10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009 Commission File No. 000-22750

ROYALE ENERGY, INC.

(Exact name of registrant as specified in its charter)

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

7676 Hazard Center Drive, Suite 1500

San Diego, CA 92108

(Address of principal executive offices)

(Zip Code)

619-881-2800

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (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 [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Check one:

Large accelerated filer  __	Accelerated filer  __
Non-accelerated filer  __	Smaller reporting company  X

Indicate by check mark whether the registrant is a blank check company (as defined in Rule 12b-2 of the Exchange Act).                  Yes [   ]     No [X]

At October 31, 2009, a total of 10,193,543 shares of registrant’s common stock were outstanding.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4	Controls and Procedures	18
PART II	OTHER INFORMATION	18
Item 1	Legal Proceedings	18
Item 1A	Risk Factors	18
Item 5	Other Information	18
Item 6.	Exhibits	18
	Signatures	19

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PART I.                      FINANCIAL INFORMATION

Item 1.  Financial Statements

ROYALE ENERGY, INC.
BALANCE SHEETS
	September 30,		December 31,
	2009		2008
	(Unaudited)		(Audited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	1,767,393	$	1,330,739
Accounts Receivable		1,810,330		3,750,557
Prepaid Expenses		1,131,018		2,839,735
Deferred Tax Asset		442,875		534,698
Available for Sale Securities		0		218,938
Inventory		859,365		216,459
Total Current Assets		6,010,981		8,891,126
Other Assets		6,946		6,946
Deferred Tax Asset-Noncurrent		6,358,862		5,029,007
Oil and Gas Properties, at cost, (successful efforts basis),
Equipment and Fixtures		8,799,827		10,263,517
Total Assets	$	21,176,616	$	24,190,596

See notes to unaudited financial statements

ROYALE ENERGY, INC.
BALANCE SHEETS
	September 30,			December 31,
	2009			2008
	(Unaudited)			(Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses	$	5,636,452		$	10,320,187
Deferred Turnkey Drilling		5,252,638			4,005,800
Total Current Liabilities		10,889,090			14,325,987
Noncurrent Liabilities:
Asset Retirement Obligation		526,461			494,168
Long-Term Debt, Net of Current Portion		2,775,000			1,975,974
Total Noncurrent Liabilities		3,301,461			2,470,142
Total Liabilities		14,190,551			16,796,129
Stockholders' Equity:
Common Stock, no par value, authorized 20,000,000 shares,
9,241,481 and 8,538,717 shares issued; 9,208,862 and
8,505,630 shares outstanding, respectively		24,644,390			23,355,926
Convertible preferred stock, Series AA, no par value,
147,500 shares authorized; 52,784 and 52,784 shares
issued and outstanding, respectively		154,014			154,014
Accumulated Deficit		(17,932,921	)		(15,918,309	)
Accumulated Other Comprehensive Income (Loss)		0			(140,053	)
Total Paid in Capital and Accumulated Deficit		6,865,483			7,451,578
Less Cost of Treasury Stock 32,619 and 33,087 shares		(179,376	)		(179,376	)
Additional Paid in Capital		299,958			122,265
Total Stockholders' Equity		6,986,065			7,394,467
Total Liabilities and Stockholders' Equity	$	21,176,616		$	24,190,596

See notes to unaudited financial statements

ROYALE ENERGY, INC.
STATEMENTS OF OPERATIONS
	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues:
Sale of Oil and Gas	$	673,916		$	1,745,103		$	2,135,421		$	5,835,278
Turnkey drilling		395,879			3,016,909			2,205,253			6,269,545
Supervisory Fees and Other		141,923			196,310			439,609			554,323
Total Revenues		1,211,718			4,958,322			4,780,283			12,659,146
Costs and Expenses:
General and Administrative		905,168			1,016,682			2,663,151			3,041,235
Turnkey Drilling and Development		6,842			1,847,797			893,386			2,926,379
Lease Operating		358,553			590,210			1,138,425			1,861,884
Lease Impairment		82,716			770,862			98,075			820,966
Bad Debt Expense		172,839			0			202,404			0
Legal and Accounting		128,862			61,413			657,281			1,067,197
Marketing		269,166			377,605			650,186			916,625
Depreciation, Depletion and Amortization		515,980			795,897			1,574,104			2,601,622
Total Costs and Expenses		2,440,126			5,460,466			7,877,012			13,235,908
Gain (Loss) on Sale of assets		(91,620	)		2,630,400			(125,102	)		2,602,577
Income (Loss) From Operations		(1,320,028	)		2,128,256			(3,221,831	)		2,025,815
Other Expense:
Interest expense		38,528			45,299			79,624			195,408
Income Before Income Tax Expense		(1,358,556	)		2,082,957			(3,301,455	)		1,830,407
Income tax provision (benefit)		(529,731	)		709,466			(1,286,843	)		624,146
Net Income (Loss)	$	(828,825	)	$	1,373,491		$	(2,014,612	)	$	1,206,261
Diluted Earnings Per Share	$	(0.10	)	$	0.16		$	(0.23	)	$	0.15
Basic Earnings Per Share	$	(0.10	)	$	0.16		$	(0.23	)	$	0.15
Other Comprehensive Income
Unrealized Gain (Loss) on Equity Securities	$	210,276		$	(53,267	)	$	352,145		$	(53,267	)
Less: Reclassification Adjustment for Losses
(Gains) Included in Net Income		91,621			6,804			120,269			6,804
Other Comprehensive Income (Loss), before tax		118,655			(46,463	)		231,876			(46,463	)
Income Tax Expense (Benefit) Related to Items of
Other Comprehensive Income		46,157			(15,797	)		91,823			(15,797	)
Other Comprehensive Income (Loss), net of tax		72,498			(30,666	)		140,053			(30,666	)
Comprehensive Income (Loss)	$	(756,327	)	$	1,342,825		$	(1,874,559	)	$	1,175,595

