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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K
(MARK ONE)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
                          FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[_]   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: 1-8424

                              SABINE ROYALTY TRUST
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                  TEXAS                                       75-6297143
      (STATE OR OTHER JURISDICTION                        (I.R.S. EMPLOYER
     OF INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NO.)

              TRUST DIVISION
             NATIONSBANK, N.A.
             NATIONSBANK PLAZA
                 17TH FLOOR
              901 MAIN STREET
               DALLAS, TEXAS                                      75202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 209-2400

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                       NAME OF EACH EXCHANGE
         TITLE OF EACH CLASS                           ON WHICH REGISTERED 
         -------------------                           -------------------
     UNITS OF BENEFICIAL INTEREST                    NEW YORK STOCK EXCHANGE


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

     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
                                               ----    ----

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  X
          -----

     At March 15, 1999, there were 14,579,345 units of beneficial interest
outstanding and the aggregate market value of such units (based on the closing
sale price on the New York Stock Exchange) held by non-affiliates of the
registrant was approximately $194,998,739.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

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                                TABLE OF CONTENTS

<TABLE>
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                                                                                            PAGE
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                                     PART I
<S>        <C>                                                                              <C>
Item  1.   Business .....................................................................     1
           Description of the Trust .....................................................     1
             Assets of the Trust ........................................................     2
             Liabilities of the Trust ...................................................     2
             Duties and Limited Powers of Trustee .......................................     2
             Liabilities of Trustee .....................................................     2
             Duration of Trust ..........................................................     3
             Voting Rights of Unit Holders ..............................................     3
             Description of Units .......................................................     3
             Distributions of Net Income ................................................     4
             Transfer ...................................................................     4
             Reports to Unit Holders ....................................................     4
             Liability of Unit Holders ..................................................     4
             Possible Divestiture of Units ..............................................     5
           Federal Taxation .............................................................     5
           State Law and Tax Considerations .............................................     6
             Regulation and Prices ......................................................     7
             Regulation .................................................................     7
             Prices .....................................................................     8
Item  2.   Properties ...................................................................     9
           Title ........................................................................     9
            Reserves ....................................................................     9
Item  3.   Legal Proceedings ............................................................    13
Item  4.   Submission of Matters to a Vote of Security Holders ..........................    13

                                     PART II

Item  5.   Market for Registrant's Common Equity and Related Stockholder Matters ........    13
Item  6.   Selected Financial Data  .....................................................    13
Item  7.   Trustee's Discussion and Analysis of Financial Condition and Results of
           Operations ...................................................................    14
Item  7A.  Quantitative and Qualitative Disclosures About Market Risk ...................    15
Item  8.   Financial Statements and Supplementary Data ..................................    16
Item  9.   Changes in and Disagreements with Accountants on Accounting and Financial
           Disclosure ...................................................................    26

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant ...........................    26
Item 11.   Executive Compensation .......................................................    26
Item 12.   Security Ownership of Certain Beneficial Owners and Management ...............    26
Item 13.   Certain Relationships and Related Transactions ...............................    27

                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K ..............    27
</TABLE>



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                                     PART I




ITEM 1.   BUSINESS.

                            DESCRIPTION OF THE TRUST

       Sabine Royalty Trust (the "Trust") is an express trust formed under the
laws of the State of Texas by the Sabine Corporation Royalty Trust Agreement
(the "Trust Agreement") made and entered into effective as of December 31, 1982,
between Sabine Corporation, as trustor, and InterFirst Bank Dallas, N.A.
("InterFirst"), as trustee. The current trustee of the Trust is NationsBank,
N.A. (as successor to NationsBank of Texas, N.A.) ("NationsBank"). In accordance
with the successor trustee provisions of the Trust Agreement, NationsBank, as
trustee of the Trust (the "Trustee"), is subject to all the terms and conditions
of the Trust Agreement. The principal office of the Trust (sometimes referred to
herein as the "Registrant") is located at NationsBank Plaza, 17th Floor, 901
Main Street, Dallas, Texas 75202. The telephone number of the Trust is (214)
209-2400.

       On November 12, 1982, the shareholders of Sabine Corporation approved and
authorized Sabine Corporation's transfer of royalty and mineral interests,
including landowner's royalties, overriding royalty interests, minerals (other
than executive rights, bonuses and delay rentals), production payments and any
other similar, nonparticipatory interest, in certain producing and proved
undeveloped oil and gas properties located in Florida, Louisiana, Mississippi,
New Mexico, Oklahoma and Texas (the "Royalty Properties") to the Trust. The
conveyances of the Royalty Properties to the Trust were effective with respect
to production as of 7:00 a.m. (local time) on January 1, 1983.

       In order to avoid uncertainty under Louisiana law as to the legality of
the Trustee's holding record title to the Royalty Properties located in that
state, title to such properties is held by a separate trust formed under the
laws of Louisiana, the sole beneficiary of which is the Trust. Sabine Louisiana
Royalty Trust is a passive entity, with the trustee thereof, Hibernia National
Bank in New Orleans, having only such powers as are necessary for the collection
of and distribution of revenues from and the protection of the Royalty
Properties located in Louisiana and the payment of liabilities of Sabine
Louisiana Royalty Trust. A separate trust also was established to hold record
title to the Royalty Properties located in Florida. Legislation was adopted in
Florida in 1992 that eliminated the provision of Florida law that prohibited the
Trustee from holding record title to the Royalty Properties located in that
state. In November 1993, record title to the Royalty Properties held by the
trustee of Sabine Florida Land Trust was transferred to the Trustee. As used
herein, the term "Royalty Properties" includes the Royalty Properties held
directly by the Trust and the Royalty Properties located in Louisiana and
Florida that are or were held indirectly through the Trust's ownership of 100
percent beneficial interest of Sabine Louisiana Royalty Trust and Sabine Florida
Land Trust. In discussing the Trust, this report disregards the technical
ownership formalities described in this paragraph, which have no effect on the
tax or accounting treatment of the Royalty Properties, since the observance
thereof would significantly complicate the information presented herein without
any corresponding benefit to Unit holders.

       Certificates evidencing units of beneficial interest (the "Units") in the
Trust were mailed on December 31, 1982 to the shareholders of Sabine Corporation
of record on December 23, 1982, on the basis of one Unit for each outstanding
share of common stock of Sabine Corporation. The Units are listed and traded on
the New York Stock Exchange under the symbol "SBR".

       In May 1988, Sabine Corporation was acquired by Pacific Enterprises, a
California corporation. Through a series of mergers, Sabine Corporation was
merged into Pacific Enterprises Oil Company (USA) ("Pacific (USA)"), a
California corporation and a wholly owned subsidiary of Pacific Enterprises,
effective January 1, 1990. This acquisition and the subsequent mergers had no
effect on the Units. Pacific (USA), as successor to Sabine Corporation, assumed
by operation of law all of Sabine Corporation's rights and obligations with
respect to the Trust. References herein to Pacific (USA) shall be deemed to
include Sabine Corporation where appropriate.

       In connection with the transfer of the Royalty Properties to the Trust
upon its formation, Sabine Corporation had reserved to itself all executive
rights, including rights to execute leases and to receive bonuses and delay
rentals. In January 1993, Pacific (USA) completed the sale of substantially all
of Pacific (USA)'s producing oil an gas assets to Hunt Oil Company. The sale did
not include the executive rights relating to the Royalty Properties, and Pacific
(USA)'s ownership of such rights was not affected by the sale.

       The following summaries of certain provisions of the Trust Agreement are
qualified in their entirety by reference to the Trust Agreement itself, which is
an exhibit to the Form 10-K and available upon request from the Trustee. The
definitions, formulas, accounting procedures and other terms governing the Trust
are complex and extensive and no attempt has been made below to describe all
such provisions. Capitalized terms not otherwise defined herein are used with
the meanings ascribed to them in the Trust Agreement.


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ASSETS OF THE TRUST

       The Royalty Properties are the only assets of the Trust, other than cash
being held for the payment of expenses and liabilities and for distribution to
the Unit holders. Pending such payment of expenses and distribution to Unit
holders, cash may be invested by the Trustee only in certificates of deposit,
United States government securities or repurchase agreements secured by United
States government securities. See "Duties and Limited Powers of Trustee" below.

LIABILITIES OF THE TRUST

       Because of the passive nature of the Trust's assets and the restrictions
on the power of the Trustee to incur obligations, it is anticipated that the
only liabilities the Trust will incur are those for routine administrative
expenses, such as insurance and trustee's fees, and accounting, engineering,
legal and other professional fees. The total general and administrative expenses
of the Trust for 1998 were $1,296,735 of which, pursuant to the terms of the
Trust Agreement, $196,546 was paid to NationsBank, as Trustee, and $589,647 was
paid to NationsBank, as escrow agent.

DUTIES AND LIMITED POWERS OF TRUSTEE

       The duties of the Trustee are specified in the Trust Agreement and by the
laws of the State of Texas. The basic function of the Trustee is to collect
income from the Trust properties, to pay out of the Trust's income and assets
all expenses, charges and obligations, and to pay available income to Unit
holders. Since Pacific (USA) has retained the executive rights with respect to
the minerals included in the Royalty Properties and the right to receive any
future bonus payments or delay rentals resulting from leases with respect to
such minerals, the Trustee is not required to make any investment or operating
decision with respect to the Royalty Properties.

       The Trust has no employees. Administrative functions of the Trust are
performed by the Trustee.

       The Trustee has the discretion to establish a cash reserve for the
payment of any liability that is contingent or uncertain in amount or that
otherwise is not currently due and payable. The Trustee has the power to borrow
funds required to pay liabilities of the Trust as they become due and pledge or
otherwise encumber the Trust's properties if it determines that the cash on hand
is insufficient to pay such liabilities. Borrowings must be repaid in full
before any further distributions are made to Unit holders. All distributable
income of the Trust is distributed on a monthly basis. The Trustee is required
to invest any cash being held by it for distribution on the next Distribution
Date or as a reserve for liabilities in certificates of deposit, United States
government securities or repurchase agreements secured by United States
government securities. The Trustee furnishes Unit holders with periodic reports.
See "Item 1--Description of Units--Reports to Unit Holders".

       The Trust Agreement grants the Trustee only such rights and powers as are
necessary to achieve the purposes of the Trust. The Trust Agreement prohibits
the Trustee from engaging in any business, commercial or, with certain
exceptions, investment activity of any kind and from using any portion of the
assets of the Trust to acquire any oil and gas lease, royalty or other mineral
interest other than the Royalty Properties. The Trustee may sell Trust
properties only as authorized by a vote of the Unit holders, or when necessary
to provide for the payment of specific liabilities of the Trust then due or upon
termination of the Trust. Pledges or other encumbrances to secure borrowings are
permitted without the authorization of unit holders if the Trustee determines
such action is advisable. Any sale of Trust properties must be for cash unless
otherwise authorized by the Unit holders or unless the properties are being sold
to provide for the payment of specific liabilities of the Trust then due, and
the Trustee is obligated to distribute the available net proceeds of any such
sale to the Unit holders.

LIABILITIES OF TRUSTEE

       The Trustee is to be indemnified out of the assets of the Trust for any
liability, expense, claim, damage or other loss incurred by it in the
performance of its duties unless such loss results from its negligence, bad
faith or fraud or from its expenses in carrying out such duties exceeding the
compensation and reimbursement it is entitled to under the Trust Agreement. The
Trustee can be reimbursed out of the Trust assets for any liability imposed upon
the Trustee for its failure to ensure that the Trust's liabilities are
satisfiable only out of Trust assets. In no event will the Trustee be deemed to
have acted negligently, fraudulently or in bad faith if it takes or suffers
action in good faith in reliance upon and in accordance with the advice of
parties considered to be qualified as 


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<PAGE>   5

experts on the matters submitted to them. The Trustee is not entitled to
indemnification from Unit holders except in certain limited circumstances
related to the replacement of mutilated, destroyed, lost or stolen certificates.
See "Item 1--Description of Units--Liability of Unit Holders".

