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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 [NO FEE REQUIRED]

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                   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 OF     (I.R.S. EMPLOYER IDENTIFICATION NO.)
    INCORPORATION OR ORGANIZATION)

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

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 508-2400

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 17, 1997, 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 $182,241,813.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Listed below is the only document parts of which are incorporated herein by
reference and the parts of this report into which the document is
incorporated:

                  1996 ANNUAL REPORT TO UNIT HOLDERS--PART II

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                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
                                     PART I

 <C>      <S>                                                              <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.....................................     3
             Duration of Trust..........................................     3
             Voting Rights of Unit Holders..............................     3
          Description of Units..........................................     4
             Distributions of Net Income................................     4
             Transfer...................................................     4
             Reports to Unit Holders....................................     5
             Liability of Unit Holders..................................     5
             Possible Divestiture of Units..............................     5
          Federal Taxation..............................................     6
          State Law and Tax Considerations..............................     8
          Regulation and Prices.........................................     9
             Regulation.................................................     9
             Prices.....................................................    10
 Item  2. Properties....................................................    11
          Title.........................................................    11
          Reserves......................................................    11
          Forward-Looking Statements....................................    16
 Item  3. Legal Proceedings.............................................    16
 Item  4. Submission of Matters to a Vote of Security Holders...........    16

                                    PART II

 Item  5. Market for Registrant's Common Equity and Related Stockholder
          Matters.......................................................    16
 Item  6. Selected Financial Data.......................................    16
 Item  7. Management's Discussion and Analysis of Financial Condition
          and Results of Operations.....................................    16
 Item  8. Financial Statements and Supplementary Data...................    17
 Item  9. Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure......................................    17

                                    PART III

 Item 10. Directors and Executive Officers of the Registrant............    17
 Item 11. Executive Compensation........................................    17
 Item 12. Security Ownership of Certain Beneficial Owners and
          Management....................................................    17
 Item 13. Certain Relationships and Related Transactions................    17

                                    PART IV

 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
          K.............................................................    17
</TABLE>

                                      (i)
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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 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) 508-2400.

  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

                                       1
<PAGE>

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.

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 1996 were $1,343,248, of which, pursuant to the
terms of the Trust Agreement, $205,750 was paid to NationsBank, as Trustee,
and $617,264 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

                                       2
<PAGE>

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 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

                                       3
<PAGE>

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 17, 1997, 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
cancelled. See "Possible Divestiture of Units" below.

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

                                       4
<PAGE>

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".

  Chemical Mellon Shareholder Services Group, Inc. 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 duly authorized agent has the right, during
reasonable business hours at his 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.

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

                                       5
<PAGE>

  summary of such controversy and will constitute a demand to each such
  holder that he dispose of his 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 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 dispositon 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,

                                       6
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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 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 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.

                                       7
<PAGE>

  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 personal tax adviser with respect to the effects of his ownership
of Units on his 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.

  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 doing business in Texas are subject to the Texas franchise tax,
which includes a calculation based upon the corporation's taxable income for
federal income tax purposes. 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

                                       8
<PAGE>

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, 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

                                       9
<PAGE>

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 increased from $15.65 in 1995 to
$17.31 in 1996. The Trustee believes that the higher average price per barrel
of crude oil realized by the Trust in 1996 can be attributed to normal market
fluctuations.

 Natural Gas

  Substantial competition in the natural gas marketplace continued in 1996.
Competition with alternative fuels and excess gas supplies persist. 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 1996 on natural gas volumes sold of $1.98 per Mcf
represented an increase from the $1.45 per Mcf received in 1995, due in part
to increased demand for gas which resulted from extreme weather conditions
during the second half of 1996.

  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

                                      10
<PAGE>

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.

  The following table summarizes total developed and proved undeveloped
acreage represented by the Royalty Properties at February 15, 1997.

<TABLE>
<CAPTION>
                                                             MINERAL AND ROYALTY
                                                             --------------------
                                                               GROSS      NET
        STATE                                                  ACRES     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, 1997 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 incorporated by
reference in Item 8 hereof for additional information regarding the proved oil
and gas reserves of the Trust.

                                      11
<PAGE>

                           DeGolyer and MacNaughton
                               One Energy Square
                              Dallas, Texas 75206

                               February 28, 1997


NationsBank of Texas, 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, 1997, 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 of Texas, 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 36 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, 1996. 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.

  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

                                      12
<PAGE>

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.

   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, 1997. In the preparation of this study, data available from wells
drilled on the appraised properties through December 31, 1996, were used in
estimating gross ultimate recovery. When applicable, gross production
estimated to January 1, 1997, was deducted from gross ultimate recovery to
arrive at the estimates of gross reserves as of January 1, 1997. In most
fields, this required that the production rates be estimated for up to 2
months since production data were available only through October 1996.

  Gas volumes shown herein are salable 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. Condensate reserves estimated
herein are those to be obtained from normal separator recovery. NGL reserves
are those attributed to the leasehold interests according to processing
agreements.