See notes to unaudited financial statements

ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
	2009			2008
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	(2,014,612	)	$	1,206,261
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided (Used) by Operating Activities:
Depreciation, Depletion and Amortization		1,574,104			2,601,622
Lease Impairment		98,075			820,966
(Gain) Loss on Sale of Assets		4,833			(2,602,577	)
Realized (Gain) Loss on Equity Securities		120,269			6,804
Bad Debt Expense		202,404			0
Stock-Based Compensation, net of adjustments		177,693			56,061
(Increase) Decrease in:
Accounts Receivable		1,737,823			(452,283	)
Prepaid Expenses and Other Assets		1,065,811			(396,360	)
Increase (Decrease) in:
Accounts Payable and Accrued expenses		(4,651,442	)		(5,050,731	)
Deferred Revenues - DWI		1,246,838			4,205,443
Deferred Income Taxes		(1,329,855	)		606,646
Net Cash Provided (Used) by Operating Activities		(1,768,059	)		1,001,852
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for Oil and Gas Properties
and Other Capital Expenditures		(260,792	)		(4,885,213	)
Proceeds from Sale of Assets		47,470			5,698,911
Purchase of Equity Securities		(8,857	)		(250,440	)
Sale of Equity Securities		339,402			19,641
Net Cash Provided by Investing Activities		117,223			582,899
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long-Term Debt		5,054,181			0
Principal Payments on Long-Term Debt		(4,255,155	)		(2,600,000	)
Proceeds from Issuance of Common Stock		1,288,464			3,724,999
Proceeds from Stock Options Exercise		0			105,000
Net Cash Provided by Financing Activities		2,087,490			1,229,999
Net Increase in Cash and Cash Equivalents		436,654			2,814,749
Cash at Beginning of Year		1,330,739			3,848,968
Cash at End of Period	$	1,767,393		$	6,663,717
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid for Interest	$	79,624		$	200,535
Cash Paid for Taxes	$	43,012		$	17,500
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING & FINANCING ACTIVITIES:
Conversion of accounts payable to long-term note payable	$	55,000		$	0
Conversion of Series AA Stock to Common Stock	$	0		$	13,965

See notes to unaudited financial statements

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ROYALE ENERGY, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 – In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normally recurring adjustments, necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented.  The results of operations for the nine month period are not, in management’s opinion, indicative of the results to be expected for a full year of operations.  It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report.

A summary of significant accounting policies of Royale Energy, Inc. (“Royale Energy") is presented in its annual Form 10K dated December 31, 2008 and is provided 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.  The accounting policy below updates a previously disclosed policy stated in the December 31, 2008 Form 10K, and conforms to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Reclassification

Certain items in the financial statements have been reclassified to maintain consistency and comparability for all periods presented herein.  The company has determined that certain G&A charges are presented more fairly as Bad Debt Expense.  The reclassification is reflected in all periods presented.

NOTE 2 – EARNINGS PER SHARE

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

	For the Nine Months ended September 30, 2009
	Income (Numerator)			Shares (Denominator)		Per-Share Amount
Basic Earnings (Loss) Per Share:
Net income (loss) available to common stock	$	(2,014,612	)		8,624,054	$	(0.23	)
Diluted Earnings (Loss) Per Share:
Effect of dilutive securities and stock      options		0			0		0.00
Net income (loss) available to common stock	$	(2,014,612	)		8,624,054	$	(0.23	)
	For the Nine Months ended September 30, 2008
	Income (Numerator)			Shares (Denominator)		Per-Share Amount
Basic Earnings (Loss) Per Share:
Net income available to common stock	$	1,206,261			8,158,570	$	0.15
Diluted Earnings (Loss) Per Share:
Effect of dilutive securities and stock      options		0			49,309		0.00
Net income available to common stock	$	1,206,261			8,207,879	$	0.15

For the nine months ended September 30, 2009, Royale Energy had dilutive securities of 416,902.  These securities were not included in the dilutive loss per share due to their anti-dilutive nature.

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ROYALE ENERGY, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 3 – OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES

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

	September 30, 2009			December 31, 2008
Oil and Gas
Producing properties, including drilling costs	$	24,450,389		$	23,875,461
Undeveloped properties		628,672			1,102,317
Lease and well equipment		9,056,367			9,081,305
		34,135,428			34,059,083
Accumulated depletion, depreciation & amortization		(26,099,787	)		(24,612,940	)
		8,035,641			9,446,143
Commercial and Other
Real estate, including furniture and fixtures	$	502,344		$	503,344
Vehicles		255,496			313,460
Furniture and equipment		1,256,116			1,232,647
		2,013,956			2,049,451
Accumulated depreciation		(1,249,770	)		(1,232,077	)
		764,186			817,374
	$	8,799,827		$	10,263,517
The guidance set forth as required by the Extractive Activities Oil & Gas Topic of the FASB Accounting Standards Codification requires that we evaluate all existing capitalized exploratory well costs and disclose the extent to which any such capitalized costs have become impaired and are expensed or reclassified during a fiscal period. We did not make any additions to capitalized exploratory well costs pending a determination of proved reserves during the first nine months of 2009 or 2008. We did not charge any previously capitalized exploratory well costs to expense upon adoption of Topic.

	Nine Months ended September 30,
	2009			2008
Beginning balance at January 1	$	0		$	0
Additions to capitalized exploratory well costs pending the      determination of proved reserves		0			497,889
Reclassifications to wells, facilities, and equipment based on      the determination of proved reserves		(0	)		(497,889	)
Ending balance at September 30	$	0		$	0

ROYALE ENERGY, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 4 – STOCK BASED COMPENSATION

Royale Energy has a stock-based compensation plan.  Effective January 1, 2006, the Company adopted the Compensation – Stock Compensation Topic of the FASB Accounting Standards Codification, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards, and has elected to use the modified prospective transition method as permitted by the Topic.  The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock, restricted stock units, and employee stock purchase plan shares that are ultimately expected to vest as the requisite service is rendered beginning on January 1, 2006. Stock-based compensation expense for awards granted prior to January 1, 2006, is based on the grant-date fair-value as determined under the pro forma provisions of the Topic.