DURATION OF TRUST

       The Trust is irrevocable and Pacific (USA) has no power to terminate the
Trust or, except with respect to certain corrective amendments, to alter or
amend the terms of the Trust Agreement. The Trust will exist until it is
terminated by (i) two successive fiscal years in which the Trust's gross
revenues from the Royalty Properties are less than $2,000,000 per year, (ii) a
vote of Unit holders as described below under "Voting Rights of Unit Holders" or
(iii) operation of provisions of the Trust Agreement intended to permit
compliance by the Trust with the "rule against perpetuities". Upon the
termination of the Trust, the Trustee will continue to act in such capacity
until all the assets of the Trust are distributed. The Trustee will sell all
Trust properties for cash (unless the Unit holders authorize the sale for a
specified non-cash consideration, in which event the Trustee may, but is not
obligated to, consummate such non-cash sale) in one or more sales and, after
satisfying all existing liabilities and establishing adequate reserves for the
payment of contingent liabilities, will distribute all available proceeds to the
Unit holders.

VOTING RIGHTS OF UNIT HOLDERS

       Although Unit holders possess certain voting rights, their voting rights
are not comparable to those of shareholders of a corporation. For example, there
is no requirement for annual meetings of Unit holders or for annual or other
periodic re-election of the Trustee.

       The Trust Agreement may be amended by the affirmative vote of a majority
of the outstanding Units at any duly called meeting of Unit holders. However, no
such amendment may alter the relative rights of Unit holders unless approved by
the affirmative vote of 100 percent of the Unit holders and by the Trustee. In
addition, certain special voting requirements can be amended only if such
amendment is approved by the holders of at least 80 percent of the outstanding
Units and by the Trustee.

       Removal of the Trustee requires the affirmative vote of the holders of a
majority of the Units represented at a duly called meeting of Unit holders. In
the event of a vacancy in the position of Trustee or if the Trustee has given
notice of its intention to resign, a successor trustee of the Trust may be
appointed by similar voting approval of the Unit holders.

       The sale of all or any part of the assets of the Trust must be authorized
by the affirmative vote of the holders of a majority of the outstanding Units.
However, the Trustee may, without a vote of the Unit holders, sell all or any
part of the Trust assets upon termination of the Trust or otherwise if necessary
to provide for the payment of specific liabilities of the Trust then due. The
Trust can be terminated by the Unit holders only if the termination is approved
by the holders of a majority of the outstanding Units.

       Meetings of Unit holders may be called by the Trustee at any time at its
discretion and must be called by the Trustee at the written request of holders
of not less than 10 percent of the then outstanding Units. The presence of a
majority of the outstanding Units is necessary to constitute a quorum and Unit
holders may vote in person or by proxy.

       Notice of any meeting of Unit holders must be given not more than 60 nor
less than 20 days prior to the date of such meeting. The notice must state the
purposes of the meeting and no other matter may be presented or acted upon at
the meeting.


                              DESCRIPTION OF UNITS

       Each Unit represents an equal undivided share of beneficial interest in
the Trust and is evidenced by a transferable certificate issued by the Trustee.
Each Unit entitles its holder to the same rights as the holder of any other
Unit, and the Trust has no other authorized or outstanding class of equity
security. At March 15, 1999, there were 14,579,345 Units outstanding.

       The Trust may not issue additional Units unless such issuance is approved
by the holders of at least 80 percent of the outstanding Units and by the
Trustee. Under limited circumstances, Units may be redeemed by the Trust and
canceled. See "Possible Divestiture of Units" below.



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DISTRIBUTIONS OF NET INCOME

       The identity of Unit holders entitled to receive distributions of Trust
income and the amounts thereof are determined as of each Monthly Record Date.
Unit holders of record as of the Monthly Record Date (the 15th day of each
calendar month except in limited circumstances) are entitled to have distributed
to them the calculated Monthly Income Amount for the related Monthly Period no
later than 10 business days after the Monthly Record Date. The Monthly Income
Amount is the excess of (i) revenues from the Trust properties plus any decrease
in cash reserves previously established for contingent liabilities and any other
cash receipts of the Trust over (ii) the expenses and payments of liabilities of
the Trust plus any increase in cash reserves for contingent liabilities.

TRANSFER

       Units are transferable on the records of the Trustee upon surrender of
any certificate in proper form for transfer and compliance with such reasonable
regulations as the Trustee may prescribe. No service charge is made to the
transferor or transferee for any transfer of a Unit, but the Trustee may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in relation to such transfer. Until any such transfer, the Trustee may
conclusively treat the holder of a Unit shown by its records as the owner of
that Unit for all purposes. Any such transfer of a Unit will, as to the Trustee,
vest in the transferee all rights of the transferor at the date of transfer,
except that the transfer of a Unit after the Monthly Record Date for a
distribution will not transfer the right of the transferor to such distribution.

       The transfer of Units by gift and the transfer of Units held by a
decedent's estate, and distributions from the Trust in respect thereof, may be
restricted under applicable state law. See "Item 1--State Law and Tax
Considerations".

       Chase Mellon Shareholder Services serves as transfer agent and registrar
for the Units.

REPORTS TO UNIT HOLDERS

       As promptly as practicable following the end of each fiscal year, the
Trustee mails to each person who was a Unit holder on any Monthly Record Date
during such fiscal year, a report showing in reasonable detail on a cash basis
the receipts and disbursements and income and expenses of the Trust for federal
and state tax purposes for each Monthly Period during such fiscal year and
containing sufficient information to enable Unit holders to make all
calculations necessary for federal and state tax purposes. As promptly as
practicable following the end of each of the first three fiscal quarters of each
year, the Trustee mails a report for such fiscal quarter showing in reasonable
detail on a cash basis the assets and liabilities, receipts and disbursements,
and income and expenses of the Trust for such fiscal quarter to Unit holders of
record on the last Monthly Record Date immediately preceding the mailing
thereof. Within 120 days following the end of each fiscal year, or such shorter
period as may be required by the New York Stock Exchange, the Trustee mails to
Unit holders of record on the last Monthly Record Date immediately preceding the
mailing thereof, an annual report containing audited financial statements of the
Trust and an audited statement of fees and expenses paid by the Trust to
NationsBank, as Trustee and escrow agent. See "Federal Taxation" below.

       Each Unit holder and his or her duly authorized agent has the right,
during reasonable business hours at his or her own expense, to examine and make
audits of the Trust and the records of the Trustee, including lists of Unit
holders, for any proper purpose in reference thereto.

LIABILITY OF UNIT HOLDERS

       As regards the Unit holders, the Trustee, in engaging in any activity or
transaction that results or could result in any kind of liability, will be fully
liable if the Trustee fails to take reasonable steps necessary to ensure that
such liability is satisfiable only out of the Trust assets (even if the assets
are inadequate to satisfy the liability) and in no event out of amounts
distributed to, or other assets owned by, Unit holders. However, the Trust might
be held to constitute a "joint stock company" under Texas law, which is
unsettled on this point, and therefore a Unit holder may be jointly and
severally liable for any liability of the Trust if the satisfaction of such
liability was not contractually limited to the assets of the Trust and the
assets of both the Trust and the Trustee are not adequate to satisfy such
liability. In view of the substantial value and passive nature of the Trust
assets, the restrictions on the power of the Trustee to incur liabilities and
the required financial net worth of any trustee of the Trust, the imposition of
any liability on a Unit holder is believed to be extremely unlikely.


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<PAGE>   7

POSSIBLE DIVESTITURE OF UNITS

       The Trust Agreement imposes no restrictions based on nationality or other
status of the persons or entities which are eligible to hold Units. However, the
Trust Agreement provides that if at any time the Trust or the Trustee is named a
party in any judicial or administrative proceeding seeking the cancellation or
forfeiture of any property in which the Trust has an interest because of the
nationality, or any other status, of any one or more Unit holders, the following
procedure will be applicable:

       1. The Trustee will give written notice to each holder whose nationality
    or other status is an issue in the proceeding of the existence of such
    controversy. The notice will contain a reasonable summary of such
    controversy and will constitute a demand to each such holder that he or she
    dispose of his or her Units within 30 days to a party not of the nationality
    or other status at issue in the proceeding described in the notice.

       2. If any holder fails to dispose of his or her Units in accordance with
    such notice, the Trustee shall have the preemptive right to redeem and shall
    redeem, at any time during the 90-day period following the termination of
    the 30-day period specified in the notice, any Unit not so transferred for a
    cash price equal to the closing price of the Units on the stock exchange on
    which the Units are then listed or, in the absence of any such listing, the
    mean between the closing bid and asked prices for the Units in the
    over-the-counter market, as of the last business day prior to the expiration
    of the 30-day period stated in the notice.

       3. The Trustee shall cancel any Unit acquired in accordance with the
    foregoing procedures.

       4. The Trustee may, in its sole discretion, cause the Trust to borrow any
    amount required to redeem Units.


                                FEDERAL TAXATION

       In May 1983, the Internal Revenue Service (the "Service") ruled that the
Trust would be classified as a grantor trust for federal income tax purposes and
not as an association taxable as a corporation. Accordingly, the income and
deductions of the Trust are reportable directly by Unit holders for federal
income tax purposes. The Service also ruled that Unit holders would be entitled
to deduct cost depletion with respect to their investment in the Trust and that
the transfer of a Unit in the Trust would be considered to be a transfer of a
proportionate part of the properties held by the Trust.

       Transferees of Units transferred after October 11, 1990 may be eligible
to use the percentage depletion deduction on oil and gas income thereafter
attributable to such Units, if the percentage depletion deduction would exceed
cost depletion. However, no Unit holders were eligible to claim percentage
depletion deductions for 1990 or any subsequent year because cost depletion has
exceeded percentage depletion.

       If a taxpayer disposes of any "section 1254 property" (certain oil, gas,
geothermal or other mineral property), and if the adjusted basis of such
property includes adjustments for deductions for depletion under section 611 of
the Internal Revenue Code (the "Code"), the taxpayer generally must recapture
the amount deducted for depletion in ordinary income (to the extent of gain
realized on the disposition of the property). This depletion recapture rule
applies to any disposition of property that was placed in service by the
taxpayer after December 31, 1986. Detailed rules set forth in Sections 1.1254-1
through 1.1254-6 of the United States Treasury regulations govern dispositions
of property after March 13, 1995. The Service will likely take the position that
a Unit holder who purchases a Unit subsequent to December 31, 1986 must
recapture depletion upon the disposition of that Unit.

       In order to facilitate creation of the Trust and to avoid the
administrative expense and inconvenience of daily reporting to Unit holders by
the Trustee, the conveyances by Sabine Corporation of the Royalty Properties
located in five of the six states provided for the execution of an escrow
agreement by Sabine Corporation and InterFirst (the initial trustee of the
Trust), in its capacities as trustee of the Trust and as escrow agent. The
conveyances by Sabine Corporation of the Royalty Properties located in Louisiana
provided for the execution of a substantially identical escrow agreement by
Sabine Corporation and Hibernia National Bank in New Orleans, in the capacities
of escrow agent and of trustee of Sabine Louisiana Royalty Trust.

