<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   Form 10-Q

             [X]  Quarterly Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934
               For the quarterly period ended September 30, 1997
                                              ------------------

                                      or

            [ ]  Transition Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934
               For the transition period from _______ to _______

                        Commission File Number: 1-11608

                     WILLIAMS COAL SEAM GAS ROYALTY TRUST
            (Exact name of registrant as specified in its charter)


                    Delaware                    75-6437433
           (State or other jurisdiction      (I.R.S. Employer
                of incorporation or         Identification No.)
                   organization)

                                Trust Division
                          NationsBank of Texas, N.A.
                               NationsBank Plaza
                                901 Main Street
                                  12th Floor
                             Dallas, Texas  75202
                   (Address of principal executive offices)
                                  (Zip code)

                                (214) 508-2364
             (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 Securities Exchange Act of
1934 during the preceding 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 
                                               -----    -----     

     Number of units of beneficial interest outstanding at October 31, 1997:
9,700,000.
<PAGE>
 
                        PART I - FINANCIAL INFORMATION
                        ------------------------------

Item 1.   Financial Statements.

     The financial statements included herein have been prepared by NationsBank
of Texas, N.A., as Trustee (the "Trustee") of Williams Coal Seam Gas Royalty
Trust (the "Trust"), pursuant to the rules and regulations of the Securities and
Exchange Commission.  Certain information and footnote disclosures normally
included in annual financial statements have been condensed or omitted pursuant
to such rules and regulations, although the Trustee believes that the
disclosures are adequate to make the information presented not misleading.  It
is suggested that these condensed financial statements be read in conjunction
with the financial statements and notes thereto incorporated by reference in the
Trust's Annual Report on Form 10-K for the year ended December 31, 1996.  The
December 31, 1996 balance sheet is derived from the audited balance sheet of
that date.  In the opinion of the Trustee, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the assets,
liabilities and trust corpus of the Trust as of September 30, 1997, the
distributable income for the three-month and nine-month periods ended September
30, 1997 and 1996, and the changes in trust corpus for the nine-month periods
ended September 30, 1997 and 1996, have been included.  The distributable income
for such interim periods is not necessarily indicative of the distributable
income for the full year.

     The financial statements as of September 30, 1997 and for the three-month
and nine-month periods ended September 30, 1997 and 1996 included herein have
been reviewed by Ernst & Young LLP, independent public accountants, as stated in
their report appearing herein.

                                       2
<PAGE>
 
                    Independent Accountants' Review Report

NationsBank of Texas, N.A.,
     as Trustee of Williams Coal Seam Gas Royalty Trust

We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of the Williams Coal Seam Gas Royalty Trust as of September 30,
1997, and the related condensed statements of distributable income for the
three-month and nine-month periods ended September 30, 1997 and 1996 and the
statements of changes in trust corpus for the nine month periods ended September
30, 1997 and 1996.  These financial statements are the responsibility of the
Trustee.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants.  A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters.  It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.

As described in Note 2 to the financial statements, these financial statements
have been prepared on a modified cash basis of accounting, which is a
comprehensive basis of accounting other than generally accepted accounting
principles.

Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements referred to above for
them to be in conformity with the basis of accounting described in Note 2.

We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Williams
Coal Seam Gas Royalty Trust as of December 31, 1996, and the related statements
of distributable income and changes in trust corpus for the year then ended (not
presented herein) and in our report dated March 21, 1997, we expressed an
unqualified opinion on those financial statements.  In our opinion, the
information set forth in the accompanying condensed statement of assets,
liabilities and trust corpus as of December 31, 1996, is fairly stated, in all
material respects, in relation to the statement of assets, liabilities and trust
corpus from which it has been derived.


                                         Ernst & Young LLP



Tulsa, Oklahoma
November 7, 1997

                                       3
<PAGE>
 
WILLIAMS COAL SEAM GAS ROYALTY TRUST

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS 
(UNAUDITED)

--------------------------------------------------------------------------------

 
<TABLE>
<CAPTION>
                                 September 30,  December 31,
            ASSETS                   1997           1996
-------------------------------  -------------  ------------
<S>                              <C>            <C>
 
Current Assets -
    cash and cash equivalents      $    63,316   $   165,290
Royalty interests in oil
    and gas properties
    (less accumulated
    amortization of
    $75,113,367 at
    September 30, 1997
    and $68,569,217 at
    December 30, 1996)              63,453,296    69,997,446
                                   -----------   -----------
 
TOTAL ASSETS                       $63,516,612   $70,162,736
                                   ===========   ===========
 
 
LIABILITIES AND TRUST CORPUS
-------------------------------
 
Current Liabilities -
    trust expenses payable         $   130,772   $   141,163
 
Trust corpus -
    9,700,000 units of
    beneficial interest
    authorized and
    outstanding                     63,385,840    70,021,573
                                   -----------   -----------
 
TOTAL LIABILITIES
    AND TRUST CORPUS               $63,516,612   $70,162,736
                                   ===========   ===========
 
</TABLE>

The accompanying notes are an integral part of these financial statements.  See
accountants' review report.

                                       4
<PAGE>
 
WILLIAMS COAL SEAM GAS ROYALTY TRUST

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
 
 
                                 THREE MONTHS         THREE MONTHS
                                     ENDED                ENDED
                              September 30, 1997   September 30, 1996
                              -------------------  -------------------
<S>                           <C>                  <C>
 
Royalty income                        $4,707,784           $5,654,462
Interest income                           17,520               18,829
                                      ----------           ----------
                                       4,725,304            5,673,291
 
General and administrative
    expenses                             (73,372)            (113,519)
                                      ----------           ----------
Distributable income                  $4,651,932           $5,559,772
                                      ==========           ==========
 
Distributable income
    per unit
    (9,700,000 units)                 $      .48           $      .57
                                      ==========           ==========
 
</TABLE>
The accompanying notes are an integral part of these financial statements.  See
accountants' review report.