At the March 12, 2008 Board of Directors meeting, directors and executive officers of Royale Energy were each granted 45,000 options to purchase common stock at an exercise or base price of $3.50 per share.  These options are to be vested in three parts, the first 15,000 vested March 31, 2008, the second part vested on March 31, 2009, and the remaining 15,000 options will vest on March 31, 2010.  The options were granted for a legal life of four years with a service period of three years. Royale Energy recorded compensation expense of $56,061 in first nine months of 2009 and 2008 relating to these options. The total income tax benefit recognized in the income statement for these option arrangements was $21,808 and $19,061 in 2009 and 2008, respectively.

In November 2008, the Board of Directors granted the directors and executive officers of Royale Energy 95,000 shares of restricted common stock. The number of granted shares will double to 190,000 shares of common stock if Royale’s stock price reaches $15 a share during the three year period. The grant is to be vested in three parts, 31,667 or 63,334 shares, depending on Royale’s stock price, will vest on November 30, 2009, 2010, and 2011. Royale has recognized share-based compensation expense of $84,130 and $32,727 as a tax benefit in the first three quarters of 2009 relating to this grant.

In July 2009, the Board of Directors granted a total of 17,858 shares of common stock to two directors as compensation for their joint and several guarantee of letter of credit on behalf of the Company.  The shares are to vest immediately.  Royale has recognized share-based compensation expense of $37,502 and $14,588 as a tax benefit for this stock grant.

NOTE 5 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The company has adopted the Subsequent Events Topic of the FASB Accounting Standards Codification. It establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Topic sets forth (1) The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Topic is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this standard did not have a significant impact on the Company’s interim financial information.

SEC Rulemaking

On December 31, 2008, the SEC published the final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the petroleum resource management system, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used to determine reserves in that companies must use a 12-month average price. The average is calculated using the first-day-of-the-month price for each of the 12 months that make up the reporting period. The SEC will require companies to comply with the amended disclosure requirements for registration statements filed after January 1, 2010, and for annual reports for fiscal years ending on or after December 15, 2009. Early adoption is not permitted. The Company is currently assessing the impact that the adoption will have on its disclosures, operating results, financial position and cash flows.

NOTE 6 – FINANCIAL INFORMATION RELATING TO INDUSTRY 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.

Royale Energy's operations are classified into two principal industry segments. Following is a summary of segmented information for the nine months ended September 30, 2009 and 2008:

	Oil and Gas
	Producing			Turnkey
	and			Drilling
	Exploration			Services			Total
		-			-			-
Nine Months Ended September 30, 2009:
Revenues from External Customers	$	2,135,421		$	2,205,253		$	4,340,674
Supervisory Fees	$	433,541		$	0		$	433,541
Interest Revenue	$	0		$	6,068		$	6,068
Interest Expense	$	39,812		$	39,812		$	79,624
Expenditures for Segment Assets	$	3,097,480		$	3,107,353		$	6,204,833
DD&A	$	1,495,399		$	78,705		$	1,574,104
Lease Impairment	$	49,038		$	49,037		$	98,075
Loss on Sale of Assets	$	(125,102	)	$	0		$	(125,102	)
Income Tax Benefit	$	(643,422	)	$	(643,421	)	$	(1,286,843	)
Total Assets	$	21,176,616					$	21,176,616
Net Loss	$	(1,594,447	)	$	(420,165	)	$	(2,014,612	)

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	Oil and Gas
	Producing		Turnkey
	and		Drilling
	Exploration		Services			Total
		-		-			-
Nine Months Ended September 30, 2008:
Revenues from External Customers	$	5,835,278	$	6,269,545		$	12,104,823
Supervisory Fees	$	473,489				$	473,489
Interest Revenue			$	80,834		$	80,834
Interest Expense	$	97,704	$	97,704		$	195,408
Expenditures for Segment Assets	$	4,285,859	$	5,527,461		$	9,813,320
DD&A	$	2,471,541	$	130,081		$	2,601,622
Lease Impairment	$	410,483	$	410,483		$	820,966
Gain on Sale of Assets	$	2,602,577	$	0		$	2,602,577
Income Tax Expense	$	312,073	$	312,073		$	624,146
Total Assets	$	34,778,589				$	34,778,589
Net Income (Loss)	$	1,333,684	$	(127,423	)	$	1,206,261

NOTE 7 – FAIR VALUE MEASUREMENTS

According to Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification,  assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in periods subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.

During the third quarter of 2009, the Company liquidated its holdings of Available for Sale Securities.  At December 31, 2008, Royale Energy reported the fair value of $218,938 in available for sale securities.  The fair value was determined using the number of shares owned as of the last day of the reporting period multiplied by the market price of those securities on that day.   For the purposes of identifying related costs to its available for sale securities, the Company uses a specific identification method. On December 31, 2008, the total cost for those securities amounted to $450,813. For the nine months ended September 30, 2009, an unrealized holding gain of $140,053 was recorded in the other comprehensive income (loss) section of the Statement of Operations. The unrealized holding gain included the income tax effect of $91,823.

The table below summarizes Royale’s fair value measurements and the level within the fair value hierarchy in which the fair value measurements fall:

Description	September 30, 2009		Level 1		December 31, 2008		Level 1
Available for Sale Securities	$	0	$	0	$	218,938	$	218,938

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Beginning with production from June 2009 and until December 2009, we have entered into a fixed natural gas agreement with BP p.l.c.  We agreed to sell BP 2,000 Mcf a day from our California wells at $4.84 an Mcf.  The committed amount represents about two thirds of our daily California production, and we anticipate no production depletion or interruption that would cause us not to fulfill our obligations.