       Pursuant to the terms of the escrow agreements and the conveyances of the
Royalty Properties, the proceeds of production from the Royalty Properties for
each calendar month, and interest thereon, are collected by the escrow agents
and are paid to and received by the Trust only on the next Monthly Record Date.
The escrow agents have agreed to endeavor to assure that they incur and pay
expenses and fees for each calendar month only on the next Monthly Record Date.
The Trust Agreement also provides that the 


                                       5
<PAGE>   8

Trustee is to endeavor to assure that income of the Trust will be accrued and
received and expenses of the Trust will be incurred and paid only on each
Monthly Record Date.

       Assuming that the escrow arrangement is recognized for federal income tax
purposes and that the Trustee and the escrow agents are able to control the
timing of income and expenses, as stated above, cash and accrual basis Unit
holders should be treated as realizing income only on each Monthly Record Date.
The Trustee and the escrow agents may not be able to cause third party expenses
to be incurred on each Monthly Record Date in all instances. Cash basis Unit
holders, however, should be treated as having paid all expenses and fees only
when such expenses and fees are actually paid. Even if the escrow arrangement is
recognized for federal income tax purposes, however, accrual basis Unit holders
might be considered to have accrued expenses when such expenses are incurred
rather than on each Monthly Record Date when paid.

       No ruling was requested from the Service with respect to the effect of
the escrow arrangement. Due to the absence of direct authority and the factual
nature of the characterization of the relationship among the escrow agent,
Pacific (USA) and the Trust, no opinion has been expressed by legal counsel with
respect to the tax consequences of the escrow arrangement. In the absence of the
escrow arrangement, the Unit holders would be deemed to receive or accrue income
from production from the Royalty Properties (and interest income) on a daily
basis, in accordance with their method of accounting, as the proceeds from
production and interest thereon were received or accrued by the Trust. If the
escrow arrangement is recognized, the income from the Royalty Properties for a
calendar month and interest income thereon will be taxed to the holder of the
Unit on the next Monthly Record Date without regard to the ownership of the Unit
prior to that date. The Trustee is treating the escrow arrangement as effective
for tax purposes and has furnished tax information to Unit holders on that
basis.

       The Service might take the position that the escrow arrangement should be
ignored for tax purposes. In such case, the Trustee could be required to report
the proceeds from production and interest income thereon to the Unit holders on
a daily basis resulting in a substantial increase in the administrative expense
of the Trust. In the event of a transfer of a Unit, the income and the depletion
deduction attributable to the Royalty Properties for the period up to the date
of transfer would be allocated to the transferor, and the income and depletion
deduction attributable to the Royalty Properties on and after the date of
transfer would be allocated to the transferee, even though the transferee was
the holder of the Unit on the next Monthly Record Date and, therefore, would be
entitled to the monthly income distribution. Thus, if the escrow arrangement is
not recognized, a mismatching of such income and deduction could occur between a
transferor and a transferee upon the transfer of a Unit.

       Unit holders of record on each Monthly Record Date are entitled to
receive monthly distributions. See "Description of Units -- Distributions of Net
Income"' above. The terms of the escrow agreements and the Trust Agreement, as
described above, seek to assure that taxable income attributable to such
distributions will be reported by the Unit holder who receives such
distributions, assuming that such holder is the holder of record on the Monthly
Record Date. In certain circumstances, however, a Unit holder may be required to
report taxable income attributable to his or her Units but the Unit holder will
not receive the distribution attributable to such income. For example, if the
Trustee establishes a reserve or borrows money to satisfy debts and liabilities
of the Trust, income used to establish such reserve or to repay such loan will
be reported by the Unit holder, even though such income is not distributed to
the Unit holder.

       Interest and royalty income attributable to ownership of Units and any
gain on the sale thereof are considered portfolio income, and not income from a
"passive activity," and therefore generally may not be offset by losses from any
passive activities.

       Individuals may deduct "miscellaneous itemized deductions" (including, in
general, investment expenses) only to the extent that such expenses exceed two
percent of the individual's adjusted gross income. Although the Trustee believes
that no portion of a Unit holder's share of administrative expenses of the Trust
is subject to the floor, it is possible that the Service could take such a
position.

       The foregoing summary is not exhaustive, and many other provisions of the
federal tax laws may affect individual Unit holders. Each Unit holder should
consult his or her personal tax adviser with respect to the effects of his or
her ownership of Units on his or her personal tax situation.

                        STATE LAW AND TAX CONSIDERATIONS

       The following is intended as a brief summary of certain information
regarding state income taxes and other state law matters affecting the Trust and
the Unit holders. Unit holders are urged to consult their own legal and tax
advisers with respect to these matters.


                                       6
<PAGE>   9

       Texas. Texas does not impose an income tax. Therefore, no part of the
income produced by the Trust is subject to an income tax in Texas. However,
corporations and limited liability companies doing business in Texas are subject
to the Texas franchise tax, which includes a calculation based upon the
company's taxable income for federal income tax purposes (or comparable amounts,
in the case of limited liability companies). It is currently unclear whether the
ownership of Units would be sufficient to subject a corporate Unit holder who is
not otherwise doing business in Texas to the franchise tax. Under certain
circumstances, Texas inheritance tax may be applicable to property in Texas
(including intangible personal property such as the Units) of both resident and
nonresident decedents.

       Louisiana. Units held by residents of Louisiana, to the extent that they
represent a proportionate share of mineral royalties from mineral interests
located in Louisiana, are subject to Louisiana inheritance and other taxes and
probate, community property, forced heirship and other rules. Units held of
record by a person who was not domiciled in Louisiana at the date of death
generally are not subject to Louisiana inheritance taxes or probate, community
property or forced heirship rules, and Units transferred inter vivos by
non-domiciliaries of Louisiana generally are not subject to Louisiana gift tax.
Income of the Units attributable to interests located in Louisiana will, subject
to applicable minimum filing requirements, be subject to Louisiana income tax,
and the Trustee is required to file with Louisiana a return reflecting the
income of the Trust attributable to mineral interests located in Louisiana.

       Florida, Mississippi, New Mexico and Oklahoma. Florida imposes an income
tax on resident and nonresident corporations but not individuals. Mississippi,
New Mexico and Oklahoma each impose an income tax applicable to both resident
and nonresident individuals and corporations which will be applicable to royalty
income allocable to a Unit holder from properties located within that state.
Although the Trust may be required to file information returns with taxing
authorities in those states and provide copies of such returns to the Unit
holders, the Trust should be considered a grantor trust for state income tax
purposes and the Royalty Properties that are located in such states should be
considered economic interests in minerals for state income tax purposes.

       Generally, the state income tax in these states is computed as a
percentage of taxable income attributable to the particular state. Furthermore,
even though there are variances from state to state, taxable income for state
purposes is often computed in a manner similar to the computation of taxable
income for federal income tax purposes. Some of these states give credit for
taxes paid by their residents on income from sources in other states. In certain
of these states, a Unit holder is required to file a state income tax return if
income is attributable to the Unit holder even though no tax is owed.


                              REGULATION AND PRICES

REGULATION

       General

       Exploration for and production and sale of oil and gas are extensively
regulated at the national, state and local levels. Oil and gas development and
production activities are subject to various state laws and regulations (and
orders of regulatory bodies pursuant thereto) governing a wide variety of
matters, including allowable rates of production, marketing, pricing, prevention
of waste, and pollution and protection of the environment. These laws,
regulations and orders may restrict the rate of oil and gas production below the
rate that would otherwise exist in the absence of such laws, regulations and
orders.

       Laws affecting the oil and gas industry are under constant review for
amendment or expansion, frequently increasing the regulatory burden. Numerous
governmental departments and agencies are authorized by statute to issue and
have issued rules and regulations binding on the oil and gas industry which
often are difficult and costly to comply with and which carry substantial
penalties for the failure to comply.

       Natural Gas

       On January 1, 1993, pursuant to the Natural Gas Wellhead Decontrol Act of
1989, the maximum lawful prices prescribed for the sale of natural gas under the
Natural Gas Policy Act of 1978 were eliminated. Consequently, prices for the
sale of natural gas, like the sale of other commodities, are governed by the
marketplace and the provisions of applicable gas sales contracts.

       The Federal Energy Regulatory Commission ("FERC") has taken significant
steps in the implementation of a policy to restructure the natural gas pipeline
industry to promote full competition in the sales of natural gas, so that all
natural gas suppliers, including pipelines, can compete equally for sales
customers. This policy, set forth principally in Order 636, issued on April 8,
1992, 



                                       7
<PAGE>   10

and its progeny, is being implemented largely through restructuring proceedings
for each pipeline. These factors make the future effect of that order upon the
natural gas markets uncertain.

       There are many other statutes, rules, regulations and orders that affect
the pricing or transportation of natural gas. Some of the provisions are and
will be subject to court or administrative review. Consequently, uncertainty as
to the ultimate impact of these regulatory provisions on the prices and
production of natural gas from the Royalty Properties is expected to continue
for the foreseeable future.

       Environmental Regulation

       General. Activities on the Royalty Properties are subject to existing
federal, state and local laws (including case law), rules and regulations
governing health, safety, environmental quality and pollution control. It is
anticipated that, absent the occurrence of an extraordinary event, compliance
with existing federal, state and local laws, rules and regulations regulating
health, safety, the release of materials into the environment or otherwise
relating to the protection of the environment will not have a material adverse
effect upon the Trust or Unit holders. The Trustee cannot predict what effect
additional regulation or legislation, enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from operations on the Royalty Properties could have on the Trust or
Unit holders. Even if the Trust were not directly liable for costs or expenses
related to these matters, increased costs of compliance could result in wells
being plugged and abandoned earlier in their productive lives, with a resulting
loss of reserves and revenues to the Trust.

       Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "superfund" law, imposes liability,
regardless of fault or the legality of the original conduct, on certain classes
of persons that contributed to the release of a "hazardous substance" into the
environment. These persons include the current or previous owner and operator of
a site and companies that disposed, or arranged for the disposal, of the
hazardous substance found at a site. CERCLA also authorizes the Environmental
Protection Agency and, in some cases, private parties to take actions in
response to threats to the public health or the environment and to seek recovery
from such responsible classes of persons of the costs of such action. In the
course of operations, the working interest owner and/or the operator of Royalty
Properties may have generated and may generate wastes that may fall within
CERCLA's definition of "hazardous substances". The operator of the Royalty
Properties or the working interest owners may be responsible under CERCLA for
all or part of the costs to clean up sites at which such substances have been
disposed. Although the Trust is not the operator of any Royalty Properties, or
the owner of any working interest, its ownership of royalty interests could
cause it to be responsible for all or part of such costs to the extent CERCLA
imposes responsibility on parties as "owners".

       Solid and Hazardous Waste. The Royalty Properties have produced oil
and/or gas for many years, and, although the Trust has no knowledge of the
procedures followed by the operators of the Royalty Properties in this regard,
hydrocarbons or other solid or hazardous wastes may have been disposed or
released on or under the Royalty Properties by the current or previous
operators. Federal, state and local laws applicable to oil- and gas-related
wastes and properties have become increasingly more stringent. Under these laws,
removal or remediation of previously disposed wastes or property contamination
could be required.

PRICES

       Oil

       Crude oil prices are affected by a variety of factors. Since domestic
crude oil price controls were lifted in 1981, the principal factors influencing
the prices received by producers of domestic crude oil have been the pricing and
production of the members of the Organization of Petroleum Exporting Countries
("OPEC").

       The Trust's average per barrel oil price decreased from $18.77 in 1997 to
$12.72 in 1998. The Trustee believes that the lower average price per barrel of
crude oil realized by the Trust in 1998 can be attributed to a worldwide decline
in oil prices that continued throughout 1998.

