<PAGE>
 
                                                                    EXHIBIT 13.1

BURLINGTON RESOURCES COAL SEAM GAS ROYALTY TRUST
1996 ANNUAL REPORT AND FORM 10-K
THE TRUST

Burlington Resources Coal Seam Gas Royalty Trust (the "Trust") was formed as a
Delaware business trust pursuant to the Trust Agreement of Burlington Resources
Coal Seam Gas Royalty Trust entered into effective as of May 1, 1993 by and
among Meridian Oil Production Inc. ("MOPI"), as trustor, Burlington Resources
Inc. ("Burlington Resources"), the parent company of MOPI, and NationsBank of
Texas, N.A. (the "Trustee") and Mellon Bank (DE) National Association (the
"Delaware Trustee"), as trustees. Effective January 1, 1996, MOPI was merged
with and into Meridian Oil Inc. ("MOI"), a wholly owned subsidiary of Burlington
Resources. Effective July 11, 1996, MOI changed its name to Burlington Resources
Oil & Gas Company ("BROG") and Meridian Oil Trading Inc. ("MOTI") and Meridian
Oil Gathering Inc. ("MOGI"), both affiliates of MOI, changed their names to
Burlington Resources Trading Inc. ("BRTI") and Burlington Resources Gathering
Inc. ("BRGI"), respectively. Accordingly, references in this Annual Report to
MOPI refer to BROG, references to MOTI refer to BRTI and references to MOGI
refer to BRGI. The Trust owns certain net profits interests (the" Royalty
Interests") in MOPI's interest in the Fruitland coal formation underlying the
Northeast Blanco Unit in the San Juan Basin of New Mexico (the "Underlying
Properties"). The Royalty Interests are the only assets of the Trust, other than
cash and temporary investments being held for the payment of expenses and
liabilities and for distribution to Unitholders.

The Trust makes quarterly cash distributions to Unitholders. The record date of
the quarterly cash distribution of the Trust is the 63rd day following the end
of the calendar quarter unless such day is not a business day in which case the
record date will be the next business day. The quarterly cash distribution is
payable on or before 75 days after the end of the calendar quarter.

Royalty income to the Trust is attributable to the sale of depleting assets. All
of the Underlying Properties burdened by the Royalty Interests consist of
producing properties. Accordingly, the proved reserves attributable to MOPI's
interest in the Underlying Properties are expected to decline substantially
during the term of the Trust and a portion of each cash distribution made by the
Trust will, therefore, be analogous to a return of capital. Accordingly, cash
yields attributable to the Units are expected to decline over the term of the
Trust.
<TABLE>
<CAPTION>
                                1997                                     1998
<S>                             <C>        <C>            <C>            <C>
Record Dates                    June 2     September 2    December 2     March 4
Distribution Dates              June 13    September 12   December 12    March 16
UNITS OF BENEFICIAL INTEREST
</TABLE>

The units of beneficial interest ("Units") in the Trust are listed and traded on
the New York Stock Exchange under the symbol "BRU." The following table sets
forth, for the periods indicated, the high and low sales prices per Unit on the
New York Stock Exchange and the amount of quarterly cash distributions per Unit
made by the Trust.
<TABLE>
<CAPTION>
 
                                          Price                        Distributions
                                High                 Low               per Unit
<S>                          <C>                 <C>                 <C>
1996
 
First Quarter                $     13-5/8        $     10-1/8       $   0.332882
                                                                    
Second Quarter               $     11-3/4        $      8-3/4       $   0.298843
                                                                    
Third Quarter                $     10            $      8-3/4       $   0.255385
                                                                    
Fourth Quarter               $     10            $      8-1/4       $   0.250990
                                                                    
1995                                                                
                                                                    
First Quarter                $     17-5/8        $     15-1/8       $   0.364168
                                                                    
Second Quarter               $     17-1/8        $     14-3/4       $   0.399989
                                                                    
Third Quarter                $     16            $     14-3/8       $   0.385197
Fourth Quarter               $     15-3/8        $     12-3/8       $   0.375008
</TABLE> 