--------------------------------------------------------------------------------

                                       5
<PAGE>
 
WILLIAMS COAL SEAM GAS ROYALTY TRUST

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
 
 
                                  NINE MONTHS          NINE MONTHS
                                     ENDED                ENDED
                              September 30, 1997   September 30, 1996
                              -------------------  -------------------
<S>                           <C>                  <C>
 
Royalty income                       $14,886,953          $17,001,496
Interest income                           53,405               59,678
                                     -----------          -----------
                                      14,940,358           17,061,174
 
General and administrative
    expenses                            (491,583)            (492,606)
                                     -----------          -----------
Distributable income                 $14,448,775          $16,568,568
                                     ===========          ===========
 
Distributable income
    per unit
    (9,700,000 units)                $      1.49          $      1.71
                                     ===========          ===========
 
</TABLE>
The accompanying notes are an integral part of these financial statements.  See
accountants' review report.


--------------------------------------------------------------------------------

                                       6
<PAGE>
 
WILLIAMS COAL SEAM GAS ROYALTY TRUST

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 
 
                                   NINE MONTHS          NINE MONTHS
                                      ENDED                ENDED
                                September 30, 1997   September 30, 1996
                                -------------------  -------------------
<S>                             <C>                  <C>
 
Trust corpus,                         $ 70,021,573         $ 82,695,754
    beginning of period
Amortization of royalty
    interests                           (6,544,150)         (10,101,803)
Distributable income                    14,448,775           16,568,568
Distributions to unitholders           (14,540,358)         (16,586,174)
                                      ------------         ------------
 
Trust corpus, end
    of period                         $ 63,385,840         $ 72,576,346
                                      ============         ============

Distributions per unit
    (9,700,000 units)                 $       1.50         $       1.71
                                      ============         ============

</TABLE>

The accompanying notes are an integral part of these financial statements.  See
accountants' review report.

--------------------------------------------------------------------------------

                                       7
<PAGE>
 
WILLIAMS COAL SEAM GAS ROYALTY TRUST

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

--------------------------------------------------------------------------------

1.  TRUST ORGANIZATION AND PROVISIONS

    Williams Coal Seam Gas Royalty Trust (the "Trust") was formed as a Delaware
business trust pursuant to the terms of the Trust Agreement of Williams Coal
Seam Gas Royalty Trust (as amended, the "Trust Agreement") entered into
effective as of December 1, 1992 by and among Williams Production Company, a
Delaware corporation ("WPC"), as trustor, The Williams Companies, Inc., a
Delaware corporation ("Williams"), and NationsBank of Texas, N.A., a national
banking association (the "Trustee"), and Chemical Bank Delaware, a Delaware
banking corporation (the "Delaware Trustee"), as trustees.  The trustees are
independent financial institutions.

    The Trust was formed to acquire and hold certain net profits interests (the
"Royalty Interests") in proved natural gas properties located in the San Juan
Basin of New Mexico and Colorado (the "Underlying Properties") owned by WPC.
The Trust was initially created effective as of December 1, 1992 with a $100
contribution by WPC.  On January 21, 1993, the Royalty Interests were conveyed
to the Trust by WPC pursuant to the Net Profits Conveyance (the "Conveyance")
dated effective as of October 1, 1992 by and among WPC, Williams, the Trustee
and the Delaware Trustee, in consideration for all the 9,700,000 authorized
units of beneficial interest in the Trust ("Units").  WPC transferred its Units
by dividend to its parent, Williams, which sold an aggregate of 5,980,000 Units
to the public through various underwriters in January and February 1993 (the
"Public Offering").  During the second quarter of 1995 Williams transferred its
Units to Williams Holdings of Delaware, Inc. (WHD), a separate holding company
for Williams' non regulated businesses.  Substantially all of the production
attributable to the Underlying Properties is from the Fruitland coal formation
and constitutes "coal seam" gas that entitles the owners of such production,
provided certain requirements are met, to tax credits for Federal income tax
purposes pursuant to Section 29 of the Internal Revenue Code of 1986, as
amended.

    On May 7, 1997, effective as of May 1, 1997, WPC transferred the Underlying
Properties to an unaffiliated third party ("Buyer") pursuant to the terms of the
Purchase and Sale Agreement dated as of May 1, 1997 (herein so called) between
WPC and Buyer (the "Transaction").  Prior to the Transaction, WPC had owned the
Underlying Properties, subject to and burdened by the Royalty Interests owned by
the Trust, since the inception of the Trust.  Neither the Trustee nor the
Delaware Trustee has any control over or responsibility relating to the
operation of the Underlying Properties.  The Transaction was previously reported
in its Form 10-Q for the quarter ended March 31, 1997, and thereafter described
in more detail in the Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 23, 1997 (the "Transaction Form 8-K").

                                       8
<PAGE>
 
    Concurrently with the Transaction, WPC and Buyer entered into a Management
Services Agreement dated May 1, 1997 (the "Management Services Agreement")
whereby WPC agreed, among other things, to continue to manage and operate the
Underlying Properties and to handle the receipt and payment of funds with
respect thereto.  Prior to the Transaction, WPC received all payments relating
to the Underlying Properties and, pursuant to the Conveyance, paid to the Trust
the portion thereof attributable to the Royalty Interests.  Following the
Transaction, under the Management Services Agreement, WPC continues to collect
all revenues on behalf of Buyer and remains obligated to pay to the Trust on
behalf of Buyer the amounts payable with respect to the Royalty Interests.

    Concurrently with the Transaction, WPC, Williams, the Trust and Buyer
entered into an Agreement dated May 7, 1997 (the "Supplemental Agreement")
pursuant to which (i) the parties acknowledged that WPC was selling the
Underlying Properties to Buyer, but retaining all of its duties and obligations
under the Trust Agreement, Conveyance and related documents (the "Trust
Documents"), subject to the terms and conditions set forth in the Purchase and
Sale Agreement and the agreements entered into pursuant to the Purchase and sale
Agreement, (ii) Williams and WPC each confirmed and agreed that, notwithstanding
the sale of the Underlying Properties to Buyer, Williams and WPC would continue
to perform their respective obligations to the Trust pursuant to the Trust
Documents, including without limitation the performance assurances of Williams
set forth in the Conveyance, and (iii) Buyer acknowledged and agreed that it was
purchasing the Underlying Properties burdened by the Royalty Interests owned by
the Trust.