       Natural Gas

       Substantial competition in the natural gas marketplace continued in 1998.
Competition with alternative fuels and excess gas supplies persists. Natural gas
prices, which once were determined largely by governmental regulations, are now
being generally governed by the marketplace. The average price received by the
Trust in 1998 on natural gas volumes sold of $1.96 per Mcf represented a
decrease from the $2.45 per Mcf received in 1997, due largely to a relatively
mild winter and declining gas prices in the latter part of 1998.


                                       8
<PAGE>   11


       FERC is the federal agency responsible for implementing regulations
governing the natural gas industry. The current policy of FERC is designed to
promote increased competition among gas industry participants. Accordingly,
Order 636 and various other orders have been proposed and implemented to
encourage nondiscriminatory open-access transportation by interstate pipelines,
to provide for the release of natural gas dedicated to long-term contracts but
not required by pipelines to meet near-term system supply needs, and to provide
for the unbundling of pipeline services so that such services may also be
furnished by nonpipeline suppliers on a competitive basis. Certain of these
orders have been or will be challenged in the courts, and no prediction can be
made regarding the future impact on the industry of FERC's current or proposed
regulations.

ITEM 2.  PROPERTIES.

       The assets of the Registrant consist principally of the Royalty
Properties, which constitute interests in gross production of oil, gas and other
minerals free of the costs of production. The Royalty Properties consist of
royalty and mineral interests, including landowner's royalties, overriding
royalty interests, minerals (other than executive rights, bonuses and delay
rentals), production payments and any other similar, nonparticipatory interest,
in certain producing and proved undeveloped oil and gas properties located in
Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas. These
properties are represented by approximately 5,400 tracts of land. Approximately
2,950 of the tracts are in Oklahoma, 1,750 in Texas, 330 in Louisiana, 200 in
New Mexico, 150 in Mississippi and 12 in Florida.

       The following table summarizes total developed and proved undeveloped
acreage represented by the Royalty Properties at December 31, 1998.


<TABLE>
<CAPTION>
                                              Mineral and Royalty
                                            -------------------------
            State                           Gross Acres     Net Acres 
            -----                           -----------     ---------
<S>                                              <C>             <C>
  Florida .................................      5,448           697
  Louisiana ...............................    244,391        23,682
  Mississippi .............................     75,489         9,713
  New Mexico ..............................    112,294         9,141
  Oklahoma ................................    381,538        67,558
  Texas ...................................  1,273,132       105,760
                                             ---------     ---------
  Total ...................................  2,092,292       216,551
                                             =========     =========
</TABLE>

       Detailed information concerning the number of wells on royalty properties
is not generally available to the owner of royalty interests. Consequently, the
Registrant does not have an accurate count of the number of wells located on the
Royalty Properties and cannot readily obtain such information.

TITLE

       The conveyances of the Royalty Properties to the Trust covered the
royalty and mineral properties located in the six states that were vested in
Sabine Corporation on the effective date of the conveyances and that were
subject to existing oil, gas and other mineral leases other than properties
specifically excluded in the conveyances. Since Sabine Corporation may not have
had available to it as a royalty owner information as to whether specific lands
in which it owned a royalty interest were subject to an existing lease, minimal
amounts of nonproducing royalty properties may also have been conveyed to the
Trust. Sabine Corporation did not warrant title to the Royalty Properties either
expressly or by implication.

RESERVES

       The Registrant has obtained from DeGolyer and MacNaughton, independent
petroleum engineering consultants, a study of the proved oil and gas reserves
attributable as of January 1, 1999 to the Royalty Properties. The following
letter report summarizes such reserve study and sets forth information as to the
assumptions, qualifications, procedures and other matters relating to such
reserve study. See Note 8 of the Notes to Financial Statements in Item 8 hereof
for additional information regarding the proved oil and gas reserves of the
Trust.


                                       9
<PAGE>   12


                            DEGOLYER AND MACNAUGHTON
                                ONE ENERGY SQUARE
                               DALLAS, TEXAS 75206

                                 March 4, 1999


NationsBank, N.A.
P.O. Box 830650
Dallas, Texas 75283-0650

Gentlemen:

       Pursuant to your request, we have prepared estimates of the extent and
value of the proved crude oil, condensate, natural gas liquids (NGL), and
natural gas reserves, as of January 1, 1999, of certain royalty interests owned
by Sabine Royalty Trust (the Trust). The properties appraised consist of
royalties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and
Texas. NationsBank, N.A. (NationsBank) acts as trustee of the Trust.

       Information used in the preparation of this report was obtained from
NationsBank, from records on file with the appropriate regulatory agencies, and
from public sources. During this investigation, we consulted freely with
officers and employees of NationsBank and were given access to such accounts,
records, geological and engineering reports, and other data as were desired for
examination. In the preparation of this report we have relied, without
independent verification, upon information furnished by NationsBank with respect
to property interests owned by the Trust, production from such properties,
current prices for production, agreements relating to current and future
operations and sale of production, and various other information and data that
were accepted as represented. It was not considered necessary to make a field
examination of the physical condition and operation of the properties in which
the Trust owns interests.

       Our reserves estimates are based on a detailed study of the properties
and were prepared by the use of standard geological and engineering methods
generally accepted by the petroleum industry. The method or combination of
methods used in the analysis of each reservoir was tempered by experience with
similar reservoirs, consideration of the state of development, and the quality
and completeness of basic data. The Trust owns several thousand royalty
interests. In view of the limited information available to a royalty owner and
the small reserves attributable to many of these interests, certain of them
representing approximately 29 PERCENT of the total reserves of the properties
included herein were summarized by state or field and worked in total rather
than being appraised individually. Historical records of net production and
revenue and experience with similar properties were used in analyzing these
properties.

       Reserves estimated in this report are expressed as gross and net
reserves. Gross reserves are defined as the total estimated petroleum to be
produced from these properties after December 31, 1998. Net reserves are defined
as that portion of the gross reserves attributable to the interests owned by the
Trust after deducting royalties and other interests owned by others. Gas volumes
shown herein are sales gas volumes and are expressed at a temperature base of 60
degrees Fahrenheit and at the legal pressure bases of the states in which the
interests are located. Sales gas is defined as the total gas to be produced from
the reservoirs, measured at the point of delivery, after reduction for fuel
usage, flare, and shrinkage resulting from field separations and processing.
Condensate reserves estimated herein are those to be obtained from normal
separator recovery. NGL reserves are those attributable to the leasehold
interests according to processing agreements.

       Petroleum reserves included in this report are classified as proved and
are judged to be economically producible in future years from known reservoirs
under existing economic and operating conditions and assuming continuation of
current regulatory practices using conventional production methods and
equipment. In the analyses of production-decline curves, reserves were estimated
only to the limit of economic rates of production under existing economic and
operating conditions using prices and costs as of the date the estimate is made,
including consideration of changes in existing prices provided only by
contractual arrangements but not including escalations based upon future
conditions. The petroleum reserves are classified as follows:

    Proved--Reserves that have been proved to a high degree of certainty by
    analysis of the producing history of a reservoir and/or by volumetric
    analysis of adequate geological and engineering data. Commercial
    productivity has been established by actual production, successful testing,
    or in certain cases by favorable core analyses and electrical-log
    interpretation when the producing characteristics of the formation are known
    from nearby fields. Volumetrically, the structure, areal extent, volume, and
    characteristics of the reservoir are well defined by a reasonable
    interpretation of adequate subsurface well control and by known continuity
    of hydrocarbon-saturated material above known fluid contacts, if any, or
    above the lowest known structural occurrence of hydrocarbons.



                                       10
<PAGE>   13

    Developed--Reserves that are recoverable from existing wells with current
    operating methods and expenses.

    Developed reserves include both producing and nonproducing reserves.
    Estimates of producing reserves assume recovery by existing wells producing
    from present completion intervals with normal operating methods and
    expenses. Developed nonproducing reserves are in reservoirs behind the
    casing or at minor depths below the producing zone and are considered proved
    by production from other wells in the field, by successful drill-stem tests,
    or by core analyses from the particular zones. Nonproducing reserves require
    only moderate expense to be brought into production.

    Undeveloped--Reserves that are recoverable from additional wells yet to be
    drilled.

    Undeveloped reserves are those considered proved for production by
    reasonable geological interpretation of adequate subsurface control in
    reservoirs that are producing or proved by other wells but are not
    recoverable from existing wells. This classification of reserves requires
    drilling of additional wells, major deepening of existing wells, or
    installation of enhanced recovery or other facilities.

       Reserves recoverable by enhanced recovery methods, such as injection of
external fluids to provide energy not inherent in the reservoirs, may be
classified as proved developed or proved undeveloped reserves depending upon the
extent to which such enhanced recovery methods are in operation. These reserves
are considered to be proved only in cases where a successful fluid-injection
program is in operation, a pilot program indicates successful fluid injection,
or information is available concerning the successful application of such
methods in the same reservoir and it is reasonably certain that the program will
be implemented.

       The development status shown herein represents the status applicable on
January 1, 1999. In the preparation of this study, data available from wells
drilled on the appraised properties through December 31, 1998, were used in
estimating gross ultimate recovery. When applicable, gross production estimated
to January 1, 1999, was deducted from gross ultimate recovery to arrive at the
estimates of gross reserves as of January 1, 1999. In most fields, this required
that the production rates be estimated for up to 4 months since production data
were available only through August 1998.

       Future oil, condensate, NGL, and gas producing rates estimated for this
report are based on production rates considering the most recent figures
available. The rates used for future production are rates that we feel are
within the capacity of the well or reservoir to produce. This information has
been considered in arriving at the rate projected.

       Net proved reserves, as of January 1, 1999, attributable to the Trust
from the properties appraised are estimated in barrels (bbl) or thousands of
cubic feet (Mcf) as follows:

<TABLE>
<CAPTION>
                              PROVED DEVELOPED            PROVED UNDEVELOPED
                                 RESERVES                      RESERVES
                              ----------------            ------------------
                            OIL,                          OIL,
                         CONDENSATE,      SALES       CONDENSATE,      SALES
     STATE              AND NGL (bbl)   GAS (Mcf)     AND NGL (bbl)   GAS (Mcf)
     -----              ------------   ----------     ------------    ---------
<S>                         <C>           <C>         <C>             <C>
Florida ...........         94,319        105,705              0              0
Louisiana .........         73,598      2,585,181              0              0
Mississippi .......         99,289      2,198,614              0              0
New Mexico ........        283,365      2,137,696              0              0
Oklahoma ..........        590,797      9,459,119              0              0
Texas .............      5,064,944     22,567,642              0              0
                        ----------     ----------     ----------     ----------
         TOTAL ....      6,206,312     39,053,957              0              0
</TABLE>

       Revenue values in this report are expressed in terms of estimated future
net revenue and present worth of future net revenue. These values are based on
the continuation of prices in effect on December 31, 1998. Future gross revenue
is defined as that revenue to be realized from the production and sale of the
estimated net reserves. Future net revenue is calculated by deducting estimated
severance and ad valorem taxes from the future gross revenue. Present worth of
future net revenue is calculated by discounting the future net revenue at the
arbitrary rate of 10 percent per year compounded monthly over the expected
period of realization.

       Revenue values in this report were estimated using the initial prices and
costs provided by NationsBank. Future prices were estimated using guidelines
established by the Securities and Exchange Commission (SEC) and the Financial
Accounting Standards Board (FASB). The initial and future prices used in this
report are based on receipts by the Trust in December 1998 and NationsBank has
represented that the prices used herein are those that the Trust could
reasonably expect to receive. The assumptions used for estimating future prices
and costs are as follows:



                                       11
<PAGE>   14

       Oil, Condensate, Natural Gas Liquids, and Natural Gas Prices

       Oil, condensate, natural gas liquids, and natural gas prices were
       furnished by NationsBank. These prices are based on receipts by the Trust
       in December 1998 and are held constant for the lives of the properties.