At March 18, 1997, there were 8,800,000 Units outstanding and approximately
1,188 Unitholders of record.
<PAGE>
 
SELECTED FINANCIAL DATA

<TABLE> 
<CAPTION> 
                                                                                       FOR THE PERIOD FROM
                                                                                            MAY 5, 1993 
                                         FOR THE YEAR ENDED DECEMBER 31,                (DATE OF INCEPTION) 
                                ----------------------------------------------------      TO DECEMBER 31,
                                    1996               1995                1994                 1993
                                ------------        ------------        ------------   --------------------
<S>                             <C>                 <C>                 <C>            <C>  
ROYALTY INCOME................. $ 10,671,428        $ 14,076,780        $ 17,115,969       $  6,900,747

DISTRIBUTABLE INCOME........... $ 10,040,541        $ 13,402,397        $ 16,423,579       $  6,549,172

DISTRIBUTABLE INCOME PER
 UNIT..........................        $1.14               $1.52               $1.87              $0.74

DISTRIBUTIONS PER UNIT.........        $1.14               $1.52               $1.88              $0.72

TOTAL ASSETS, DECEMBER 31...... $107,530,131        $123,634,960        $147,565,760       $172,184,435
TRUST CORPUS, DECEMBER 31...... $107,328,165        $123,534,740        $147,459,837       $172,153,000

</TABLE>

      TO UNITHOLDERS:

We are pleased to present the 1996 Annual Report to Unitholders of Burlington
Resources Coal Seam Gas Royalty Trust (the "Trust"). The report includes a copy
of the Trust's annual report on Form 10-K for the year ended December 31, 1996.
The Form 10-K contains important information concerning the creation and
administration of the Trust, and the assets of the Trust, including coal seam
gas reserves attributable to the net profits interests owned by the Trust
estimated as of December 31, 1996.

The Trust was formed as a Delaware business trust under the Delaware Business
Trust Act pursuant to the Trust Agreement of Burlington Resources Coal Seam Gas
Royalty Trust (the "Trust Agreement") entered into effective as of May 1, 1993
by and among Meridian Oil Production Inc. ("MOPI"), as trustor, Burlington
Resources Inc. ("Burlington Resources"), the parent company of MOPI, and
NationsBank of Texas, N.A. (the "Trustee") and Mellon Bank (DE) National
Association, as trustees. The Trust was formed to acquire and hold certain net
profits interests (the "Royalty Interests") in MOPI's interest in the Fruitland
coal formation underlying the Northeast Blanco Unit in the San Juan Basin of New
Mexico. The Royalty Interests are the only assets of the Trust, other than cash
and temporary investments being held for the payment of expenses and liabilities
and for distribution to Unitholders.

Royalty income to the Trust is attributable to the sale of depleting assets. All
of the Underlying Properties burdened by the Royalty Interests consist of
producing properties. Accordingly, the proved reserves attributable to MOPI's
<PAGE>
 
interest in the Underlying Properties are expected to decline substantially
during the term of the Trust and a portion of each cash distribution made by the
Trust will, therefore, be analogous to a return of capital. Accordingly, cash
yields attributable to the Units are expected to decline over the term of the
Trust. For additional information concerning the reserves please refer to Note 9
"Supplemental Oil and Gas Information" to the financial statements.

The year 1996 marked the Trust's third full year of operations. Distributable
income for the year ended December 31, 1996 was $10,040,541 or $1.14 per Unit as
compared to $13,402,397 or $1.52 per Unit for 1995. Royalty income for the year
totaled $10,671,428 as compared to $14,076,780 for 1995. The Trust also earned
interest of $28,339 from temporary investments of funds prior to quarterly
distributions being made as compared to $37,576 for 1995. General and
administrative expenses for the year were $659,226 as compared to $711,959 for
1995.

Under the Trust Agreement, the Trustee has the responsibility to collect
proceeds attributable to the Royalty Interests and to make quarterly cash
distributions to Unitholders after deducting administrative expenses and any
amounts necessary for cash reserves. The quarterly record date is the 63rd day
following the end of the calendar quarter unless such day is not a business day
in which case the record date will be the next business day. The quarterly
distribution date is on or prior to 75 days after the end of the calendar
quarter.