    As a result of these assurances and the Trustee's belief that the
Transaction will have no adverse effect on Unitholders, the information and
descriptions set forth herein give no effect to the Transaction.  Consequently,
with regard to ownership of the Underlying Properties, references herein to
"WPC" with respect to those periods after the effective date of the Transaction
are to Buyer.  The Transaction Form 8-K should be consulted for further
information on the Transaction.

    The Trustee has the power to collect and distribute the proceeds received by
the Trust and to pay Trust liabilities and expenses.  The Delaware Trustee has
only such powers as are set forth in the Trust Agreement and is not empowered to
otherwise manage or take part in the business of the Trust.  The Royalty
Interests are passive in nature and neither the Delaware Trustee nor the Trustee
has any control over or any responsibility relating to the operation of the
Underlying Properties.

    The Trust will terminate no later than December 31, 2012, subject to earlier
termination under certain circumstances described in the Trust Agreement (the
"Termination Date"). Cancellation of the Trust will occur on or following the
Termination Date when all Trust assets have been sold and the net proceeds
thereof distributed to Unitholders.

    The only assets of the Trust, other than cash and cash equivalents being
held for the payment of expenses and liabilities and for distribution to
Unitholders, are the Royalty Interests. The Royalty Interests consist primarily
of a net profits interest (the "NPI") in the Underlying Properties.  The NPI
generally entitles the Trust to receive 81 percent of the NPI Net Proceeds,

                                       9
<PAGE>
 
as defined below, attributable to (i) gas produced and sold from WPC's net
revenue interests (working interests less lease burdens) in the properties in
which WPC has a working interest (the "WI Properties") and (ii) the revenue
stream received by WPC attributable to its 35 percent net profits interest in
5,348 gross acres in La Plata County, Colorado (the "Farmout Properties"). The
Royalty Interests also include a 20 percent interest in WPC's Infill Net
Proceeds, as defined below, from the sale of production if well spacing rules
are effectively modified and additional wells are drilled on producing drilling
blocks on the WI Properties (the "Infill Wells") during the term of the Trust.
No Infill Wells have been drilled on the WI Properties to date. "NPI Net
Proceeds" consists generally of the revenue stream received by WPC from its 35
percent net profits interest in the Farmout Properties, plus the aggregate
proceeds attributable to WPC's net revenue interest, based on the price paid at
or in the vicinity of the wellhead (the "Wellhead"), of gas produced from the WI
Properties, less WPC's share of certain taxes and costs. "Infill Net Proceeds"
consists generally of the aggregate proceeds, based on the price at the
Wellhead, of gas produced from WPC's net revenue interest in any Infill Wells
less certain taxes and costs. The complete definitions of NPI Net Proceeds and
Infill Net Proceeds are set forth in the Conveyance.

2.  BASIS OF ACCOUNTING

    The financial statements of the Trust are prepared on a modified cash basis
and are not intended to present financial position and results of operations in
conformity with generally accepted accounting principles ("GAAP").  Preparation
of the Trust's financial statements on such basis includes the following:

     Revenues are recognized in the period in which amounts are received by the
     Trust.  General and administrative expenses are recognized on an accrual
     basis.

     Amortization of the Royalty Interests is calculated on a unit-of-production
     basis and charged directly to trust corpus.

     Distributions to Unitholders are recorded when declared by the Trustee (see
     Note 4).

    The financial statements of the Trust differ from financial statements
prepared in accordance with GAAP because royalty income is not accrued in the
period of production and amortization of the Royalty Interests is not charged
against operating results.

    Williams sold an aggregate of 5,980,000 Units of the Trust's authorized
9,700,000 Units in the Public Offering at the offering price of $20 per Unit,
retaining 3,720,000 Units. Subsequently, Williams sold an additional 151,209
Units for $23.50 per Unit.  Accordingly, the condensed statements of assets,
liabilities and trust corpus reflect the sale of these Units at the respective
sale prices thereof, as well as the remaining 3,568,791 Units at Williams'
historical cost.  During the second quarter of 1995 Williams transferred its
Units to WHD, a separate holding company for Williams' non regulated businesses.
If WHD, in the future, should sell all or a portion of its retained Units, at
that time, the carrying value on the Trust's statements of assets, liabilities
and trust corpus would again be adjusted from WHD's historical cost to the
subsequent sale price with respect to the Units sold.

                                       10
<PAGE>
 
3.  FEDERAL INCOME TAXES

    The Trust is a grantor trust for Federal income tax purposes.  As a grantor
trust, the Trust will not be required to pay Federal or state income taxes.
Accordingly, no provision for income taxes has been made in these financial
statements.

    Because the Trust will be treated as a grantor trust, and because a
Unitholder will be treated as directly owning an interest in the Royalty
Interests, each Unitholder will be taxed directly on his per Unit pro rata share
of income attributable to the Royalty Interests consistent with the Unitholder's
method of accounting and without regard to the taxable year or accounting method
employed by the Trust.

    Production from coal seam gas wells drilled after December 31, 1979 and
prior to January 1, 1993, qualifies for the Federal income tax credit for
producing nonconventional fuels under Section 29 of the Internal Revenue Code.
This tax credit is calculated annually based on each year's qualified production
through the year 2002.  Such credit, based on the Unitholder's pro rata share of
qualifying production, may not reduce his regular tax liability (after the
foreign tax credit and certain other non-refundable credits) below his
alternative minimum tax.  Any part of the Section 29 credit not allowed for the
tax year solely because of this limitation is subject to certain carryover
provisions.  Each Unitholder should consult his tax advisor regarding Trust tax
compliance matters.