       A projection of the estimated future net revenue from the properties
appraised, as of January 1, 1999, based on the aforementioned assumptions
concerning prices and costs is summarized as follows:


<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31                                      FUTURE NET REVENUE $
------------                                     --------------------
<S>                                              <C>       
    1999 .....................................       16,399,212
    2000 .....................................       13,649,675
    2001 .....................................       11,508,370
                                                    -----------
    SUBTOTAL .................................       41,557,257
    REMAINING ................................       86,911,547
                                                    -----------
      TOTAL ..................................      128,468,804
</TABLE>


       The present worth of future net revenue, as of January 1, 1999, is
estimated to be $71,413,818.

       Estimates of oil, condensate, NGL and gas reserves and future net revenue
should be regarded only as estimates that may change as further production
history and additional information become available. Not only are such reserves
and revenue estimates based on that information which is currently available,
but such estimates are also subject to the uncertainties inherent in the
application of judgmental factors in interpreting such information.

       In our opinion, the information relating to estimated proved reserves,
estimated future net revenue from proved reserves, and present worth of
estimated future net revenue from proved reserves of oil, condensate, natural
gas liquids, and gas contained in this report has been prepared in accordance
with Paragraphs 10-13, 15 and 30(a)-(b) of Statement of Financial Accounting
Standards No. 69 (November 1982) of the FASB and Rules 4-10(a)(1)-(13) of
Regulation S-X and Rule 302(b) of Regulation S-K of the SEC; provided, however,
(i) certain estimated data have not been provided with respect to changes in
reserve information, (ii) future income tax expenses have not been taken into
account in estimating the future net revenue and present worth values set forth
herein, and (iii) at the request of NationsBank and because of the limited
availability of data, proved reserves, future net revenue therefrom, and the
present worth thereof for certain royalty interests accounting for approximately
29 percent of the Trust's total proved reserves have been estimated in the
aggregate by state or field rather than on a property-by-property basis using
net production and revenue data and our general knowledge of producing
characteristics in the geographic areas in which such interests are located.

       To the extent the above-enumerated rules, regulations, and statements
require determinations of an accounting or legal nature or information beyond
the scope of our report, we are necessarily unable to express an opinion as to
whether the above-described information is in accordance therewith or sufficient
therefor.

                                     Submitted,

                                     DeGOLYER and MacNAUGHTON

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


       There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development. The preceding reserve data in the letter regarding the study
represent estimates only and should not be construed to be exact. The estimated
present worth of future net revenue amounts shown by the study should not be
construed as the current fair market value of the estimated oil and gas reserves
since a market value determination would include many additional factors.

       Reserve estimates may be adjusted from time to time as more accurate
information on the volume or recoverability of existing reserves becomes
available. Actual reserve quantities do not change, however, except through
production. The Trust continues to own only the Royalty Properties that were
initially transferred to the Trust at the time of its creation and is prohibited
by the Trust Agreement from acquiring additional oil and gas interests.


                                       12
<PAGE>   15

       The future net revenue shown by the study has not been reduced for
administrative costs and expenses of the Trust in future years. The costs and
expenses of the Trust may increase in future years, depending on the amount of
income from the Royalty Properties, increases in the Trustee's and escrow
agents' fees and expenses, accounting, engineering, legal and other professional
fees, and other factors. It is expected that the costs and expenses of the Trust
in 1999 will be approximately $1,350,000.

       The present worth of future net revenue of the Trust`s proved developed
reserves declined from $104,912,482 at January 1, 1998 to $71,413,818. This
decline resulted primarily from a decline in the oil and gas prices used in the
calculation of such amount, from $17.81 per barrel of oil and $2.7161 per Mcf of
gas at January 1, 1998 to $10.82 per barrel of oil and $1.8508 per Mcf of gas at
January 1, 1999. Subsequent to year end, the price of oil increased
significantly. As of March 15, 1999, published oil prices were approximately
$14.48 per barrel. The use of such price, as compared to $10.82 per barrel,
which was used to calculate the above information, would result in a larger
standardized measure of discounted future net cash flows.

       The volatile nature of the world energy markets makes it difficult to
estimate future prices of oil and gas. The prices obtained for oil and gas
depend upon numerous factors, including the domestic and foreign supply of oil
and gas and the price of foreign imports, market demand, the price and
availability of alternative fuels, the availability of pipeline capacity and the
effect of governmental regulations.

ITEM 3.   LEGAL PROCEEDINGS.

       There are no material pending legal proceedings to which the Registrant
is a party or of which any of its property is the subject.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

       Not applicable.

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

       The Units are listed and traded on the New York Stock Exchange under the
symbol "SBR." The following table sets forth the high and low sales prices for
the Units and the aggregate amount of cash distributions paid by the Trust
during the periods indicated.

<TABLE>
<CAPTION>
                                     Sales Price         Distributions
                              ------------------------   -------------
1998                             High           Low        Per Unit
-------------------------     ----------    ----------   -------------
<S>                           <C>           <C>          <C>          
First Quarter ...........     $   15.188    $   13.000   $      .52526
Second Quarter ..........         16.563        14.000          .43088
Third Quarter ...........         16.500        14.375          .38152
Fourth Quarter ..........         15.750        11.750          .31600

<CAPTION>

1997
-------------------------     ----------    ----------   -------------
First Quarter  ..........     $   13.375    $   11.750   $      .47428
Second Quarter ..........         14.625        12.500          .45869
Third Quarter ...........         16.438        14.125          .41136
Fourth Quarter ..........         17.000        12.625          .30023
-------------------------     ----------    ----------   -------------
</TABLE>

At March 15, 1999, there were 14,579,345 Units outstanding and approximately
3,354 Unit holders of record.

ITEM 6.   SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Years Ended December 31                              1998           1997            1996             1995             1994
--------------------------------------------     -----------     -----------     -----------     -----------     -----------
<S>                                               <C>             <C>             <C>             <C>             <C>        
Royalty Income ..............................     $24,075,260     $25,688,064     $22,173,492     $16,088,936     $18,669,739
Distributable Income ........................      22,941,409      24,499,892      20,972,323      14,829,839      17,441,297
Distributable Income per Unit ...............            1.57            1.68            1.44            1.02            1.20
Total Assets at Year End ....................       4,766,116       6,936,828       6,868,761       6,598,427       7,172,645
Distributions per Unit ......................            1.65            1.64            1.37            1.03            1.20
--------------------------------------------     -----------     -----------     -----------     -----------     -----------
</TABLE>


                                       13
<PAGE>   16


ITEM 7.  TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
         OF OPERATIONS.

       Sabine Royalty Trust (the "Trust") makes monthly distributions to its
Unit holders of the excess of the preceding month's revenues received over
expenses incurred. Upon receipt, royalty income is invested in short-term
investments until its subsequent distribution. In accordance with the Trust
Agreement, the Trust's only long-term assets consist of royalty interests in
producing oil and gas properties. Although the Trust is permitted to borrow
funds if necessary to continue its operations, borrowings are not anticipated in
the foreseeable future.

       Distributable income consists of royalty income plus interest income plus
any decrease in cash reserves established by the Trustee less general and
administrative expenses of the Trust less any increase in cash reserves
established by the Trustee. The Trust's royalty income represents payments
received during a particular time period for oil and gas production from the
Trust's properties. Because of various factors which influence the timing of the
Trust's receipt of payments, royalty income for any particular time period will
usually include payments for oil and gas produced in prior periods. The price
and volume figures that follow represent the volumes and prices for which the
Trust received payment during 1998.

       Royalty income during 1998 decreased approximately $1,613,000, or 6.3
percent, compared to 1997 royalty income, which had increased approximately
$3,515,000, or 15.9 percent, from 1996 royalty income.

       Revenues generated by sales of oil and gas decreased in 1998 from 1997 as
a result of lower oil and gas prices offset somewhat by an increase in volumes
of oil and natural gas sold. Gas volumes increased from 7,154,510 thousand cubic
feet ("Mcf") in 1997 to 9,119,288 Mcf in 1998, after increasing from 6,565,302
in 1996. The average price per Mcf of gas received by the Trust decreased from
$2.45 in 1997 to $1.96 in 1998, after increasing from $1.98 in 1996. The Trustee
believes that normal market forces and a relatively mild winter during the 
fourth quarter of 1998 resulted in lower gas prices.

       Oil volumes sold increased to 629,011 barrels in 1998 from 614,976
barrels in 1997, having decreased from 660,521 barrels in 1996. The effect of
this minor volume increase was negated by a significant decline in the average
price per barrel received by the Trust to $12.72 in 1998 from $18.77 in 1997 and
$17.31 in 1996. An oversupply in domestic oil volumes and the effect of volatile
world market conditions contributed to a decline in prices throughout 1998.

       Interest income remained relatively unchanged in 1998 compared to 1997.
General and administrative expenses declined in 1998 compared to 1997 largely
due to non-recurring costs associated with the retention and storage of
historical trust documents incurred during 1997. General and administrative
expenses were relatively unchanged in 1997 compared 1996.

YEAR 2000 ISSUE

       Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations. If
a company or organization does not successfully address its Year 2000 issues, it
may face material adverse consequences. The Trustee has identified the General
Ledger/Accounts Payable System as its primary system that is vulnerable to the
Year 2000 issue. The Trust selected a system that has been warranted to be Year
2000 compliant and completed the installation of the new system at the beginning
of 1998. The cost of the system was approximately $6,000. To date the Trustee
has incurred no other costs in connection with its efforts to identify, assess,
remediate and test the Trust's systems for Year 2000 compliance.

       The Trustee is in the process of identifying and assessing other
information technology ("IT") systems used in connection with the Trust as well
as other systems, for Year 2000 compliance. Non-IT systems are generally more
difficult to assess because they often contain embedded technology that may be
subject to Year 2000 problems. The total cost of the Trustee's Year 2000 efforts
is expected to be approximately $10,000 (including the $6,000 referred to
above), all of which was incurred and paid during the last quarter of 1998 and
the first quarter of 1999. Of this amount, the Trustee expects to pay $4,000 for
identification and assessment of affected systems.

       The Trustee has additionally identified those vendors it believes could
have an impact on its day-to-day operations if their operations were interrupted
as a result of Year 2000 problems. The Trustee has developed a questionnaire
regarding the vendor's Year 2000 status. These vendors, consisting primarily of
energy companies, have been contacted to determine their Year 2000 status.


                                       14
<PAGE>   17

       The Trustee has no reason to believe that its vendors will not be Year
2000 compliant. In the event the Trustee learns that a vendor's system will not
be Year 2000 compliant, the Trustee will assess the potential risk and develop
contingency plans at that time.

       The Trust is a passive entity with no business operations, and the IT
systems employed by the Trustee in connection with its duties on behalf of the
Trust are less extensive than the systems employed by many business entities.
The Trust has no formal IT budget, and the Trustee does not anticipate making
any other significant expenditures relating to the Trustee's IT systems used in
connection with Trust during 1998 or 1999. Thus, the expenditures expected to be
made in connection with the Year 2000 efforts described above will represent
substantially all of the Trustee's IT-related expenditures on behalf of the
Trust during 1998 and 1999. These expenses will be treated as Trust expenses on
the financial statements of the Trust.