Tax information for calendar year 1996 permitting each Unitholder to make all
calculations reasonably necessary for tax purposes was distributed by the
Trustee to Unitholders prior to March 15, 1997, in accordance with the Trust
Agreement. Such income tax information will be provided annually to Unitholders
by the Trustee not later than March 15th of each year.

BURLINGTON RESOURCES COAL SEAM GAS ROYALTY TRUST
BY: NATIONSBANK OF TEXAS, N.A., TRUSTEE
BY:/SIG/RON E. HOOPER
VICE PRESIDENT
MARCH 31, 1997

TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The Trust makes quarterly cash distributions to Unitholders. The only assets of
the Trust, other than cash and cash equivalents being held for the payment of
expenses and liabilities and for distribution to Unitholders, are the Royalty
Interests. The Royalty Interests owned by the Trust burden the net revenue
interest in the Underlying Properties which are owned by MOPI and not the Trust.

Distributable income of the Trust consists of the excess of royalty income plus
interest income over the general and administrative expenses of the Trust. Upon
receipt by the Trust, royalty income is invested in short-term investments in
accordance with the Trust Agreement until its subsequent distribution to
Unitholders.

The amount of distributable income of the Trust for any calendar year may differ
from the amount of cash available for distribution to the Unitholders in such
year due to differences in the treatment of the expenses of the Trust in the
determination of those amounts. The financial statements of the Trust are
prepared on a modified cash basis pursuant to which the expenses of the Trust
are recognized when paid or reserves are established for them. Consequently, the
reported distributable income of the Trust for any year is determined by
deducting from the income received by the Trust the amount of expenses paid by
the Trust during such year. The amount of cash available for distribution to
Unitholders, however, is determined in accordance with the provisions of the
Trust Agreement and reflects the deduction from the income actually received by
the Trust of the amount of expenses actually paid by the Trust and adjustment
for changes in reserves for unpaid liabilities. See Note 
<PAGE>
 
5 to the financial statements of the Trust appearing elsewhere in this Annual
Report to Unitholders for additional information regarding the determination of
the amount of cash available for distribution to Unitholders.

Royalty income to the Trust is attributable to the sale of depleting assets. All
of the Underlying Properties burdened by the Royalty Interests consist of
producing properties. Accordingly, the proved reserves attributable to MOPI's
interest in the Underlying Properties are expected to decline substantially
during the term of the Trust and a portion of each cash distribution made by the
Trust will, therefore, be analogous to a return of capital. Accordingly, cash
yields attributable to the Units are expected to decline over the term of the
Trust. For additional information concerning the reserves please refer to Note 9
"Supplemental Oil and Gas Information" of the financial statements.

The year 1996 marked the third full year of operations for the Trust. Royalty
income for 1996 was $10,671,428 as compared to $14,076,780 for 1995 and
$17,115,969 for 1994. Production of 12,122,587 Mcf for 1996 declined from
14,212,659 Mcf for 1995 and 16,706,193 Mcf for 1994 due to the natural decline
of production from the coal seam formation. Natural gas prices received for 1996
were $1.06 per Mcf compared to $1.08 per Mcf for 1995 and $1.22 per Mcf for
1994.

Royalty income received by the Trust in a given calendar year will generally
reflect the proceeds from the sale of gas produced from the Underlying
Properties during the first three quarters of that year and the fourth quarter
of the preceding calendar year less any operating and capital costs.
Accordingly, the royalty income included in distributable income for the years
ended December 31, 1996, 1995 and 1994  was based on production volumes and
natural gas prices for the twelve months ended September 30, 1996, 1995 and
1994, respectively, in accordance with the terms of the conveyance of the
Royalty Interests to the Trust, as shown in the table below. The production
volumes included in the table are actual net production volumes attributable to
MOPI's interest in the Underlying Properties, and not production attributable to
the Royalty Interests owned by the Trust.