4.  DISTRIBUTIONS TO UNITHOLDERS

    The Trustee determines for each quarter the amount of cash available for
distribution to Unitholders.  Such amount (the "Quarterly Distribution Amount")
is an amount equal to the excess, if any, of the cash received by the Trust, on
or prior to the last day of the month following the end of each calendar quarter
from the Royalty Interests, plus, with certain exceptions, any other cash
receipts of the Trust during such quarter, over the liabilities of the Trust
paid during such quarter, subject to adjustments for changes made by the Trustee
during such quarter in any cash reserves established for the payment of
contingent or future obligations of the Trust.

    The Quarterly Distribution Amount for each quarter is payable to Unitholders
of record on the 45th day following the end of such calendar quarter unless such
day is not a business day in which case the record date is the next business day
thereafter.  The Trustee distributes the Quarterly Distribution Amount within 60
days after the end of each calendar quarter to each person who was a Unitholder
of record on the associated record date, together with interest estimated to be
earned on such amount from the date of receipt thereof by the Trustee to the
payment date.

    In addition to the regular quarterly distributions, under certain
circumstances specified in the Trust Agreement (such as upon a purchase price
adjustment, if any, or pursuant to the sale of a Royalty Interest), the Trust
would make a special distribution (a "Special Distribution Amount").  A Special
Distribution Amount would be made when amounts received by the Trust 

                                       11
<PAGE>
 
under such circumstances aggregated in excess of $9,000,000. The record date for
a Special Distribution Amount will be the 15th day following receipt of amounts
aggregating a Special Distribution Amount by the Trust (unless such day is not a
business day in which case the record date will be the next business day
thereafter) unless such day is within 10 days of the record date for a Quarterly
Distribution Amount in which case the record date will be the date as is
established for the next Quarterly Distribution Amount. Distribution to
Unitholders of a Special Distribution Amount will be made no later than 15 days
after the Special Distribution Amount record date.

5.    SUBSEQUENT EVENTS

    Subsequent to September 30, 1997, the Trust declared the following
distribution:
<TABLE>
<CAPTION>
 
         Quarterly
          Record               Payment    Distribution
           Date                 Date        per Unit
         ---------             -------    ------------
<S>                          <C>          <C>
 
        November 14          November 29    $.430231
</TABLE>

    The distribution per unit decreased from $.472711 for the third quarter of
1997 to $.430231 for the fourth quarter of 1997. The distribution decrease was
primarily due to an increase in expenses related to royalties and taxes as well
as a slight decrease in payments from the Farmout Properties. 

6.  CONTINGENCIES

    Under the terms of the gas purchase contract entered into by WPC and WFS Gas
Resources Company ("WFSGR"), an affiliate of WPC, as amended (the "Gas Purchase
Contract"), additional revenues may be paid to the Trust to meet the minimum gas
price provision of 97 percent of $1.75 per MMBtu (the "Minimum Purchase Price").
This additional revenue is subject to recoupment by the purchaser from future
revenues received from production commencing January 1, 1994 when the applicable
index price exceeds the Minimum Purchase Price as long as the Minimum Purchase
Price commitment is in effect.  The primary term of the Gas Purchase Contract
runs to December 31, 1997 at which time the WPC affiliate may elect to
discontinue paying the Minimum Purchase Price by giving notice of its election
to pay solely on an index price.

    During the third quarter of 1997, the applicable index price was above the
Minimum Purchase Price resulting in recoupments against the price credit account
established pursuant to the terms of the Gas Purchase Contract.  WPC estimates
that, as of September 30, 1997, WFSGR 

                                       12
<PAGE>
 
had aggregate price credits in the price credit account of approximately $18.8
million of which the Trust's 81 percent interest was approximately $15.2
million. The applicable index price was above the Minimum Purchase Price in
October 1997.

    The entitlement of WFSGR to recoup the price credits means that if and when
the applicable Blanco Hub Spot Price rises above $1.75 per MMBtu, future royalty
income paid to the Trust would be reduced until such time as such price credits
have been fully recouped.  Corresponding cash distributions to Unitholders would
also be reduced.

     Southern Ute Litigation.  As previously reported in the Public Offering
Prospectus, each of the Trust's prior Annual Reports on Form 10-K as filed with
the SEC, including the Trust's 1996 Annual Report on Form 10-K (the "1996 Annual
Report") under "Item 2--The Royalty Interest--Title to Properties--Southern Ute
Litigation," and most recently in Amendment No. 1 to the Trust's Quarterly
Report on Form 10-Q for the second quarter of 1997 as filed with the Securities
and Exchange Commission on September 18, 1997, WPC is a named defendant in a
lawsuit (the "Southern Ute Litigation") brought by the Southern Ute Indian Tribe
(the "Tribe") which, among other things, contests ownership rights in certain
coal seam gas producing properties, including a portion of the Farmout
Properties in which WPC owns a net profits interest. A portion of the revenues
received by WPC with regard to the Farmout Properties is paid to the Trust as a
component of the NPI. The following information is included herein to update the
Trust's previously reported disclosures regarding the Southern Ute Litigation
and should be read in conjunction with the discussion of the litigation provided
in the 1996 Annual Report. Capitalized terms used and not otherwise defined in
the following discussion are used with the meanings given to such terms in the
1996 Annual Report.

     Amoco, on behalf of itself, WPC and the other members of the Defendant
Class, is vigorously defending the lawsuit. On September 13, 1994, the District
Court issued a memorandum opinion and order in the litigation granting the
motion for summary judgment filed by the Defendant Class on the question of
ownership of the coal seam gas. The District Court ruled that the U.S. Congress
did not reserve the coal seam gas in the Coal Lands Acts of 1909 and 1910, and
denied the Tribe's claim of equitable ownership of the coal seam gas. The Tribe
appealed the order to the United States Court of Appeals for the Tenth Circuit
(the "Court of Appeals"), which issued an opinion dated July 16, 1997 reversing
the District Court and holding that coal seam gas was "an integral component of
coal" and had therefore been vested in the Tribe as owners of the coal resource.
The Court of Appeals remanded the matter to the District Court for further
proceedings consistent with its decision. Amoco, the class representative for
the Defendant Class, has indicated its intent to seek review of the Court of
Appeals' decision. In the event further review is denied, the District Court
will be in the position to adjudicate the Defendant Class' affirmative defenses
to the Tribe's claims.