       Because the royalty interests held by the Trust are fixed, the Trustee is
dependent upon the third parties (primarily energy companies) that hold
operating interests with respect thereto for the receipt of royalty income.
Thus, if any such third party failed to deliver royalty income, the Trustee
would have available no alternative source for such income. The Trustee believes
that the worst case scenario would be the failure by the Trustee and one or more
third parties who pay royalties to the Trust to identify or remediate Year 2000
problems on a timely basis, which could cause the Trustee to be unable to make
required distributions to Unitholders. Such inability could result in the
incurrence by the Trust of interest charges or other liabilities to Unitholders.
The Trustee believes that in the event of a failure of any of its internal
systems it would be able to replace such systems in a relatively short period of
time, relying on internal resources of NationsBank, N.A., which serves as the
Trustee, although there can be no assurance that such replacement would not be
costly or that it would be completed without resulting in a significant delay in
the distributions to Unitholders. With respect to a failure by a third party to
deliver royalty income on a timely basis, the Trustee believes that it would
have no control over the efforts of such third party to correct the problems,
and significant delays in the receipt of royalty income could result.

       The Trust will utilize both internal and external resources to achieve
Year 2000 compliance. The Trustee estimates that its identification and
assessment activities are approximately 80% complete. It expects that all of its
Year 2000 efforts related to the Trust's internal systems will be completed by
the end of the first quarter of 1999. However, there can be no guarantee that
the Trustee will be able to identify all potential Year 2000 problems or to
fully remediate all Year 2000 problems identified on a timely basis. There also
can be no assurance that the systems of third party vendors on which the Trust
relies will be timely remediated. The failure by the Trustee or any such third
party to fully remediate its Year 2000 problems on a timely basis could have a
material adverse affect on the Trustee's ability to account for and make timely
distribution of the Trust's distributable income.

       Certain of the statements made above regarding the Trustee's Year 2000
program are forward-looking statements, and there can be no assurance that the
Trustee will be able to achieve Year 2000 compliance in the manner and by the
dates indicated.

FORWARD-LOOKING STATEMENTS

       This Annual Report includes "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, which are
intended to be covered by the safe harbor created thereby. All statements other
than statements of historical fact included in this Annual Report are
forward-looking statements. Such statements include, without limitation, certain
reserve information and other statements contained in Item 2, "Properties", and
certain statements regarding the Trust's financial position, industry conditions
and other matters contained in this Item 7. Although the Trustee believes that
the expectations reflected in such forward-looking statements are reasonable,
such expectations are subject to numerous risks and uncertainties and the
Trustee can give no assurance that they will prove correct. There are many
factors, none of which is within the Trustee's control, that may cause such
expectations not to be realized, including, among other things, factors
identified in this Annual Report affecting oil and gas prices and the
recoverability of reserves, general economic conditions, actions and policies of
petroleum-producing nations and other changes in the domestic and international
energy markets.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

       The Trust is a passive entity and other than the Trust's ability to 
periodically borrow money as necessary to pay expenses, liabilities and 
obligations of the Trust that cannot be paid out of cash held by the Trust, the 
Trust is prohibited from engaging in borrowing transactions. The amount of any 
such borrowings is unlikely to be material to the Trust. The Trust periodically 
holds short term investments acquired with funds held by the Trust pending 
distribution to Unitholders and funds held in reserve for the payment of Trust 
expenses and liabilities. Because of the short-term nature of these borrowings 
and investments and certain limitations upon the types of such investments 
which may be held by the Trust, the Trustee believes that the Trust is not 
subject to any material interest rate risk. The Trust does not engage in 
transactions in foreign currencies which could expose the Trust or Unitholders 
to any foreign currency related market risk. The Trust invests in no derivative 
financial instruments and has no foreign operations or long-term debt 
instruments. 


                                       15
<PAGE>   18


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                          INDEPENDENT AUDITORS' REPORT

UNIT HOLDERS OF SABINE ROYALTY TRUST AND NATIONSBANK, N.A., TRUSTEE:

       We have audited the statements of assets, liabilities and trust corpus of
Sabine Royalty Trust (the "Trust") as of December 31, 1998 and 1997, and the
related statements of distributable income and changes in trust corpus for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Trustee. Our responsibility is to
express an opinion on these financial statements based on our audits.

       We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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

       In our opinion, such financial statements present fairly, in all material
respects, the assets, liabilities and trust corpus of the Trust at December 31,
1998 and 1997, and the distributable income and changes in trust corpus for each
of the three years in the period ended December 31, 1998, on the basis of
accounting described in Note 2.




/SIG/ DELOITTE & TOUCHE LLP


Dallas, Texas
March 29, 1999


                                       16
<PAGE>   19


                              FINANCIAL STATEMENTS
                              SABINE ROYALTY TRUST

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                           -------------------------
                                                                              1998           1997
                                                                           ----------     ----------
<S>                                                                        <C>            <C> 
ASSETS
Cash and short-term investments ......................................     $2,132,011     $3,857,558
Royalty interests in oil and gas
  properties less accumulated
  amortization of and 19,761,080 (1998) and
  $19,315,915 (1997) .................................................      2,634,105      3,079,270
                                                                           ----------     ----------
Total ................................................................     $4,766,116     $6,936,828
                                                                           ==========     ==========
LIABILITIES AND TRUST CORPUS
Trust expenses payable ...............................................     $  140,756     $  222,322
Other payables (Note 4) ..............................................        299,215        774,399
Trust corpus (14,579,345 units of
  beneficial interest authorized
  and outstanding) ...................................................      4,326,145      5,940,107
                                                                           ----------     ----------
Total ................................................................     $4,766,116     $6,936,828
                                                                           ==========     ==========
</TABLE>

STATEMENTS OF DISTRIBUTABLE INCOME

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                            -------------------------------------------
                                                               1998            1997           1996
                                                            -----------     -----------     -----------
<S>                                                         <C>             <C>             <C>        
Royalty income ........................................     $24,075,260     $25,688,064     $22,173,492
Interest income .......................................         162,884         162,059         142,079
                                                            -----------     -----------     -----------
Total .................................................      24,238,144      25,850,123      22,315,571
General and administrative
  expenses (Note 6) ...................................       1,296,735       1,350,231       1,343,248
                                                            -----------     -----------     -----------
Distributable income ..................................     $22,941,409     $24,499,892     $20,972,323
                                                            ===========     ===========     ===========
Distributable income per unit (Basic and
  Assuming Dilution) (14,579,345 units)
  (Note 1) ............................................     $      1.57     $      1.68     $      1.44
                                                            ===========     ===========     ===========
Distributions per unit
  (Note 3) ............................................     $      1.65     $      1.64     $      1.37
                                                            ===========     ===========     ===========
</TABLE>

STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
                                                            ------------------------------------------------
                                                                1998             1997             1996
                                                            ------------      ------------      ------------
<S>                                                         <C>              <C>              <C>         
Trust corpus, beginning of
  year ................................................     $  5,940,107      $  5,885,543      $  5,447,142 
Amortization of royalty
  interests ...........................................         (445,165)         (467,768)         (543,094)
Distributable income ..................................       22,941,409        24,499,892        20,972,323
Distributions to unit
  holders (Note 3) ....................................      (24,110,206)      (23,977,560)      (19,990,828)
                                                            ------------      ------------      ------------
Trust corpus, end of year .............................     $  4,326,145      $  5,940,107      $  5,885,543
                                                            ============      ============      ============
</TABLE>

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



                                       17
<PAGE>   20


SABINE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS

1.     TRUST ORGANIZATION AND PROVISIONS

       Sabine Royalty Trust (the "Trust") was established by the Sabine
Corporation Royalty Trust Agreement (the "Trust Agreement"), made and entered
into effective as of December 31, 1982, to receive a distribution from Sabine
Corporation ("Sabine") of royalty and mineral interests, including landowner's
royalties, overriding royalty interests, minerals (other than executive rights,
bonuses and delay rentals), production payments and any other similar,
nonparticipatory interest, in certain producing and proved undeveloped oil and
gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma
and Texas (the "Royalties").

       Certificates evidencing units of beneficial interest (the "Units") in the
Trust were mailed on December 31, 1982 to Sabine's shareholders of record on
December 23, 1982, on the basis of one Unit for each share of Sabine's
outstanding common stock. In May 1988, Sabine was acquired by Pacific
Enterprises, a California corporation. Through a series of mergers, Sabine was
merged into Pacific Enterprises Oil Company (USA) ("Pacific (USA)"), a
California corporation and a wholly owned subsidiary of Pacific Enterprises,
effective January 1, 1990. This acquisition and the subsequent mergers had no
effect on the Units. Pacific (USA), as successor to Sabine, has assumed by
operation of law all of Sabine's rights and obligations with respect to the
Trust. The Units are listed and traded on the New York Stock Exchange.

       In connection with the transfer of the Royalties to the Trust upon its
formation, Sabine had reserved to itself all executive rights, including rights
to execute leases and to receive bonuses and delay rentals. In January 1993,
Pacific (USA) completed the sale of substantially all its producing oil and gas
assets to a third party. The sale did not include executive rights relating to
the Royalties, and Pacific (USA)'s ownership of such rights was not affected by
the sale.

       NationsBank, N.A., as trustee (the "Trustee"), acts as trustee of the
Trust. The terms of the Trust Agreement provide, among other things, that:

o      The Trust shall not engage in any business or commercial activity of any
       kind or acquire assets other than those initially transferred to the
       Trust.

o      The Trustee may not sell all or any part of its assets unless approved by
       the holders of a majority of the outstanding Units in which case the sale
       must be for cash and the proceeds, after satisfying all existing
       liabilities, promptly distributed to Unit holders.

o      The Trustee may establish a cash reserve for the payment of any liability
       that is contingent or uncertain in amount or that otherwise is not
       currently due and payable.

o      The Trustee will use reasonable efforts to cause the Trust and the Unit
       holders to recognize income and expenses on monthly record dates.

o      The Trustee is authorized to borrow funds to pay liabilities of the Trust
       provided that such borrowings are repaid in full before any further
       distributions are made to Unit holders.

o      The Trustee will make monthly cash distributions to Unit holders of
       record on the monthly record date (see Note 3).

       Because of the passive nature of the Trust and the restrictions and
limitations on the powers and activities of the Trustee contained in the Trust
Agreement, the Trustee does not consider any of the officers and employees of
the Trustee to be "officers" or "executive officers" of the Trust as such terms
are defined under applicable rules and regulations adopted under the Securities
Exchange Act of 1934.

       The proceeds of production from the Royalties are receivable from
hundreds of separate payors. In order to facilitate creation of the Trust and to
avoid the administrative expense and inconvenience of daily reporting to Unit
holders, the conveyances by Sabine of the Royalties located in five of the six
states provided for the execution of an escrow agreement by Sabine and the
initial trustee of the Trust, in its capacities as trustee of the Trust and as
escrow agent. The conveyances by Sabine of the Royalties located in Louisiana
provided for the execution of a substantially identical escrow agreement by
Sabine and a Louisiana bank in the capacities of escrow agent and of trustee
under the name of Sabine Louisiana Royalty Trust. Sabine Louisiana Royalty
Trust, the sole 


                                       18
<PAGE>   21


SABINE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


beneficiary of which is the Trust, was established in order to avoid uncertainty
under Louisiana law as to the legality of the Trustee's holding record title to
the Royalties located in Louisiana.
      