NOTE 9 – LONG TERM DEBT

On February 13, 2009 Royale Energy entered into an agreement with Texas Capital Bank, N.A. for a new revolving line of credit and letter of credit facility, secured by oil and gas properties, of up to $14,250,000 and separate letter of credit facility of up to $750,000, for the purposes of refinancing Royale’s existing debt and to fund development, exploration and acquisition activities as well as other general corporate purposes.  Interest is to be the greater of Texas Capital Bank’s base rate and the Federal Funds rate but in no event less than 3% per year.  The borrowing base at the closing date was $4,900,000 with borrowing base reductions of $175,000 commencing on March 1, 2009.  All unpaid principal and interest is payable at maturity on February 13, 2013.

In June 2009, Texas Capital Bank performed a re-determination on our credit and letter of credit facility.  As the result of the non-compliance with one of our debt covenants during the first quarter of 2009, the interest rate changed to the greater of Texas Capital Bank’s base rate and the Federal Funds rate plus 1%, but in no event less than 5% per year.  The borrowing base at the close of the redetermination was $3,000,000 with borrowing base reductions of $140,000 commencing on August 1, 2009.  In addition, a joint and several guarantee of the $750,000 Letter of Credit Facility by and between Stephen Hosmer and Harry Hosmer was added to the loan agreement.  The guarantors are required to collectively maintain unencumbered liquidity in the form of cash or marketable securities equal to 150% of the line amount.  Annual personal financial statements from each of the guarantors will be due to Texas Capital Bank within 120 days after the end of each calendar year.

For the quarter ended September 30, 2009, Royale Energy was non-compliant with our current ratio covenant with Texas Capital Bank’s credit and letter of credit facility.  As the result, the Company has obtained a waiver from Texas Capital Bank.  Royale Energy is not in default on any principal, interest, or sinking fund payment.

NOTE 10 – SUBSEQUENT EVENTS

In October 2009, the Company announced an agreement for the private placement of approximately $2 Million of common stock and warrants.  Funds from the offering were used for general working capital, which allowed the Company to accelerate drilling and development on several key projects in the Sacramento Basin.   The terms of the agreement included the sale of 623,053 shares of common stock at $3.21 per share and a warrant which is immediately exercisable for a period of 5 years to purchase 342,679 shares in the aggregate at $3.53 per share.   The warrant contains customary adjustments for corporate events such as reorganizations, splits, dividends, and the exercise prices of all such warrants are subject to weighted-average anti-dilution adjustments in the event of additional issuances of common stock below the exercise price then in effect.  The investor has also agreed to waive the upward share adjustment portion of the anti-dilution provision that exists in the warrant issued in connection with its 2008 purchase, solely in connection with this transaction.   The Company has also provided customary registration rights in connection with the transaction.

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Item 2.                       Management's Discussion And Analysis Of Financial Condition And Results Of Operations

Forward Looking Statements

In addition to historical information contained herein, this discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, subject to various risks and uncertainties that could cause our actual results to differ materially from those in the "forward-looking" statements. While we believe our forward looking statements are based upon reasonable assumptions, there are factors that are difficult to predict and that are influenced by economic and other conditions beyond our control. Investors are directed to consider such risks and other uncertainties discussed in documents filed by the company with the Securities and Exchange Commission.

Results of Operations

For the nine months ended September 30, 2009, we had a net loss of $2,014,612 compared to a net income of $1,206,261 during the first nine months of 2008, a $3,220,873 difference.  Total revenues for the first nine months of 2009 were $4,780,283, a decrease of $7,878,863 or 62.2% from the total revenues of $12,659,146 during the period in 2008.  This decrease in revenues was the result of decreases in oil and natural gas commodity prices affecting our oil and natural gas production revenues.   The decline in revenues was also the result of lower turnkey drilling revenues due to lower direct working interest sales for the period in 2009.  For the quarter ended September 30, 2009 our net loss was $828,825 compared to a net profit of $1,373,491, again as a result of lower oil and natural gas prices and lower turnkey drilling revenues.

In the first nine months of 2009, revenues from oil and gas production decreased $3,699,857 or 63.4% to $2,135,421 from 2008 revenues of $5,835,278, due to lower prices received for our oil and natural gas production.  The net sales volume of natural gas for the nine months ended September 30, 2009, was approximately 460,675 Mcf with an average price of $3.96 per Mcf, versus 535,777 Mcf with an average price of $9.13 per Mcf for the first nine months of 2008.  This represents a decrease in net sales volume of 75,102 Mcf or 14%, mainly due to the natural declines in production from existing wells.  For the quarter ended September 30, 2009, we produced 137,885 Mcf with an average price of $3.94 per Mcf versus 158,323 Mcf produced during the same quarter in 2008 with an average price of $8.31 per Mcf, which represents a 20,438 Mcf or 12.9% decrease in net sales volume.  The net sales volume for oil and condensate (natural gas liquids) was 6,403 barrels with an average price of $48.55 per barrel for the first nine months of 2009, compared to 9,029 barrels at an average price of $104.77 per barrel for the first nine months in 2008.  This represents a decrease in net sales volume of 2,626 barrels, or 29.1%.  For the third quarter of 2009, oil and condensate produced decreased 578 barrels, or 22%, from 2,623 barrels produced in 2008 to 2,045 barrels produced in the same period in 2009.  This decrease was mainly due to the natural declines in production from existing wells.

Oil and natural gas lease operating expenses decreased by $723,459 or 38.9%, to $1,138,425 for the nine months ended September 30, 2009, from $1,861,884 for the same period in 2008.    For the third quarter 2009, lease operating expenses decreased $231,657 or 39.3% over the same period in 2008.  These decreases were mainly due to lower workover and plugging costs during the period in 2009.