     WPC has agreed to indemnify the Trust from and against any loss, charge or
liability as may arise in respect of the Underlying Properties or the Royalty
Interests, in connection with the defense of such lawsuit and all legal costs
the Trust might incur if the Trust is named as a defendant in such litigation.
The Trust has not been named a defendant at the present time. WPC's indemnity
with respect to the Farmout Properties, should the Trust be named as a party, is
limited to its retained interest share of any settlement or judgment costs that
may reduce the revenue stream it receives from its 35 percent net profits
interest in the Farmout Properties. In the event of a settlement or issuance of
a final non-appealable court decision in the Southern Ute Litigation, either of
which results in a determination that WPC has no right to produce or receive
proceeds from coal seam gas from the properties in question, WPC agreed,
pursuant to a provision of the Conveyance, to pay to the Trust, in addition to
the indemnification described above, for distribution to then current
Unitholders as a return of a portion of the original purchase price paid for the
Units in the Public Offering, an amount equal to (a) the product of (i) $1.47
per Mcf times (ii) the proved reserves estimated in the October 1, 1992 Reserve
Report for the Royalty Interests that are affected by such settlement or
decision, less (b) the cash distributions paid by the Trust and tax benefits, if
any, available to the Unitholders, in each case attributable to the portion of
the Farmout Properties affected by such settlement or decision prior to the
effective date of such settlement or decision.

     WPC has advised the Trustee that, according to its calculations, 
approximately $852,000 remained available as of September 30, 1997 for 
reimbursement of the Trust pursuant to the above formula in the event of such a 
settlement or issuance of a final non-appealable court decision. Because the
amount available for reimbursement declines under such formula as cash
distributions are paid by the Trust and tax benefits, if any, are available to
Unitholders prior to the effective date of such a settlement or decision, and
because the effective date of any such settlement or decision is uncertain,
Unitholders may receive substantially less than $852,000 or nothing upon the
final resolution of such litigation. If the final resolution of the litigation
reflects a loss of title of WPC's interest in the portion of the Farmout
Properties subject to such litigation, the amount of NPI Net Proceeds thereafter
payable to the Trust for distribution to Unitholders would decrease
correspondingly.

     The Trustee makes no prediction as to the ultimate resolution of this
litigation or as to the likely effect, if any, that such resolution may have
upon the Trust or its Unitholders.

7.  POSSIBLE NPI PERCENTAGE CHANGE

    The NPI generally entitles the Trust to receive 81 percent of the NPI Net
Proceeds. However, at the point that cumulative production since October 1, 1992
from the Underlying Properties exceeds 178.5 Bcf of gas and the "internal rate
of return" of the "Aftertax Cash Flow per Trust Unit" (as such terms are defined
in the Conveyance) is equal to or greater than 12 percent but not more than 14
percent, the percentage of NPI Net Proceeds payable to the Trust in respect of
the NPI would be reduced to 60 percent. If such level of production is exceeded
and such internal rate of return of the Aftertax Cash Flow per Trust Unit
exceeds 14 percent, the percentage of NPI Net Proceeds payable in respect of the
NPI would be reduced to 40 percent. WPC has advised the Trustee that the
cumulative production from the Underlying Properties to date has been
approximately 140 Bcf.

Item 2.   Trustee's Discussion and Analysis of Financial Condition
          and Results of Operations.

     Southern Ute Litigation Update.  For a discussion of recent developments
regarding the Southern Ute Indian Tribe litigation involving the Trust, see Part
II, Item 1, "Legal Proceedings" of this Form 10-Q, which discussion is
incorporated herein by reference.

     On May 7, 1997, effective as of May 1, 1997, WPC transferred the Underlying
Properties to an unaffiliated third party ("Buyer") pursuant to the terms of the
Purchase and Sale Agreement dated as of May 1, 1997 (herein so called) between
WPC and Buyer (the "Transaction").  Prior to the Transaction, WPC had owned the
Underlying Properties, subject to and burdened by the Royalty Interests owned by
the Trust, since the inception of the Trust.  Neither the Trustee nor the
Delaware Trustee has any control over or responsibility relating to the
operation of the Underlying Properties.  The Transaction was previously reported
as a subsequent event by the Trust in its Form 10-Q for the quarter ended March
31, 1997, and thereafter described in more detail in the Current Report on Form
8-K filed with the Securities and Exchange Commission on June 23, 1997 (the
"Transaction Form 8-K").

     Concurrently with the Transaction, WPC and Buyer entered into a Management
Services Agreement dated May 1, 1997 (the "Management Services Agreement")
whereby WPC agreed, among other things, to continue to manage and operate the
Underlying Properties and to handle the receipt and payment of funds with
respect thereto.  Prior to the Transaction, WPC received all payments relating
to the Underlying Properties and, pursuant to the Conveyance, paid to the Trust
the portion thereof attributable to the Royalty Interests.  Following the
Transaction, under the Management Services Agreement, WPC continues to collect
all revenues on behalf of Buyer and remains obligated to pay to the Trust on
behalf of Buyer the amounts payable with respect to the Royalty Interests.

                                       13
<PAGE>
 
     Concurrently with the Transaction, WPC, Williams, the Trust and Buyer
entered into an Agreement dated May 7, 1997 (the "Supplemental Agreement")
pursuant to which (i) the parties acknowledged that WPC was selling the
Underlying Properties to Buyer, but retaining all of its duties and obligations
under the Trust Agreement, Conveyance and related documents (the "Trust
Documents"), subject to the terms and conditions set forth in the Purchase and
Sale Agreement and the agreements entered into pursuant to the Purchase and sale
Agreement, (ii) Williams and WPC each confirmed and agreed that, notwithstanding
the sale of the Underlying Properties to Buyer, Williams and WPC would continue
to perform their respective obligations to the Trust pursuant to the Trust
Documents, including without limitation the performance assurances of Williams
set forth in the Conveyance, and (iii) Buyer acknowledged and agreed that it was
purchasing the Underlying Properties burdened by the Royalty Interests owned by
the Trust.