       Pursuant to the terms of the escrow agreements and the conveyances of the
properties by Sabine, the proceeds of production from the Royalties for each
calendar month, and interest thereon, are collected by the escrow agents and are
paid to and received by the Trust only on the next monthly record date. The
escrow agents have agreed to endeavor to assure that they incur and pay expenses
and fees for each calendar month only on the next monthly record date. The Trust
Agreement also provides that the Trustee is to endeavor to assure that income of
the Trust will be accrued and received and expenses of the Trust will be
incurred and paid only on each monthly record date. Assuming that the escrow
agreement is recognized for Federal income tax purposes and that the Trustee and
the escrow agents are able to control the timing of income and expenses, as
stated above, cash and accrual basis Unit holders should be treated as realizing
income only on each monthly record date. The Trustee is treating the escrow
agreement as effective for tax purposes. However, for financial reporting
purposes, royalty and interest income are recorded in the calendar month in
which the amounts are received by either the escrow agents or the Trust.

       Distributable income as determined for financial reporting purposes for a
given quarter will not usually equal the sum of distributions made during that
quarter. Distributable income for a given quarter will approximate the sum of
the distributions made during the last two months of such quarter and the first
month of the next quarter.

2.     ACCOUNTING POLICIES

BASIS OF ACCOUNTING

       The financial statements of the Trust are prepared on the following basis
and are not intended to present financial position and results of operations in
conformity with generally accepted accounting principles:

o      Royalty income, net of severance and ad valorem taxes, and interest
       income are recognized in the month in which amounts are received by the
       Trust (see Note 1).

o      Trust expenses, consisting principally of routine general and
       administrative costs, include payments made during the accounting period.
       Expenses are accrued to the extent of amounts that become payable on the
       next monthly record date following the end of the accounting period.
       Reserves for liabilities that are contingent or uncertain in amount may
       also be established if considered necessary.

o      Royalties that are producing properties are amortized using the
       unit-of-production method. This amortization is shown as a reduction of
       Trust corpus.

o      Distributions to Unit holders are recognized when declared by the Trustee
       (see Note 3).

       The financial statements of the Trust differ from financial statements
prepared in conformity with generally accepted accounting principles because of
the following:

o      Royalty income is recognized in the month received rather than in the
       month of production.

o      Expenses other than those expected to be paid on the following monthly
       record date are not accrued.

o      Amortization of the Royalties is shown as a reduction to Trust corpus and
       not as a charge to operating results.

o      Reserves may be established for contingencies that would not be recorded
       under generally accepted accounting principles.

USE OF ESTIMATES

       The preparation of financial statements in conformity with the basis of
accounting described above requires management to make estimates and assumptions
that affect reported amounts of certain assets, liabilities, revenues and
expenses as of and for the reporting periods. Actual results may differ from
such estimates.



                                       19
<PAGE>   22

SABINE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

IMPAIRMENT

       Trust management routinely reviews its royalty interests in oil and gas
properties for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. If an impairment event
occurs and it is determined that the carrying value of the Trust's royalty
interests may not be recoverable, an impairment will be recognized as measured
by the amount by which the carrying amount of the royalty interests exceeds the
fair value of these assets, which would likely be measured by discounting
projected cash flows. There can be no assurance such a writedown will not occur.

NEW ACCOUNTING STANDARDS

       The Financial Accounting Standards Board ("FASB") issued, in June 1997,
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which established standards
for the way public companies disclose information about operating segments,
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Trust's adoption of SFAS No. 131 has no effect on the Trust's 
financial statements since the Trust operates in only one segment and solely 
within the United States.

       In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments. SFAS No. 133 is effective for all fiscal
quarters for all fiscal years beginning after June 15, 1999. The Trust has not
yet completed the process of evaluating the impact, if any, that will result
from adopting this SFAS.

DISTRIBUTABLE INCOME PER UNIT

       Basic earnings per Unit is computed by dividing net income by the
weighted average Units outstanding. Earnings per Unit assuming dilution is
computed by dividing net income by the weighted average number of Units and
equivalent Units outstanding. The Trust had no equivalent Units outstanding for
any period presented. Basic and assuming dilution distributable income per Unit
are the same.

FEDERAL INCOME TAXES

       The Internal Revenue Service has ruled that the Trust would be classified
as a grantor trust for Federal income tax purposes and therefore is not subject
to taxation at the trust level. The Unit holders are considered, for Federal
income tax purposes, to own the Trust's income and principal as though no trust
were in existence. Accordingly, no provision for Federal income tax expense has
been made in these financial statements. The income of the Trust will be deemed
to have been received or accrued by each Unit holder at the time such income is
received or accrued by the Trust.

3.     DISTRIBUTIONS TO UNIT HOLDERS

       The amount to be distributed to Unit holders ("Monthly Income Amount") is
determined on a monthly basis. The Monthly Income Amount is an amount equal to
the sum of cash received by the Trust during a monthly period (the period
commencing on the day after a monthly record date and continuing through and
including the next succeeding monthly record date) attributable to the
Royalties, any reduction in cash reserves and any other cash receipts of the
Trust, including interest, reduced by the sum of liabilities paid and any
increase in cash reserves. Unit holders of record as of the monthly record date
(the 15th day of each calendar month except in limited circumstances) are
entitled to have distributed to them the calculated Monthly Income Amount for
such month on or before 10 business days after the monthly record date. The
Monthly Income Amount per Unit is declared by the Trust no later than 10 days
prior to the monthly record date.

       The cash received by the Trust from purchasers of the Trust's oil and gas
production consists of gross sales of production less applicable severance
taxes.



                                       20
<PAGE>   23

SABINE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


4.     OTHER PAYABLES

       Other payables consist of the following:

<TABLE>
<CAPTION>
December 31,                                             1998        1997
------------                                           --------     --------
<S>                                                    <C>          <C>
Funds due to payors for royalties
  erroneously forwarded to the Trust .............     $     19     $  1,806

Royalty receipts in suspense pending
  verification of ownership interest or title ....      299,196     $772,593
                                                       --------     --------
Total ............................................     $299,215     $774,399
                                                       ========     ========
</TABLE>

       The Trustee believes that these amounts represent an ordinary operating
condition of the Trust and that they will be paid or released in the normal
course of business.

5.     SUBSEQUENT EVENTS

       Subsequent to December 31, 1998, the Trust declared the following
distributions:


<TABLE>
<CAPTION>
             Monthly Record Date       Payment Date        Distribution per Unit
             -------------------       ------------        ---------------------
<S>                                    <C>                <C>    
             January 15, 1999          January 29, 1999           $.11622

             February 16, 1999         February 26, 1999          $.11243

             March 15, 1999            March 29, 1999             $.05488
</TABLE>

6.     TRUSTEE'S FEES AND EXPENSES

       Fees and expenses for the years ended December 31, associated with the
Trustee's services for the Trust pursuant to the Trust Agreement, were as
follows:

<TABLE>
<CAPTION>
                                     1998         1997        1996
                                   --------     --------     --------
<S>                                <C>          <C>          <C>     
Trustee's fee ................     $196,546     $203,962     $205,750
Escrow agent's fee ...........      589,647      611,895      617,264
                                   --------     --------     --------
Total fees and expenses ......     $786,193     $815,857     $823,014
                                   ========     ========     ========
</TABLE>



                                       21
<PAGE>   24


SABINE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.     QUARTERLY FINANCIAL DATA (UNAUDITED)

       The following table sets forth the royalty income, distributable income
and distributable income per Unit of the Trust for each quarter in the years
ended December 31, 1998 and 1997 (in thousands, except per Unit amounts):


<TABLE>
<CAPTION>
Calendar                           Royalty   Distributable    Distributable
Quarter                            Income        Income      Income per Unit
-------                            -------   -------------   ---------------
<S>                                <C>       <C>             <C> 
1998
First ........................     $ 7,766         $ 7,445       $     .51
Second .......................       5,688           5,386             .37
Third ........................       5,919           5,679             .39
Fourth .......................       4,702           4,431             .30
                                   -------         -------       ---------
                                   $24,075         $22,941            1.57
                                   =======         =======       =========
1997
----
First ........................     $ 7,440         $ 7,118       $     .49
Second .......................       6,793           6,507             .45
Third ........................       5,654           5,356             .37
Fourth .......................       5,801           5,519             .37
                                   -------         -------       ---------
                                   $25,688         $24,500       $    1.68
                                   =======         =======       =========
</TABLE>

8.    SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

RESERVE QUANTITIES

      Information regarding estimates of the proved oil and gas reserves
attributable to the Trust are based on reports prepared by DeGolyer and
MacNaughton, independent petroleum engineering consultants. Estimates were
prepared in accordance with Statement of Financial Accounting Standards No. 69
and the guidelines established by the Securities and Exchange Commission.

      Oil and gas reserve quantities (all located in the United States) are
estimates based on information available at the time of their preparation. Such
estimates are subject to change as additional information becomes available.
Reserves actually recovered, and the timing of the production of those reserves,
may differ substantially from original estimates. The following schedule
presents changes in the Trust's total proved reserves (in thousands):

<TABLE>
<CAPTION>
                                               Oil          Gas
                                            (Barrels)      (Mcf)
                                             -------      -------
<S>                                          <C>         <C>   
January 1, 1996 ........................       5,538       36,449
  Revisions of previous estimates ......       1,010        2,980
  Production ...........................        (573)      (5,729)
                                             -------      -------
December 31, 1996 ......................       5,975       33,700
  Revisions of previous estimates ......         820        7,592
  Production ...........................        (612)      (6,927)
                                             -------      -------
December 31, 1997 ......................       6,183       34,365
  Revisions of previous estimates ......         656       13,427
  Production ...........................        (633)      (8,738)
                                             -------      -------
December 31, 1998                              6,206       39,054
                                             =======      =======
</TABLE>


                                       22
<PAGE>   25


SABINE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


       Estimated quantities of proved developed reserves of oil and gas as of
the dates indicated were as follows (in thousands):


<TABLE>
<CAPTION>
                                       Oil       Gas
                                    (Barrels)   (Mcf)
                                    ---------   ------
Proved developed reserves:
<S>                                 <C>         <C>   
January 1, 1996 ................      5,061     35,606
December 31, 1996 ..............      5,885     33,572
December 31, 1997 ..............      6,171     34,288
December 31, 1998 ..............      6,206     39,054
</TABLE>


DISCLOSURE OF A STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

       The following is a summary of a standardized measure (in thousands) of
discounted future net cash flows related to the Trust's total proved oil and gas
reserve quantities. Information presented is based upon a valuation of proved
reserves by using discounted cash flows based upon current oil and gas prices
($10.82 per bbl and $1.85 per Mcf, respectively) and severance and ad valorem
taxes, if any, and economic conditions, discounted at the required rate of 10
percent. As the Trust is not subject to taxation at the trust level, no
provision for income taxes has been made in the following disclosure. The impact
of changes in current prices on reserves could vary significantly from year to
year. Accordingly, the information presented below should not be viewed as an
estimate of the fair market value of the Trust's oil and gas properties nor
should it be viewed as indicative of any trends.


<TABLE>
<CAPTION>
December 31,                                              1998           1997          1996
------------                                           ---------      ---------      ---------
<S>                                                    <C>            <C>            <C>      
Future net cash inflows ..........................     $ 128,469      $ 187,364      $ 175,010
Discount of future net cash flows at 10% .........       (57,055)       (82,452)       (80,383)
                                                       ---------      ---------      ---------
Standardized measure of discounted
  future net cash flows ..........................     $  71,414      $ 104,912      $  94,627
                                                       =========      =========      =========
</TABLE>


The change in the standardized measure of discounted future net cash flows for
the years ended December 31, 1998, 1997 and 1996 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                          1998           1997          1996
                                                       ---------      ---------      ---------
<S>                                                  <C>            <C>            <C>      
Standardized measure of discounted
  future net cash flows, January 1 ...............     $ 104,912      $  94,627      $  69,265
Royalty income, net of severance
  and ad valorem taxes ...........................       (24,075)       (25,688)       (22,173)
Changes in prices, net of related costs ..........       (35,640)         3,479         25,715
Revisions of previous estimates and other ........        15,726         23,031         14,894
Accretion of discount ............................        10,491          9,463          6,926
                                                       ---------      ---------      ---------
Standardized measure of discounted
  future net cash flows, December 31, ............     $  71,414      $ 104,912      $  94,627
                                                       =========      =========      =========
</TABLE>

       Subsequent to year end, the price of oil increased significantly. As of
March 15, 1999, published oil prices were approximately $14.48 per barrel. The
use of such price, as compared to $10.82 per barrel, which was used to calculate
the above information, would result in a larger standardized measure of
discounted future net cash flows.