For the nine months ended September 30, 2009, turnkey drilling revenues decreased $4,064,292 or 64.8% to $2,205,253 from $6,269,545 during the same period in 2008.  We also had a $2,032,993 or 69.5% decrease in turnkey drilling and development costs to $893,386 in 2009 from $2,926,379 in 2008. In the third quarter of 2009, turnkey drilling revenues decreased $2,621,030 or 86.9% from $3,016,909 during the period in 2008 to $395,879 in 2009.  Also, during the second quarter in 2009 we had an adjustment to turnkey drilling costs of $334,150 on previously drilled wells due to lower than anticipated drilling costs.  Turnkey drilling revenues decreased due to lower direct working interest sales for the period in 2009 due to the current economic downturn.  Turnkey drilling costs decreased due to lower than anticipated costs on wells drilled during 2008 and 2009.  In the fourth quarter, we have completed the drilling of one well and have begun drilling another well in California.  We expect to drill approximately three to six additional California wells before the end of the year.

We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to the expense.  Impairment losses of $98,075 and $820,966 were recorded in the first nine months of 2009 and 2008, respectively.  These impairments were mainly due to various lease and land costs that were no longer viable.  Also during the periods in 2009 and 2008, we recorded a loss of $125,102 and a gain of $2,602,577, respectively, on the sales of non-oil and gas assets.  The majority of the 2009 loss stems from the liquidation of our available for sale securities holdings.  The gain from the same period in 2008 relates to the sale of our Rio Bravo field located in Kern County, California

The aggregate of supervisory fees and other income was $439,609 for the nine months ended September 30, 2009, a decrease of $114,714 (20.7%) from $554,323 during the same period in 2008.  Third quarter supervisory fees and other income decreased $54,387, or 27.7%, to $141,923 from $196,310 in 2008.    These decreases were due to lower interest income received on our available cash and to lower cost recovery fees on facilities due to lower natural gas production.

Depreciation, depletion and amortization expense decreased to $1,574,104 from $2,601,622, a decrease of $1,027,518 (39.5%) for the nine months ended September 30, 2009, as compared to the same period in 2008. This decrease in depletion expense was mainly due to the decrease in our oil and gas assets from our 2008 impairments.

General and administrative expenses decreased by $378,084 or 12.4%, from $3,041,235 for the nine months ended September 30, 2008, to $2,663,151 for the period in 2009.  Third quarter 2009 general and administrative expense decreased $111,514, or 11% from $1,016,682 in 2008 compared to $905,168 in 2009.   These decreases were primarily due to our cost control measures.

Marketing expense for the nine months ended September 30, 2009, decreased $266,439, or 29.1%, to $650,186, compared to $916,625 for the same period in 2008.  For the third quarter, marketing expenses decreased $108,439, or 28.7%, to $269,166 from $377,605 for the same period in 2008.   Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs.

Legal and accounting expense decreased to $657,281 for the first nine months of 2009, compared to $1,067,197 for same period in 2008, a $409,916 or 38.4% decrease.  This decrease was a result of lower legal fees due to litigation defending property rights in 2008, which culminated in a trial and a successful outcome for the company in April of 2008. For the third quarter, legal and accounting expenses increased by $67,449, or 109.8% from the previous period last year.  The increase in legal and accounting expense was a result of higher tax preparation fees.

Interest expense decreased to $79,624 for the three quarters ended September 30, 2009, from $195,408 for the same period in 2008, a $115,784, or 59.3% decrease. This was due to a decrease in the usage of our bank line of credit.  For the same periods in 2009 and 2008, we also had income tax benefits of $1,286,843, an increase of $1,910,989 or 306.2% from an expense of $624,146 in 2008 as the result of operations moving from an income to loss position.

Bad debt expense for the first nine months ended September 30, 2009 was $202,404 and $172,839 for the third quarter of 2009.  These expenses arose from identified uncollectable receivables relating to our oil and natural gas properties either plugged and abandoned or scheduled for plugging and abandonment.  Approximately 78% of these expenses stem from one of our California wells.  There were no bad debt expenses identified and recognized for the first nine months ended September 30, 2008.

Capital Resources and Liquidity

At September 30, 2009, Royale Energy had current assets totaling $6,010,981 and current liabilities totaling $10,889,090, for a $4,878,109 working capital deficit.  We had cash and cash equivalents at September 30, 2009 of $1,767,393 compared to $1,330,739 at December 31, 2008.

During 2008, Royale Energy maintained a revolving credit agreement with Guaranty Bank, FSB, secured by all of our oil and gas properties, which at December 31, 2008, had outstanding indebtedness of $1,975,974.  In February 2009, the Guaranty Bank loan was repaid and we entered into a new agreement with Texas Capital Bank, N.A. for a new revolving line of credit and letter of credit facility, also secured by our oil and gas properties, of up to $14,250,000 and separate letter of credit facility of up to $750,000, for the purposes of refinancing Royale’s existing debt and to fund development, exploration and acquisition activities as well as other general corporate purposes.  Under the terms of the agreement, Royale Energy may borrow, repay, and re-borrow funds as necessary.  At September 30, 2009, we had a current borrowing base and outstanding indebtedness on this loan of $2,720,000.

At September 30, 2009, we were not in compliance with the current ratio financial covenant of our loan agreement with the bank, but we have obtained a waiver from the terms of that loan covenant.  We are not in default on any principal, interest or sinking fund payment.

At September 30, 2009, our accounts receivable totaled $1,810,330, compared to $3,750,557 at December 31, 2008, a $1,940,227 (51.7%) decrease, primarily due to lower receivables from an industry member participating in wells we drilled at the end of 2008.  At September 30, 2009, our accounts payable and accrued expenses totaled $5,636,452, a decrease of $4,683,735 or 45.4% from the accounts payable at December 31, 2008, of $10,320,187.  This decrease was due to applying prepaid drilling remittances to trade accounts payable as aided by payments on other trade account payables.