     As a result of these assurances and the Trustee's belief that the
Transaction will have no adverse effect on Unitholders, the information and
descriptions set forth herein give no effect to the Transaction.  Consequently,
with regard to ownership of the Underlying Properties, references herein to
"WPC" with respect to those periods after the effective date of the Transaction
are to Buyer.  The Transaction Form 8-K should be consulted for further
information on the Transaction.

     The Trust makes quarterly cash distributions to holders of units of
beneficial interest ("Units") in the Trust ("Unitholders").  The only assets of
the Trust, other than cash and cash equivalents being held for the payment of
expenses and liabilities and for distribution to Unitholders, are net profits
interests (the "Royalty Interests") in certain proved coal seam gas properties
located in the San Juan Basin of New Mexico and Colorado (the "Underlying
Properties").  The Royalty Interests owned by the Trust burden the Underlying
Properties, which are owned by Williams Production Company ("WPC") and not the
Trust.

     Distributable income of the Trust consists of the excess of royalty income
plus interest income over the general and administrative expenses of the Trust.
Upon receipt by the Trust, royalty income is invested in short-term investments
in accordance with the Trust Agreement (as defined in Note 1 to the financial
statements of the Trust appearing elsewhere in this Form 10-Q ("Note 1")) until
its subsequent distribution to Unitholders.

     The amount of distributable income of the Trust for any quarter may differ
from the amount of cash available for distribution to Unitholders in such
quarter due to differences in the treatment of the expenses of the Trust in the
determination of those amounts.  The financial statements of the Trust are
prepared on a modified cash basis pursuant to which the expenses of the Trust
are recognized when incurred.  Consequently, the reported distributable income
of the Trust for any quarter is determined by deducting from the income received
by the Trust the amount of expenses incurred by the Trust during such quarter.
The amount of cash available for distribution to Unitholders, however, is
determined in accordance with the provisions of the Trust Agreement and reflects
the deduction from the income actually received by the Trust of the amount of
expenses actually paid by the Trust and adjustments for changes in reserves for
unpaid liabilities.  See Note 4 to the financial statements of the Trust
appearing elsewhere in this 

                                       14
<PAGE>
 
Form 10-Q for additional information regarding the determination of the amount
of cash available for distribution to Unitholders.

Three Months and Nine Months Ended September 30, 1997 Compared to Three Months
------------------------------------------------------------------------------
and Nine Months Ended September 30, 1996
----------------------------------------

     For the quarter ended September 30, 1997, royalty income received by the
Trust amounted to $4,707,784 as compared to $5,654,462 received for the same
quarter in 1996. For the nine months ended September 30, 1997, royalty income
received by the Trust amounted to $14,886,953 as compared to $17,001,496
received for the same period in 1996. The decrease in royalty income is
primarily due to adjustments resulting from expansion of federal units within
the Underlying Properties. Expansions of federal unit acreage can either
increase or decrease the Trust's ownership of particular wells resulting in
potential adjustments of production for prior periods and associated
distributions to unitholders can either increase or decrease. Federal unit
acreage expansions are determined by the commercial value of the property as
valued by the operator and approved by the U.S. Bureau of Land Management (BLM).
Williams Production Company does not operate any wells in these federal acreage
units. Production related to the royalty income received by the Trust in the
third quarter of 1997 was 5,863,427 MMBtu as compared to 8,335,017 MMBtu for the
same quarter in 1996. Interest income for the quarter ended September 30, 1997
was $17,520 compared to $18,829 for the same quarter in 1996. Interest income
for the nine months ended September 30, 1997 was $53,405 compared to $59,678 for
the same period in 1996. This decrease was primarily due to a decrease in the
amount of funds available for investment. General and administrative expenses
during the third quarter of 1997 amounted to $73,372 compared to $113,519 for
the same quarter in 1996. This decrease was primarily due to timing of payments
of printing costs in the third quarter of 1996. General and administrative
expenses during the nine months ended September 30, 1997 amounted to $491,583
compared to $492,606 for the same period in 1996.

     Distributable income for the quarter ended September 30, 1997 was
$4,651,932 or $.48 per Unit compared to $5,559,772 or $.57 per Unit for the
third quarter of 1996.  This decrease was the result of adjustments resulting
from expansion of federal units within the Underlying Properties.  Distributable
income for the nine months ended September 30, 1997 was $14,448,775 or $1.49 per
Unit compared to $16,568,568 or $1.71 per Unit for the same period in 1996.  A
distribution of $.472711 per Unit was made on August 28, 1997 to Unitholders of
record on August 14, 1997.

     Because the Trust incurs administrative expenses throughout a quarter but
receives its royalty income only once in a quarter, the Trustee established in
the first quarter of 1993 a cash reserve for the payment of expenses and
liabilities of the Trust.  The Trustee thereafter has adjusted the amount of
such reserve in certain quarters as required for the payment of the Trust's
expenses and liabilities, in accordance with the provisions of the Trust
Agreement.  The Trustee anticipates that it will maintain for the foreseeable
future a cash reserve which will fluctuate as expenses are paid and royalty
income is received.

     Royalty income to the Trust is attributable to the sale of depleting
assets.  All of the Underlying Properties burdened by the Royalty Interests
consist of producing properties. Accordingly, the proved reserves attributable
to WPC's interest in the Underlying Properties are expected to decline
substantially during the term of the Trust and a portion of each cash
distribution made by the Trust will, therefore, be analogous to a return of
capital.  Accordingly, cash yields attributable to the Units are expected to
decline over the term of the Trust.