                                       23
<PAGE>   26


REPORT OF INDEPENDENT ACCOUNTANTS

TO THE TRUSTEE ON BEHALF OF UNIT HOLDERS OF SABINE ROYALTY TRUST:

       We have audited the accompanying statements of fees and expenses (as
defined in Exhibit C to the Sabine Royalty Trust Agreement) paid by Sabine
Royalty Trust to NationsBank, N.A., as trustee and escrow agent, for the years
ended December 31, 1998, 1997 and 1996. These statements are the responsibility
of the Trustee's management. Our responsibility is to express an opinion on
these statements based on our audits.

       We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of fees and expenses are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of fees and expenses.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

       In our opinion, the statements of fees and expenses audited by us present
fairly, in all material respects, the fees and expenses paid by Sabine Royalty
Trust to NationsBank, N.A., as trustee and escrow agent, for the years ended
December 31, 1998, 1997 and 1996, in conformity with the Trust Agreement.



/SIG/ PRICE WATERHOUSE COOPERS LLP


Charlotte, North Carolina
March 29, 1999



                                       24
<PAGE>   27


                         STATEMENTS OF FEES AND EXPENSES
                         PAID BY SABINE ROYALTY TRUST TO
                              NATIONSBANK, N.A., AS
                 TRUSTEE AND ESCROW AGENT, FOR EACH OF THE THREE
                   YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

 
<TABLE>
<CAPTION>
                                               1998         1997         1996
                                             --------     --------     --------
<S>                                          <C>          <C>          <C>     
Trustee's fee ..........................     $196,546     $203,962     $205,750
Escrow agent's fee .....................      589,647      611,895      617,264
                                             --------     --------     --------

Total fees paid ........................     $786,193     $815,857     $823,014
   Reimbursement for expenses ..........           --           --           --
                                             --------     --------     --------
Total fees and expenses paid
  to NationsBank, N.A ..................     $786,193     $815,857     $823,014
</TABLE>

        The accompanying notes are an integral part of these statements.

NOTES

       1. Sabine Royalty Trust (the "Trust") is an express trust formed under
the laws of Texas by the Sabine Corporation Royalty Trust Agreement (the "Trust
Agreement") made and entered into effective as of December 31, 1982, between
Sabine Corporation ("Sabine"), as trustor, and NationsBank, N.A. (the "Bank"),
as successor trustee (the "Trustee"). Contemporaneously with the execution of
the Trust Agreement, Sabine, the Trustee and a predecessor the Bank, as escrow
agent (the "Escrow Agent"), entered into an escrow agreement which establishes
an escrow (the "Escrow"). Prior to distribution of units of beneficial interest
(the "Units") in the Trust to Sabine's shareholders, Sabine transferred to the
Trust royalty and mineral interests, including landowner's royalties, overriding
royalty interests, minerals (other than executive rights, bonuses and delay
rentals), production payments and other similar, non-participatory interests, in
certain producing and proved undeveloped oil and gas properties in six states
(the "Royalty Properties").

       In May 1988, Sabine was acquired by Pacific Enterprise ("Pacific"), a
California corporation. Through a series of mergers, Sabine was merged into
Pacific Enterprises Oil Company (USA) ("Pacific (USA)"), a California
corporation and a wholly owned subsidiary of Pacific, effective January 1, 1990.
This acquisition and the subsequent mergers had no effect on the Units. Pacific
(USA), as successor to Sabine, has assumed by operation of law all of Sabine's
rights and obligations with respect to the Trust.

       In connection with the transfer of the Royalty Properties to the Trust
upon its formation, Sabine had reserved to itself all executive rights,
including rights to execute leases and to receive bonuses and delay rentals. In
January 1993, Pacific (USA) completed the sale of substantially all its
producing oil and gas assets to a third party. The sale did not include the
executive rights relating to the Royalty Properties, and Pacific (USA)'s
ownership of such rights was not affected by the sale.

       The compensation agreement under the Trust Agreement provides for a "cost
plus" fee payable to the Bank for all services rendered in its capacities as
Trustee and as Escrow Agent. Generally, the fees payable to the Bank are
calculated by dividing the expenses incurred by the Bank, as Trustee and as
Escrow Agent, solely for services provided by the Bank in the administration of
the Trust and the Escrow by seven-tenths (0.7). Professional and other
noncontributing (out-of-pocket) expenses incurred by the 



                                       25
<PAGE>   28

Bank, as Trustee or as Escrow Agent, as the case may be, in the performance of
its duties in the foregoing capacities are charged to the Trust or the Escrow,
as the case may be, at cost. These expenses do not contribute to the fees
payable to the Bank described above. Annually, the Trustee must estimate Trust
and Escrow expenses contributing to the fee for the forthcoming year and publish
this amount in the Trust's first quarterly report to Unit holders. The Trustee
can be penalized by forfeiture of reimbursement for part of its expenses if such
expenses exceed the estimate. The Trustee also can earn a bonus by administering
the Trust for total costs that are lower than the estimate.

       2. Escrow Agent's fees and Trustee's fees consist of a profit margin plus
all fully allocated costs incurred by the Bank, as Trustee and as Escrow Agent,
in performing administrative services to the Trust as specified in the Trust
Agreement.

       Administrative costs do not include any professional and related expenses
to third parties.

       All costs incurred by the Bank in its capacities as Trustee and as Escrow
Agent are accumulated in one account. Fees based thereon are allocated between
the Trustee function and the Escrow Agent function according to the actual
administrative services rendered by the Bank in each capacity. Any
determinations by the Bank as to the allocation of the fee between the Trustee
and the Escrow Agent are conclusive and binding on the Unit holders and Pacific
(USA), but in no event does the Bank's allocation affect the aggregate fee
payable to the Bank.

       3. The Bank did not earn a bonus for 1998, 1997 or 1996; therefore, none
will be taken in 1999 and none was taken in 1998 or 1997.

       A total of $130,696 of Trustee's fees and Escrow Agent's fees paid to the
Bank in January and February 1999 was based on expenses incurred in 1998. Of
this amount, $68,807 is included in the 1998 statement and the remaining $61,889
will be included in the subsequent year's statement.

       Similarly, a total of $132,174 of Trustee's fees and Escrow Agent's fees
paid to the Bank in January and February 1998 was based on expenses incurred in
1997. Of this amount, $65,084 was included in the 1997 statement, and the
remaining $67,090 is reflected in the 1998 statement. A total of $145,397 of
Trustee's fees and Escrow Agent's fees paid to the Bank in January and February
1997 was based on expenses incurred in 1996. Of this amount, $71,008 was
included in the 1996 statement and the remaining $74,389 was included in the
1997 statement.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

       None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

       The Registrant has no directors or executive officers. The Trustee is a
corporate trustee which may be removed, with or without cause, by the
affirmative vote at a meeting duly called and held of the holders of a majority
of the Units represented at the meeting.

ITEM 11.   EXECUTIVE COMPENSATION.

       Not applicable.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

       (a) Security Ownership of Certain Beneficial Owners. As of March 29, 1999
there were no Unit holders known to the Trustee to be beneficial owners of more
that 5% of the outstanding Units.

       (b) Security Ownership of Management. The Trust has no directors or
executive officers. NationsBank , N.A., the Trustee, held as of March 24, 1999
an aggregate of 167,811 Units in various fiduciary capacities, and it had sole
voting and investment power with respect to none of such Units.



                                       26
<PAGE>   29

       (c) Changes in Control. The Trustee knows of no arrangements the
operation of which may at a subsequent date result in a change in control of the
Registrant.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       Not applicable.

                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

       (a) The following documents are filed as a part of this report:

       1. Financial Statements (included in Item 8 of this report)

          Independent Auditors' report
          Statements of Assets, Liabilities and Trust Corpus at 
          December 31, 1998 and 1997
          Statements of Distributable Income for Each of the Three Years in the
          Period Ended December 31, 1998 
          Statements of Changes in Trust Corpus for Each of the Three Years in
          the Period Ended December 31, 1998 
          Notes to Financial Statements
          Report dated March 1, 1999 of the Trustee containing interim tax
          information for each of the 12 months in the year ending 
          December 31, 1998.

       2. Financial Statement Schedules

       Financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required information is
included in the financial statements and notes thereto.

       3. Exhibits

       (4)    (a)*   --     Sabine Corporation Royalty Trust Agreement effective
                            as of December 31, 1982, by and between Sabine
                            Corporation and InterFirst Bank Dallas, N.A., as
                            trustee.

              (b)*   --     Sabine Corporation Louisiana Royalty Trust Agreement
                            effective as of December 31, 1982, by and between
                            Sabine Corporation and Hibernia National Bank in New
                            Orleans, as trustee, and joined in by InterFirst
                            Bank Dallas, N.A., as trustee.

             (23)    --     Consent of DeGolyer and MacNaughton.

             (27)**  --     Financial Data Schedule.

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

*   Exhibits 4(a) and 4(b) are incorporated herein by reference to Exhibits 4(a)
    and 4(b), respectively, of the Registrant's Annual Report on Form 10-K for
    the year ended December 31, 1993.

**  Included with EDGAR version of Form 10-K only.

    (b)   Reports on Form 8-K. No reports on Form 8-K were filed by the
          Registrant during the last quarter of the period covered by this
          report.



                                       27
<PAGE>   30


                                   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.


                                           SABINE ROYALTY TRUST

                                           BY: NATIONSBANK, N.A.
                                               (as successor), Trustee


                                           By: /s/ RON E. HOOPER
                                               --------------------------------
                                               Ron E. Hooper
                                               Vice-President

Date:  March 30, 1999

            (THE REGISTRANT HAS NO DIRECTORS OR EXECUTIVE OFFICERS.)




                                       28
<PAGE>   31

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
      EXHIBIT NUMBER                         DESCRIPTION
      --------------                         -----------
<S>                         <C> 
       (4)    (a)*   --     Sabine Corporation Royalty Trust Agreement effective
                            as of December 31, 1982, by and between Sabine
                            Corporation and InterFirst Bank Dallas, N.A., as
                            trustee.

              (b)*   --     Sabine Corporation Louisiana Royalty Trust Agreement
                            effective as of December 31, 1982, by and between
                            Sabine Corporation and Hibernia National Bank in New
                            Orleans, as trustee, and joined in by InterFirst
                            Bank Dallas, N.A., as trustee.

             (23)    --     Consent of DeGolyer and MacNaughton.

             (27)**  --     Financial Data Schedule.

             (99)    --     Report dated March 1, 1999 of the Trustee containing
                            interim tax information for each of the 12 months in
                            the year ending December 31, 1998.
</TABLE>

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

*   Exhibits 4(a) and 4(b) are incorporated herein by reference to Exhibits 4(a)
    and 4(b), respectively, of the Registrant's Annual Report on Form 10-K for
    the year ended December 31, 1993.

**  Included with EDGAR version of Form 10-K only.