On April 1, 2008, Nasdaq notified Royale that it was not in compliance with the requirement that companies listed on the Nasdaq Global Market are required by Marketplace Rule 4450(a)(3) to maintain a minimum of $10 million in stockholders’ equity for continued listing.  Effective July 31, 2009, Royale transferred its securities listing from the Nasdaq Global Market to the Nasdaq Capital Market.  Royale complies with the Capital Market listing requirements.  Royale does not believe that the transfer of its listing will have a material effect on the market for, or marketability of, its common stock.

Operating Activities.  For the three quarters ended September 30, 2009, cash used by operating activities totaled $1,768,059 compared to operating activities providing $1,001,852 for the same period in 2008, a $2,769,911 or 276.5% decrease.  This decrease in cash provided was due primarily to a decrease in our accounts payable and direct working interest sales during the period in 2009.

Investing Activities. For the first nine months ending September 30, 2009 and 2008, net cash provided by investing activities amounted to $117,223 and $582,899, respectively, a decrease of $465,676 or 80%.  The difference stems from the sale of our Rio Bravo field during the third quarter of 2008.  Capital acquisitions of oil and gas properties used $260,792 for the first nine months of 2009, compared to $4,885,213 for the same period in 2008, a $4,624,421 or a 94.7% decrease in cash used.  This decreased capital acquisition was due to lower drilling expenditures during the period in 2009.  During the third quarter of 2009, the Company liquidated all its Equity Securities.  For the first nine months of 2009, its equity sales and purchases generated $330,545.  However, for the first nine months of 2008, the Company’s equity sales and purchases used $230,799.

Financing Activities.  For the nine months ended September 30, 2009, cash provided by financing activities was $2,087,490 compared to $1,229,999 for the same period in 2008, a $857,491 difference.  In the third quarter of 2009 and second quarter of 2008 we received net proceeds of $1,288,464 and $3,724,999 from the sale of common stock and warrants to one investor in a private placement.  The proceeds were used to reduce long term debt and for working capital.  Moreover, in the first quarter of 2009, we paid off our line of credit with Guaranty Bank and established a new one with Texas Capital Bank.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

Our major market risk exposure relates to pricing of oil and gas production.  The prices we receive for oil and gas are closely related to worldwide market prices for crude oil and local spot

prices paid for natural gas production.  Prices have been volatile for the last few years, and we expect that volatility to continue.  Monthly average natural gas prices ranged from a low of $3.22 per Mcf to a high of $5.36 per Mcf for the first nine months of 2009.  Beginning with production from June 2009 and until December 2009, we have entered into a fixed natural gas agreement with BP p.l.c.  We agreed to sell BP 2,000 Mcf a day from our California wells at $4.84 an Mcf.  The committed amount represents about two thirds of our daily California production, and we anticipate no production depletion or interruption that would cause us not to fulfill our obligations.

Item 4.   Controls and Procedures

As of September 30, 2009, an evaluation was performed under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures.  These controls and procedures are based on the definition of disclosure controls and procedures in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934.  Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2009.

No changes occurred in our internal control over financial reporting during the nine months ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II    OTHER INFORMATION

Item 1 Legal Proceedings

National Fuel Corporation (“NFC”) v. Royale Energy, Inc., No. 080800735, Uintah County, Utah. This lawsuit arose from a dispute over jointly operated property in which Royale is the 75% owner and operator and NFC is a non-operator with a 25% ownership.  NFC disagrees with the Company’s operations and seeks to remove the Company as operator.  As of the date of this filing, both parties have signed a settlement agreement.  However, until the count enters an order dismissing the case, the case remains an active matter.   

Item 1A Risk Factors

Please review the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 5 Other Information

On October 21, 2009, after the close of the third fiscal quarter, the Company reached an agreement for the private placement of approximately $2 Million of common stock and warrants.  The transaction is described in Note 10 to the Company’s unaudited financial statements for the period ending September 30, 2009, which are included in this Form 10-Q, and in the Form 8-K filed with the SEC by the Company on October 21, 2009.

Item 6 Exhibits

3.1	Amended and Restated Articles of Incorporation, with amendments through August 14, 2009, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed with the SEC on August 14, 2009
4.1	Form of Series A Warrant, incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed with the SEC on August 6, 2009
4.2	Form of Series A-1 Warrant, incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed with the SEC on August 6, 2009
4.3	Form of Series B Warrant, incorporated by reference to Exhibit 4.3 of the Company’s Form 8-K filed with the SEC on August 6, 2009
4.4	Form of Series C Warrant, incorporated by reference to Exhibit 4.4 of the Company’s Form 8-K filed with the SEC on August 6, 2009
4.5	Form of Warrant dated October 19, 2009, incorporate by reference to Exhibit 4.1 of the Company’s Form 8-K filed with the SEC on October 21, 2009.
4.6	Placement Agent warrant dated August 5, 2009, incorporated by reference to Exhibit 4.5 of the Company’s Form S-3/A filed with the SEC on August 21, 2009
4.7*	Placement Agent warrant dated October 20, 2009
10.1	Securities Purchase Agreement, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on August 6, 2009
10.2	Registration Rights Agreement, incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed with the SEC on August 6, 2009
10.3	Securities Purchase Agreement, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on October 21, 2009
10.4	Registration Rights Agreement, incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed with the SEC on October 21, 2009
31.1*	Rule 13a-14(a)/15d-14(a) Certification
31.2*	Rule 13a-14(a)/15d-14(a) Certification
32.1*	18 U.S.C. § 1350 Certification
32.2*	18 U.S.C. § 1350 Certification