                                       15
<PAGE>
 
     Royalty income received by the Trust in a given calendar quarter will
generally reflect the sum of (i) proceeds from the sale of gas produced from the
WI Properties during the preceding calendar quarter, plus (ii) cash received by
WPC with respect to the Farmout Properties either (a) during the preceding
calendar quarter or (b) if received in sufficient time to be paid to the Trust,
in the month immediately following such calendar quarter.  Accordingly, the
royalty income included in distributable income for the quarter ended September
30, 1997 was based on production volumes and natural gas prices for the period
April through June 1997, as shown in the table below.  Due to delays associated
with the receipt of income related to the Farmout Properties, the Trust's
royalty income for the 1997 third quarter reflects estimated production volumes
from the Farmout Properties for the months of March 1997 through May 1997, as
shown in the table below.  The production volumes included in the table below
are for production attributable to the Underlying Properties, and not for
production attributable to the Trust's Royalty Interests and are net of the
amount of production attributable to WPC's royalty obligations to third parties,
which is determined by contractual arrangement with such parties.
<TABLE>
<CAPTION>
 
                                  Three Months        Three Months
                                     Ended               Ended
                                  June 30, 1997       June 30, 1996
                                  -------------       -------------
<S>                               <C>               <C>
 
Production (MMBtu) (1)
   WI Properties                  4,139,141 (2)       6,291,977 (4)
   Farmout Properties             1,642,399 (3)       2,043,040 (5)
                                                      
Blanco Hub Spot Price                                 
   ($/MMBtu)  (6)                        $1.83               $1.14
Net Wellhead Price                                    
   WI Properties ($/MMBtu) (6)           $1.01               $1.10
</TABLE>

_______________________
(1)  Million British Thermal Units.
(2)  Includes prior period adjustments of (504,768) MMBtu.
(3)  Reflects estimated volumes for March 1997 through May 1997.
(4)  Includes prior period adjustments of 96,820 MMBtu.
(5)  Reflects March 1996 through May 1996.
(6)  Simple average of estimates for the months included in the period
     presented.

     Production from the WI Properties is generally sold pursuant to a gas
purchase contract between WPC and WFS Gas Resources Company ("WFSGR") (as
successor in interest to Williams Gas Marketing Company).  The gas purchase
contract provides certain protections for WFSGR in the form of price credits
(for production purchased by WFSGR on or after January 1, 1994) and for
Unitholders when the applicable Blanco Hub Spot Price falls below $1.75 per
MMBtu and provides certain benefits for WFSGR when the Blanco Hub Spot Price
exceeds $2.00 per MMBtu.  The gas purchase contract also provides that the price
paid for gas by WFSGR is reduced by the amount of gathering, processing and
certain other costs paid by WFSGR.

                                       16
<PAGE>
 
     The Blanco Hub Spot Price was above $1.75 per MMBtu during each month in
the third quarter of 1997. However, pursuant to the terms of the gas purchase
contract, WFSGR continued to purchase gas produced from the WI Properties at the
$1.70 minimum purchase price, less certain gathering, processing and delivery
costs paid by WFSGR, established by the gas purchase contract; and WFSGR
received a price credit from WPC for each MMBtu of natural gas so purchased by
WFSGR equal to the difference between the $1.70 minimum purchase price and the
applicable index price (which price is equal to 97 percent of the applicable
Blanco Hub Spot Price). WPC estimates that, as of September 30, 1997, WFSGR had
aggregate price credits of approximately $18.8 million of which the Trust's 81
percent interest was approximately $15.2 million. The Blanco Hub Spot Price was
also above $1.75 per MMBtu in October 1997.

     The entitlement of WFSGR to recoup the price credits means that if and when
the applicable Blanco Hub Spot Price rises above $1.75 per MMBtu, future royalty
income paid to the Trust would be reduced until such time as such price credits
have been fully recouped. Corresponding cash distributions to Unitholders would
also be reduced.

     The information in this Form 10-Q concerning production and prices relating
to the Underlying Properties is based on information prepared and furnished by
WPC to the Trustee. The Trustee has no control over and no responsibility
relating to the operation of the Underlying Properties.

     This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical fact included in this Form 10-Q,
including, without limitation, statements contained in this "Trustee's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Trust's financial position and industry conditions, are forward-
looking statements. Although the Trustee believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct.

                          PART II - OTHER INFORMATION
                          ---------------------------

Item 1.   Legal Proceedings

     Southern Ute Litigation.  As previously reported in the Public Offering
Prospectus, each of the Trust's prior Annual Reports on Form 10-K as filed with
the SEC, including the Trust's 1996 Annual Report on Form 10-K (the "1996 Annual
Report") under "Item 2--The Royalty Interest--Title to Properties--Southern Ute
Litigation," and most recently in Amendment No. 1 to the Trust's Quarterly
Report on Form 10-Q for the second quarter of 1997 as filed with the Securities
and Exchange Commission on September 18, 1997, WPC is a named defendant in a
lawsuit (the "Southern Ute Litigation") brought by the Southern Ute Indian Tribe
(the "Tribe") which, among other things, contests ownership rights in certain
coal seam gas producing properties, including a

                                       17
<PAGE>
 
portion of the Farmout Properties in which WPC owns a net profits interest. A
portion of the revenues received by WPC with regard to the Farmout Properties is
paid to the Trust as a component of the NPI. The following information is
included herein to update the Trust's previously reported disclosures regarding
the Southern Ute Litigation and should be read in conjunction with the
discussion of the litigation provided in the 1996 Annual Report. Capitalized
terms used and not otherwise defined in the following discussion are used with
the meanings given to such terms in the 1996 Annual Report.
 
     On December 31, 1991, the Tribe initiated the Southern Ute Litigation in
the United States District Court for the District of Colorado (the "District
Court") against WPC, Amoco Production Company ("Amoco") and other major gas
producers and affected parties in the San Juan Basin area (collectively, the
"Defendant Class") alleging that certain coal strata and constituents within
that strata (including coal seam gas) were reserved by the United States, then
granted to the Tribe for the Tribe's perpetual benefit and ownership. The Tribe
alleges that coal seam gas from the coal strata is and has been wrongfully
extracted by members of the Defendant Class. The Tribe is seeking a declaration
that it owns a beneficial interest in the coal seam gas and that the extraction
of such gas without Tribal consent is an unlawful trespass. In addition to a
declaration of ownership of the gas, the Tribe is seeking compensation for the
value of coal seam gas heretofore extracted and certain other remedies.

