 and 2000, 224,815 shares of Series A Convertible Preferred Stock
had been converted to 198,625 shares of common stock.

# 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, 2001 and 2000, there were 56,780 and 49,593 shares issued and outstanding.
The dividend has been paid on all shares outstanding at December 31, 2001 and 2000.

# 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 (deficit) 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. A 3.75% stock dividend was paid on June 30, 2003, which increased common
shares by 187,879, resulting in a $1,016,425 decrease to retained earnings.

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:

|                                            | 2001 |         | 2000 |        
|------------------------------------------- | ---- | ------- | ---- | -------
|Outstanding warrants at beginning of period |      | 230,555 |      | 230,555
|                                            |      |        
|15% Stock dividend                          |      | 34,583  |      | --     
|Additional warrants issued                  |      | --      |      | --     
|Exercise of stock warrants                  |      | --      |      | --     
|Warrants expired or ineligible              |      | --      |      | --     
|                                            |      |        
|Outstanding warrants at end of period       |      | 265,138 |      | 230,555

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 expiration

F-16

---

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

At the November 3, 1993 Board of
Directors meeting, the Board of Directors granted RPC additional warrants to purchase
175,000 shares of Royale Energys common stock at prices ranging from $1.50 to $3.00
per share. The expiration date of this grant has been extended through December 31, 2002.

Due to the declaration of the 15%
stock dividend the number of warrants increased by 34,583, with a corresponding decrease
in prices ranging from $2.60 to $1.35 per share.

# 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, 2001 is as follows:

|Year Ended
December 31, | 
|----------------------- | 
|2002                    | 
|2003                    | 
|2004                    | 
|2005                    | 
|                        | 
|                        | 

Rental expense for the years ended
December 31, 2001 and 2000, was $186,474 and $177,257, respectively.

# NOTE 13 - RELATED
PARTY TRANSACTIONS

Significant Ownership
Interests

On December 31, 2001, 27.53% 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 10.50% of Royale Energys
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

On December 18, 1992, the Board of
Directors granted the directors and executive officers of Royale Energy 30,000 options to
purchase common stock at an exercise or base price of $3.00 per share. All options are
exercisable on or after the second anniversary of the date of grant. Also on this date,
the Board of Directors voted to adopt a policy of awarding stock options to key employees
and contractors based on performance.

On March 26, 2001, the number of
options increased from 30,000 to 34,500 and the price decreased from $3.00 per share to
$2.60 per share due to the declaration of the 15% stock dividend.

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 2001 or
2000.

F-17

---

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.

A summary of the status of Royale
Energys stock option plan as of December 31, 2001 and 2000, and changes during the
years ending on those dates follows

|                                       | 2001 |              | 2000
|-------------------------------------- | ---- | ------------ | ----
|                                       |      | Shares       |     
|Fixed Options                          |      |              |     
|Outstanding at beginning of year       |      | $129,000     |     
|15% of Stocks dividend                 |      | 19,350       |     
|Exercised                              |      | --           |     
|                                       |      |              |     
|Outstanding at end of year             |      | 148,350      |     
|                                       |      |              |     
|Options exercisable at year end        |      | 148,350      |     
|                                       |      |              |     
|Weighted-average fair value of options |     
|Granted during the year                |      | $         -- |     

The following table summarizes
information about fixed stock options outstanding at December 31, 2001 and 2000:

|Range of 
 ExercisePrices | Number
Outstanding at  December 31, 2001 | Weighted- Average   Remaining   ContractualLife (Years) | Weighted-Average  Exercise Price | Number
Outstanding at  December 31, 2000 | Weighted-Average  Remaining  ContractualLife (Years)
|------------------------- | ---------------------------------------- | ------------------------------------------------------- | -------------------------------- | ---------------------------------------- | ----------------------------------------------------
|$1.65                     | 34,500                                   | 1.0                                                     | $3.00                            | 30,000                                   | 2.0                                                 
|$2.60                     | 113,850                                  | 3.2                                                     | $1.90                            | 99,000                                   | 4.2                                                 
|                          |                                          |                                                         |                                  |                                          |                                                     
|$1.65 to $2.60            | 148,350                                  | 2.7                                                     | $1.90 to $3.00                   | 129,000                                  | 3.7                                                 

The Board of Directors adopted a
policy in 1989 that permits directors and officers of Royale Energy to purchase from
Royale Energy, at Royale Energys actual costs, up to one percent of a fractional
interest in any well to be drilled by Royale Energy. Current and former officers and
directors were billed $97,261 and $77,067 for their interests for the years ended December
31, 2001 and 2000, respectively.