* Filed herewith

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:    November 6, 2009	/s/ Donald H. Hosmer
	Donald H. Hosmer, Co-President and Co-Chief Executive Officer
Date:    November 6, 2009	/s/ Stephen M. Hosmer
	Stephen M. Hosmer, Co-President and Co-Chief Executive Officer and Chief Financial Officer

--

EX-31.1

Exhibit 31.1

I, Donald H. Hosmer, certify that:

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

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

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

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 6, 2009	/s/  Donald H. Hosmer____________________
	Donald H. Hosmer, Co-President and Co-Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Stephen M. Hosmer, certify that:

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

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

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

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions)

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 6, 2009	/s/ Stephen M. Hosmer
	Stephen M. Hosmer, Co-President, Co-Chief Executive Officer and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. § 1350

The undersigned, Donald H. Hosmer, Co-President and Co-Chief Executive Officer of Royale Energy, Inc., a California corporation (the "Company"), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, hereby certifies that:

(1) the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2009 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 6, 2009	By:	/s/ Donald H. Hosmer
		Donald H. Hosmer, Co-President and Co Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C. § 1350

The undersigned, Stephen M. Hosmer, Co-President, Co-Chief Executive Officer and Chief Financial Officer of Royale Energy, Inc., a California corporation (the "Company"), pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, hereby certifies that:

(1) the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2009 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 6, 2009	By:	/s/ Stephen M. Hosmer
		Stephen M. Hosmer, Co-President, Co-Chief Executive Officer and Chief Financial Officer

EX-4.7

Exhibit 4.7

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.

Warrant No. 0005

Number of Shares of Common Stock: 33,994

Date of Issuance: October 20, 2009

ROYALE ENERGY, INC.

Warrant To Purchase Common Stock

THIS CERTIFIES that, for value received, J.P.TURNER PARTNERS, LP., is entitled to purchase from ROYALE ENERGY, INC., a California corporation (the “Corporation”), subject to the terms and conditions hereof, 33,994 shares (the “Warrant Shares”) of common stock, no par value (the “Common Stock”).  This warrant, together with all warrants hereafter issued in exchange or substitution for this warrant, is referred to as the “Warrant” and the holder of this Warrant (together with its successors and assigns) is referred to as the “Holder.”  The number of Warrant Shares is subject to adjustment as hereinafter provided.  Notwithstanding anything to the contrary contained herein, this Warrant shall expire at 5:00pm CDT on October 20, 2012 (the “Termination Date”).

1.  Exercise of Warrants.   (a)  The Holder may, at any time prior to the Termination Date, exercise this Warrant in whole or in part at an exercise price per share equal to $3.53 per share, subject to adjustment as provided herein (the “Warrant Price”), by the surrender of this Warrant (properly endorsed) at the principal office of the Corporation, or at such other agency or office of the Corporation in the United States of America as the Corporation may designate by notice in writing to the Holder at the address of such Holder appearing on the books of the Corporation, and by payment to the Corporation of the Warrant Price in lawful money of the United States by check or wire transfer for each share of Common Stock being purchased.  Upon any partial exercise of this Warrant, there shall be executed and issued to the Holder a new Warrant in respect of the shares of Common Stock as to which this Warrant shall not have been exercised.  In the event of the exercise of the rights represented by this Warrant, a certificate or certificates for the Warrant Shares so purchased, as applicable, registered in the name of the Holder, shall be delivered to the Holder hereof as soon as practicable after the rights represented by this Warrant shall have been so exercised.

(b)           If at any time more than one hundred eighty (180) days after the date of issuance set forth above, all of the Warrant Shares are not registered for sale on an effective Registration Statement under the Securities Act of 1933, as amended (the “Securities Act”), (or the prospectus contained therein is not available for use, then this Warrant may also be exercised at such time by means of a “cashless exercise” in which, at any time prior to the Termination Date, the Holder of this Warrant may, at its option, exchange this Warrant, in whole or in part (a “Warrant Exchange”), into Warrant Shares by surrendering this Warrant at the principal office of the Corporation, accompanied by a notice stating such Holder’s intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the “Notice of Exchange”). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, within five (5) days of the date the Notice of Exchange is received by the Corporation (the “Exchange Date”). Certificates for the Warrant Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant of like tenor evidencing the balance of the Warrant Shares remaining subject to this Warrant, shall be issued as of the Exchange Date and delivered to the Holder within three (3) business days following the Exchange Date. In connection with any Warrant Exchange, this Warrant shall represent the receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula:

Net Number = (A x B) - (A x C)

B

For purposes of the foregoing formula:

A= the total number of shares with respect to which this Warrant is then being exercised.

B= the closing sale price of the Common Stock on the NASDAQ Global Market or other principal securities exchange or trading market where the Common Stock is listed or traded, on the business day immediately preceding the date of the exercise.

C= the Warrant Price then in effect for the applicable Warrant Shares at the time of such exercise.

2. Reservation of Warrant Shares.  The Corporation agrees that, prior to the expiration of this Warrant, it will at all times have authorized and in reserve, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the number of Warrant Shares as from time to time shall be issuable by the Corporation upon the exercise of this Warrant.

3.  No Stockholder Rights.  This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Corporation.

4.  Transferability of Warrant.  Prior to the Termination Date and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed for transfer.

5.  Certain Adjustments.  With respect to any rights that Holder has to exercise this Warrant and convert into shares of Common Stock, Holder shall be entitled to the following adjustments:

(a)           Merger or Consolidation.  If at any time there shall be a merger, consolidation  or sale of substantially all of the assets of the Corporation with or into another corporation when the Corporation is not the surviving corporation, then, as part of such merger or consolidation, lawful provision shall be made so that the holder hereof shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the aggregate Warrant Price then in effect, the number of shares of stock or other securities or property (including cash) of the successor corporation resulting from such merger or consolidation, to which the Holder hereof as the holder of the stock deliverable upon exercise of this Warrant would have been entitled in such merger or consolidation if this Warrant had been exercised immediately before such merger or consolidation.  In any such case, appropriate adjustment shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the holder hereof as the holder of this Warrant after the merger or consolidation.