     The Southern Ute Litigation involves approximately 1,745 gross acres
comprising a portion of the Farmout Properties. Two Tribe leases covering
approximately 3,600 gross acres included in the Farmout Properties are not
covered by the pending litigation, but could be the subject of future
litigation.

     Amoco, on behalf of itself, WPC and the other members of the Defendant
Class, is vigorously defending the lawsuit. On September 13, 1994, the District
Court issued a memorandum opinion and order in the litigation granting the
motion for summary judgment filed by the Defendant Class on the question of
ownership of the coal seam gas. The District Court ruled that the U.S. Congress
did not reserve the coal seam gas in the Coal Lands Acts of 1909 and 1910, and
denied the Tribe's claim of equitable ownership of the coal seam gas. The Tribe
appealed the order to the United States Court of Appeals for the Tenth Circuit
(the "Court of Appeals"), which issued an opinion dated July 16, 1997 reversing
the District Court and holding that coal seam gas was "an integral component of
coal" and had therefore been vested in the Tribe as owners of the coal resource.
The Court of Appeals remanded the matter to the District Court for further
proceedings consistent with its decision. Amoco, the class representative for
the Defendant Class, has indicated its intent to seek review of the Court of
Appeals' decision. In the event further review is denied, the District Court
will be in the position to adjudicate the Defendant Class' affirmative defenses
to the Tribe's claims.

     WPC has agreed to indemnify the Trust from and against any loss, charge or
liability as may arise in respect of the Underlying Properties or the Royalty
Interests, in connection with the defense of such lawsuit and all legal costs
the Trust might incur if the Trust is named as a defendant in such litigation.
The Trust has not been named a defendant at the present time. WPC's indemnity
with respect to the Farmout Properties, should the Trust be named as a party, 

                                       18
<PAGE>
is limited to its retained interest share of any settlement or judgment costs
that may reduce the revenue stream it receives from its 35 percent net profits
interest in the Farmout Properties. In the event of a settlement or issuance of
a final non-appealable court decision in the Southern Ute Litigation, either of
which results in a determination that WPC has no right to produce or receive
proceeds from coal seam gas from the properties in question, WPC agreed,
pursuant to a provision of the Conveyance, to pay to the Trust, in addition to
the indemnification described above, for distribution to then current
Unitholders as a return of a portion of the original purchase price paid for the
Units in the Public Offering, an amount equal to (a) the product of (i) $1.47
per Mcf times (ii) the proved reserves estimated in the October 1, 1992 Reserve
Report for the Royalty Interests that are affected by such settlement or
decision, less (b) the cash distributions paid by the Trust and tax benefits, if
any, available to the Unitholders, in each case attributable to the portion of
the Farmout Properties affected by such settlement or decision prior to the
effective date of such settlement or decision. 

     WPC has advised the Trustee that, according to its calculations, 
approximately $852,000 remained available as of September 30, 1997 for 
reimbursement of the Trust pursuant to the above formula in the event of such a 
settlement or issuance of a final non-appealable court decision. Because the
amount available for reimbursement declines under such formula as cash
distributions are paid by the Trust and tax benefits, if any, are available to
Unitholders prior to the effective date of such a settlement or decision, and
because the effective date of any such settlement or decision is uncertain,
Unitholders may receive substantially less than $852,000 or nothing upon the
final resolution of such litigation. If the final resolution of the litigation
reflects a loss of title of WPC's interest in the portion of the Farmout
Properties subject to such litigation, the amount of NPI Net Proceeds thereafter
payable to the Trust for distribution to Unitholders would decrease
correspondingly.

     Amoco has advised WPC that, in light of the opinion of the Court of 
Appeals, it is suspending payment of amounts attributable to the portion of the 
Farmout Properties affected by the litigation from the revenues otherwise 
payable by Amoco to WPC upon its 35 percent net profits interest in the Farmout 
Properties.  To the extent any such amounts are so suspended, the current 
revenues of the Trust will be reduced correspondingly.  According to WPC's 
calculations, revenues attributable to the Farmout Properties affected by the 
litigation have constituted between approximately 3.3 percent and 20 percent of 
the Trust's quarterly royalty income, averaging approximately 7.8 percent of the
Trust's quarterly royalty income. Whether any amounts so suspended are
thereafter released and paid to WPC (and the applicable portion thereof
ultimately paid to the Trust), and the timing of any such release, will depend 
upon the outcome of the Southern Ute Litigation and cannot be predicted at this 
time.

     To the extent that any such payments of revenue are so suspended by Amoco,
Unitholders will not be required currently to take into income such revenues,
nor will they be entitled to claim depletion on such production or Section 29
tax credits attributable thereto. If and when any amounts so suspended by
Amoco are released and payment thereof received by the Trust, Unitholders on the
record date for such payment will then be required to report all of the income
attributable to the previously suspended amounts paid and will then be entitled
to claim the Section 29 tax credits thereon, subject to the requirement that
each such Unitholder be an owner of such Units during the period that such
production was actually produced and sold. Each Unitholder should consult his
tax advisor regarding tax compliance matters relating to these circumstances.

     The Trustee makes no prediction as to the ultimate resolution of this
litigation or as to the likely effect, if any, that such resolution may have
upon the Trust or its Unitholders.

                                       19
<PAGE>
 
Item 6.   Exhibits and Reports on Form 8-K.

     (a)  Exhibit No.                    Description
          -----------                    -----------

               27             Financial Data Schedule

     (b)  No reports on Form 8-K were filed during the quarter for which the
          report is filed.

                                       20
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements 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.

                         WILLIAMS COAL SEAM GAS ROYALTY TRUST

                         By:  NATIONSBANK OF TEXAS, N.A., Trustee



                              By:  /s/ Ron Hooper
                                   ---------------------------------------------
                                    Ron Hooper
                                    Vice President and Administrator


              (The Trust has no directors or executive officers.)


Date:  November 14, 1997

                                       21