# NOTE 14 - SIMPLE
IRA PLAN

In April 1998, Royale Energy
established a Simple IRA pension plan covering all employees. Royale Energy will
contribute a matching contribution to each eligible employees Simple IRA equal to
the employees salary reduction contributions up to a limit of 3% of the
employees compensation for the year. The employer contribution for the years ending
December 31, 2001 and 2000 were $34,606 and $23,035, respectively.

# NOTE 15 -
ENVIRONMENTAL MATTERS

Royale Energy has established
procedures for the on-going evaluation of its operations to identify potential
environmental exposures and assure compliance with regulatory policies and procedures.
Management monitors these laws and regulations and periodically assesses the propriety of
its operational and accounting policies related to environmental issues. The nature of
Royale Energys business requires routine day-to-day compliance with

F-18

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environmental
laws and regulations. Royale Energy incurred no material environmental investigation,
compliance and remediation costs in 2000 or 1999.

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 group of 16
investors in drilling projects sponsored by Royale Energy from 1994 to 1998 filed suit
against Royale Energy and certain of its officers and former officers in U.S. District
Court for the Northern District of California, alleging fraud, negligent
misrepresentation, breach of fiduciary duties and other related claims in connection with
the sales of working interests in those projects. Buck, et al., v. Royale Energy, et al.,
No. C 99 5236. The complaint generally states that the defendants failed to adequately
disclose the companys track record regarding previously drilled wells and makes
other general statements about misconduct which are not in Royale Energys view
supported by specific factual allegations. The suit seeks an unspecified amount of
damages, restitution of amounts the plaintiffs invested, and punitive damages. 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. No discovery has been conducted in
the case. No discovery has ever been conducted in the case since it was filed in December
1999. If the plaintiffs elect to pursue this case, Royale Energy will contend that the
plaintiffs suffered no damages, that their claims are completely without merit and that
the complaint fails to state a claim on which relief can be based.

On October 12, 2001, Blue Star
Resources, Inc. and others filed suit against Royale Energy for declaratory relief, money
damages, imposition of a constructive trust, and declaratory relief, seeking a working
interest and drilling rights to certain properties covered by a joint operating agreement
between plaintiffs and Royale Energy. The dispute is over whether plaintiffs failed to
consent to drilling operations that resulted in a commercially productive well drilled by
Royale Energy and thereby lost their rights to working interests in the well. The case is
set for trial in July 2002. In March 2001, the court dismissed the plaintiffs motion
for partial summary judgment. Since the amount of the judgment against the Company, if
any, cannot be reasonably determined at this time, no liability has been accrued in the
financial statements.

In the normal course of business,
Royale Energy occasionally becomes party to litigation. In the opinion of management,
based on advice of legal counsel, pending and threatened litigation involving Royale
Energy will not have a material adverse effect upon its financial condition or results of
operations.

# NOTE 17 - QUARTERLY
FINANCIAL DATA (UNAUDITED)

Operating revenues, operating income,
net income, and earnings per common share by quarters from 2001 and 2000 are shown below.
Royale Energy, in its opinion, has included all adjustments necessary for a fair
presentation of the results of operations for the quarters. Due to the nature of Turnkey
Drilling Revenues, which are recognized at specified times over program development on
specified wells, annual amounts are not generated evenly by quarter during the year.
Amounts for the four quarters and year ended December 31, 2000 have been restated (see
note 2).

F-19

---

|Quarter Ended      |  |  |   | Total   Revenues |  |   | Gross Profit |  |   | Net Income(Loss) |   |  |   | Basic Earnings PerCommonShare |  | Weighted-AverageSharesOutstanding | 
|------------------ |  |  | - | ---------------- |  | - | ------------ |  | - | ---------------- | - |  | - | ----------------------------- |  | --------------------------------- | 
|December 31, 2001  |  |  | $ | 2,485,301        |  | $ | 323,262      |  | $ | (1,575,274       | ) |  | $ | (0.30)                        |  | 5,212,091                         | 
|2000               |  |  | $ | 4,330,993        |  | $ | 3,525,104    |  | $ | 1,686,057        |   |  | $ | 0.32                          |  | 5,205,837                         | 
|                   |  |  |   |                  | 
|September 30, 2001 |  |  | $ | 3,470,768        |  | $ | 1,659,976    |  | $ | 513,216          |   |  | $ | 0.10                          |  | 5,212,091                         | 
|2000               |  |  | $ | 2,962,880        |  | $ | 1,604,364    |  | $ | 527,930          |   |  | $ | 0.10                          |  | 5,205,289                         | 
|                   |  |  |   |                  | 
|June 30, 2001      |  |  | $ | 3,950,337        |  | $ | 3,005,045    |  | $ | 1,778,077        |   |  | $ | 0.34                          |  | 5,210,289                         | 
|2000               |  |  | $ | 2,495,162        |  | $ | 1,224,745    |  | $ | 394,535          |   |  | $ | 0.08                          |  | 5,205,289                         | 
|                   |  |  |   |                  | 
|March 31, 2001     |  |  | $ | 5,951,867        |  | $ | 4,459,575    |  | $ | 3,030,505        |   |  | $ | 0.58                          |  | 5,210,289                         | 
|2000               |  |  | $ | 1,898,317        |  | $ | 1,026,910    |  | $ | 142,544          |   |  | $ | 0.03                          |  | 5,205,289                         | 