(b)           Reclassification, Recapitalization, etc.  If the Corporation at any time shall, by subdivision, combination or reclassification of securities, recapitalization, automatic conversion, or other similar event affecting the number or character of outstanding shares of Common Stock, or otherwise, change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change.

(c)           Split or Combination of Common Stock and Stock Dividend.  In case the

Corporation shall at any time subdivide, redivide, recapitalize, split (forward or reverse) or change its outstanding shares of Common Stock into a greater number of shares or declare a dividend upon its Common Stock payable solely in shares of Common Stock, the Warrant Price shall be proportionately reduced and the number of Warrant Shares proportionately increased.  Conversely, in case the outstanding shares of Common Stock of the Corporation shall be combined into a smaller number of shares, the Warrant Price shall be proportionately increased and the number of Warrant Shares proportionately reduced.  Notwithstanding the foregoing, in no event will the Warrant Price be reduced below the par value of the Common Stock.

6.  Legend and Stop Transfer Orders. Unless the Warrant Shares have been registered under the Securities Act, upon exercise of any part of the Warrant, the Corporation shall instruct its transfer agent to enter stop transfer orders with respect to such Warrant Shares, and all certificates or instruments representing the Warrant Shares shall bear on the face thereof substantially the following legend:

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.

7.Piggyback Registrations.  (a)  Whenever the Company proposes to register any of its securities under the Securities Act and the registration form to be used may be used for the registration of the Warrant Shares and any shares issued or issuable upon any stock split, dividend or other distribution, recapitalization, merger, sale of assets or similar event (said shares being “Registrable Securities” and said registration being a “Piggyback Registration”), the Company will give prompt written notice (in any event within three (3) Business Days after its receipt of notice of any exercise of demand registration rights other than under this Warrant) to all holders of Registrable Securities with respect of the proposed offering at least 15 days before the initial filing with the Securities and Exchange Commission of such registration statement, and offer to include in such filing such Registrable Securities as any such holder may request.  Each such holder of Registrable Securities desiring to have Registrable Securities registered under this Section 7 shall advise the Company in writing within 15 days after the date of receipt of such notice from the Company, setting forth the amount of such Registrable Securities for which registration is requested.  The Company shall thereupon include in such filing the number of Registrable Securities for which registration is so requested, and shall use its best efforts to effect registration under the Securities Act of such Registrable Securities.

(b)  All expenses incident to the Company’s performance of or compliance with this Section 7, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and all independent certified public accountants, and other persons retained by the Company, will be borne by the Company.

(c)  If a Piggyback Registration is an underwritten primary registration on behalf of holders of the Company’s securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company will include in such registration:  (i) first, the securities the Company proposes to sell, and (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the holders of the securities requested to be included in such registration.

(d)  If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company’s securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number that can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, the Company will include in such registration, the Registrable Securities requested to be included in such registration, pro rata among the holders of other securities requested to be included in such registration.

8.  Miscellaneous.  This Warrant shall be governed by and construed in accordance with the laws of the State of California.  All the covenants and provisions of this Warrant by or for the benefit of the Corporation shall bind and inure to the benefit of its successors and assigns hereunder.  Nothing in this Warrant shall be construed to give to any person or corporation other than the Corporation and the Holder of this Warrant any legal or equitable right, remedy or claim under this Warrant.  This Warrant shall be for the sole and exclusive benefit of the Corporation and the holder of this Warrant.  The section headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation hereof.  Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Corporation, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Corporation shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination.

{Signature page follows.}

Warrant – 667680.2/SPA/16552/0101/110609 Page

IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be executed as of the Issuance Date set out above.

ROYALE ENERGY, INC.

By:           _______________________

Name:           Stephen M. Hosmer

Title:           Co-President, Co-Chief Executive Officer

and Chief Financial Officer

Warrant – 667680.2/SPA/16552/0101/110609 Page

WARRANT EXERCISE FORM

To Be Executed by the Holder in Order to Exercise Warrant

To:           Royale Energy, Inc.

7676 Hazard Center Drive, Suite 1500

San Diego, California 92108

Attention:  Stephen M. Hosmer

Dated:____________

The undersigned, pursuant to the provisions set forth in the attached Warrant No. ______, hereby irrevocably elects to purchase (check applicable box):

¨ _________ shares of the Common Stock of Royale Energy, Inc. covered by such Warrant; or

¨ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in subsection 1(b) (if applicable).

The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant.  Such payment takes the form of (check applicable box or boxes):

¨      $______ in lawful money of the United States; and/or

¨ if the provisions of subsection 1(b) of this Warrant are in effect, the cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using closing Sale Price of $_____ per share for purposes of this calculation); and/or

¨   if the provisions of subsection 1(b) of this Warrant are in effect, the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b).

The undersigned hereby requests that certificates for the Warrant Shares purchased hereby be issued in the name of:

(please print or type name and address)

(please insert social security or other identifying number)

and be delivered as follows:

(please print or type name and address)

(please insert social security or other identifying number)

and if such number of shares of Common Stock shall not be all the shares evidenced by this Warrant Certificate, that a new Warrant for the balance of such shares be registered in the name of, and delivered to, Holder.

___________________________________

Signature of Holder

SIGNATURE GUARANTEE:

___________________________________

Warrant – 667680.2/SPA/16552/0101/110609 Page

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form.  Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

________________________________________________________________ whose address is

______________________________________________________________________________

______________________________________________________________________________

Dated:  _____________________, _______

Holder's Signature:                                __________________________________________

Holder's Address:                                __________________________________________

__________________________________________

Signature Guaranteed:  ___________________________________________

NOTE:  The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust Corporation.  Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

Warrant – 667680.2/SPA/16552/0101/110609 Page