                                      13
<PAGE>

  Net proved reserves, as of January 1, 1997, of the Trust from the properties
appraised are estimated in barrels (bbl) and thousands of cubic feet (Mcf) as
follows:

<TABLE>
<CAPTION>
                           PROVED DEVELOPED AND          PROVED DEVELOPED
                           UNDEVELOPED RESERVES              RESERVES
                        --------------------------- ---------------------------
                        OIL, CONDENSATE,            OIL, CONDENSATE,
                            AND NGL         GAS         AND NGL         GAS
STATE                        (BBL)         (MCF)         (BBL)         (MCF)
-----                   ---------------- ---------- ---------------- ----------
<S>                     <C>              <C>        <C>              <C>
Florida................      121,769        233,424      121,769        233,424
Louisiana..............       65,593      2,904,294       65,593      2,904,294
Mississippi............       69,125      1,311,631       69,125      1,311,631
New Mexico.............      307,007      1,915,648      307,007      1,915,648
Oklahoma...............      584,025     10,751,249      584,025     10,751,249
Texas..................    4,827,536     16,583,723    4,737,419     16,455,911
                           ---------     ----------    ---------     ----------
  Total................    5,975,055     33,699,969    5,884,938     33,572,157
                           =========     ==========    =========     ==========
</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, 1996. 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 and producing
rates used in this report have been reviewed by NationsBank and it has
represented that the prices and rates used herein are those that the Trust
could reasonably expect to receive. The assumptions used for estimating future
prices and costs are as follows.

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

   Year-end oil, condensate, natural gas liquids, and natural gas prices
   were furnished by NationsBank. These prices are used as initial prices
   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, 1997, based on the aforementioned assumptions
concerning prices and costs is summarized as follows:

<TABLE>
<CAPTION>
                                                           FUTURE NET REVENUE
                                                         -----------------------
         YEAR                                               TOTAL      PROVED
        ENDING                                             PROVED     DEVELOPED
      DECEMBER 31                                            ($)         ($)
      -----------                                        ----------- -----------
      <S>                                                <C>         <C>
      1997..............................................  20,147,092  20,101,914
      1998..............................................  17,764,734  17,681,952
      1999..............................................  15,535,225  15,401,241
                                                         ----------- -----------
      Subtotal..........................................  53,447,051  53,185,107
      Remaining......................................... 121,562,591 119,723,621
                                                         ----------- -----------
        Total........................................... 175,009,642 172,908,728
</TABLE>


                                      14
<PAGE>

  The present worth of future net revenue, as of January 1, 1997, is estimated
as follows:

<TABLE>
<CAPTION>
                                                                   PRESENT WORTH
                                                                        ($)
                                                                   -------------
      <S>                                                          <C>
      Total Proved................................................  94,627,213
      Proved Developed............................................  93,757,721
</TABLE>

  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, (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 36 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, and (iv) at the request of NationsBank, we
have estimated future net revenue and the present worth thereof by holding
constant current gas prices for the remaining lives of the applicable reserves
in accordance with NationsBank's advice that these are the prices that the
Trust can reasonably expect to receive.

  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.

  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,

                                      15
<PAGE>

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 1997 will be approximately $1,350,000.

  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.

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 this Item 2,
"Properties", and certain statements regarding the Trust's financial position,
industry conditions and other matters contained in "Trustee's Discussion and
Analysis" incorporated by reference in 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 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 section entitled "Units of Beneficial Interest" appearing on the inside
front cover of the Trust's Annual Report to Unit holders for the year ended
December 31, 1996 sets forth certain information with respect to the Units of
the Trust and the market therefor, and is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA.

  The information under "Selected Financial Data" appearing on the inside
front cover of the Trust's Annual Report to Unit holders for the year ended
December 31, 1996 is incorporated herein by reference.

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

  The "Trustee's Discussion and Analysis" of financial condition and results
of operations appearing on page 2 of the Trust's Annual Report to Unit holders
for the year ended December 31, 1996 is incorporated herein by reference.

                                      16
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

  The financial statements of the Trust and the notes thereto, together with
the report thereon of Deloitte & Touche LLP dated March 21, 1997 appearing on
pages 3 though 8 of the Trust's Annual Report to Unit holders for the year
ended December 31, 1996 are incorporated herein by reference.

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 15, 1997
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 of Texas, N.A., the Trustee, held as of March
15, 1997 an aggregate of 153,367 Units in various fiduciary capacities, with
respect to which it had sole voting and investment power over all 153,367 of
such Units.

  (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 (incorporated by reference in Item 8 of this
     report)

      Independent Auditors' report
      Statements of Assets, Liabilities and Trust Corpus at December 31, 1996
       and 1995
      Statements of Distributable Income for Each of the Three Years in the
       Period Ended December 31, 1996
      Statements of Changes in Trust Corpus for Each of the Three Years in the
       Period Ended December 31, 1996
      Notes to Financial Statements

                                      17
<PAGE>

  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
<TABLE>
     <C>      <S>
     (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.
     (13)     --Portions of 1996 annual report to Unit holders incorporated by
               reference into Part II of this Annual Report on Form 10-K.
     (23)     --Consent of DeGolyer and MacNaughton.
     (27)**   --Financial Data Schedule.
     (99)     --Report dated March 1, 1997 of the Trustee containing interim
               tax information for each of the 12 months in the year ending
               December 31, 1996.
</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.

  (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.

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<PAGE>

                                  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 OF TEXAS, N.A.
                                             (as successor), Trustee

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

Date: March 31, 1997

           (THE REGISTRANT HAS NO DIRECTORS OR EXECUTIVE OFFICERS.)

                                      19