F-20

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# 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, 2001 and 2000. 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, 2001
and 2000 and changes in such quantities during each of the years then ended, were as
follows:

|                                              | 2001      |        | 2000      |            |           |         |           |           
|--------------------------------------------- | --------- | ------ | --------- | ---------- | --------- | ------- | --------- | ----------
|                                              | Oil (BBL) |        | Gas (MCF) |            | Oil (BBL) |         | Gas (MCF) |           
|Proved developed and undeveloped reserves:    |           |        |           |            |           |         |           |           
|Beginning of period                           |           | 3,000  |           | 16,651,010 |           | 80,000  |           | 15,842,000
|Revisions of previous estimates               |           | (2,000 | )         | (6,457,330 | )         | (76,404 | )         | 1,103,647 
|Production                                    |           | --     |           | (1,366,109 | )         | (596    | )         | (1,161,513
|Extensions, discoveries and improved recovery |           | 7,000  |           | 4,333,429  |           | --      |           | 866,876   
|Purchase of minerals in place                 |           | --     |           | --         |           | --      |           | --        
|                                              |           |        |           |           
|Proved reserves end of period                 |           | 8,000  |           | 13,161,000 |           | 3,000   |           | 16,651,010
|                                              |           |        |           |           
|Proved developed reserves:                    |          
|Beginning of period                           |           | 3,000  |           | 12,672,000 |           | 80,000  |           | 10,401,000
|                                              |           |        |           |           
|End of period                                 |           | 8,000  |           | 11,245,000 |           | 3,000   |           | 12,672,000

These estimates were determined using
gas prices at December 31, 2001 ranging from $2.41 per Mcf to $2.85 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,
2001.

The future net cash inflows are
developed as follows:



(1)     Estimates
are made of quantities of proved reserves and the future periods 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 is as follows:

|           |  
|---------- | -
|2002       | $
|2003       |  
|2004       |  
|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.

|                                                         | 2001 |  | 2000 |            
|-------------------------------------------------------- | ---- |  | ---- | -----------
|Future cash inflows                                      |      |  | $    | 34,888,000 
|Future production costs                                  |      |  |      | (11,830,000
|Future development costs                                 |      |  |      | (1,943,000 
|Future income tax expenses                               |      |  |      | (6,334,800 
|                                                         |      | 
|Future net cash flows                                    |      |  |      | 14,780,200 
|                                                         |      | 
|10% annual discount for estimated timing of cash flows   |      |  |      | (5,766,930 
|                                                         |      | 
|Standardized measure of discounted future net cash flows |      |  | $    | 9,013,270  

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

---

|                                                       | 2001 |  | 2000 |             
|------------------------------------------------------ | ---- |  | ---- | ------------
|Standardized measure - beginning of year               |      |  | $    | 83,054,587  
|                                                       |      | 
|Sales of oil and gas produced, net of production costs |      |  |      | (1,819,352  
|                                                       |      | 
|Revisions of previous quantity estimates               |      |  |      | (9,178,726  
|Net changes in prices and production costs             |      |  |      | (106,445,929
|                                                       |      | 
|Extensions, discoveries and improved recovery          |      |  |      | 5,973,576   
|                                                       |      | 
|Accretion of discount                                  |      |  |      | 5,216,894   
|                                                       |      | 
|Net change in income tax                               |      |  |      | 32,212,220  
|                                                       |      | 
|Net increase (decrease)                                |      |  |      | (74,041,317 
|                                                       |      | 
|Standardized measure - end of year                     |      |  | $    | 9,013,270   

F-23