<TABLE>
<CAPTION>
                                      For the Twelve Months Ended September 30,
                                      -----------------------------------------
                                          1996             1995           1994
                                        -------          -------        -------
<S>                                     <C>              <C>            <C>
Production (Bcf)(1)...................   12.761           14.961         17.585

Production (Trillion Btu)(2)..........   11.515           13.519         15.881

Average Inside FERC Price
 ($/MMBtu)(3).........................  $  1.34          $  1.22        $  1.76


MOPI Average Entitled Price Received
 ($/MMBtu)(4).........................  $  1.18          $  1.20        $  1.36
</TABLE>

(1)Billion cubic feet of natural gas.
(2)Trillion British Thermal Units.
(3)The posted index price (Inside FERC) of spot gas delivered to pipelines.
(4)Average Inside FERC price less allowable deductions.

At December 31, 1995 and 1994, the Trust's net carrying value of its investment
in royalty interests exceeded the sum of the future net cash flows plus the
estimated future Section 29 tax credit benefits from the production of the
Trust's reserves by $561,809 and $995,048, respectively. Accordingly, the Trust
was required to record an impairment allowance in 1995 and 1994 to 
<PAGE>
 
reduce its carrying value of royalty interests in gas reserves. The reduction in
the carrying value of its investments was charged directly to trust corpus. For
further discussion of impairment, please refer to Notes 2 and 10 in the
financial statements. There was no impairment for 1996.

Production attributable to MOPI's interest in the Underlying Properties is
generally sold pursuant to a gas purchase contract between MOPI and Meridian Oil
Trading Inc. ("MOTI"). The gas purchase contract provides certain protections
for MOTI in the form of price credits and for Unitholders when the applicable
Blanco Hub Spot Price falls below $1.65 per MMBtu and provides certain benefits
for MOTI when the Blanco Hub Spot Price exceeds $2.10 per MMBtu. The gas
purchase contract also provides that the price paid for gas by MOTI is reduced
by the amount of gathering and/or transportation charges, taxes, treating and
processing costs and all other costs in connection with such services from the
central gathering point to main line delivery paid by MOTI. For more detailed
information regarding the terms and conditions of the gas purchase contract, see
"Item 2. Properties -- Gas Purchase Contract" in the Form 10-K of the Trust
appearing elsewhere in this Annual Report to Unitholders.

The Blanco Hub Spot Price was below $1.65 per MMBtu for all months during 1996
except August, November and December. The Blanco Hub Spot Price was below $1.65
per MMBtu in each month during 1995 and during the second, third and fourth
quarters of 1994. However, pursuant to the terms of the gas purchase contract,
MOTI continued to purchase gas attributable to MOPI's interest in the Underlying
Properties at the $1.60 per MMBtu minimum purchase price, less deductible costs
paid by MOTI, established by the gas purchase contract; and MOTI received a
price credit from MOPI for each MMBtu of natural gas so purchased by MOTI equal
to the difference between the $1.60 per MMBtu minimum purchase price and the
applicable index price (which price is equal to 97 percent of the applicable
Blanco Hub Spot Price). MOTI estimates that, as of December 31, 1996, MOTI had
aggregate price credits of approximately $8.9 million of which the Trust's 95
percent interest was approximately $8.5 million. The Blanco Hub Spot Price was
above $1.65 per MMBtu in January and February 1997 although there can be no
assurance that it will not again fall below such price level. With the Blanco
Hub Spot Price being above the minimum purchase price for several months of
1996, MOTI recouped price credits totaling $1.2 million. The entitlement of MOTI
to recoup the price credits means that even though the applicable Blanco Hub
Spot Price is above $1.65 per MMBtu, royalty income otherwise payable to the
Trust will be reduced until such time as all accrued and unrecouped price
credits have been recovered by MOTI. Reduced royalty income to the Trust
correspondingly reduces cash distributions to Unitholders.

The information in this Annual Report to Unitholders concerning production and
prices relating to MOPI's interest in the Underlying Properties is based on
information prepared and furnished by MOPI to the Trustee. The Trustee has no
control over and no responsibility relating to the operation of the Underlying
Properties.

This Annual Report and the accompanying Form 10-K include "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 harbors created thereby. All
statements other than statements of historical fact included in this Annual
Report and the accompanying Form 10-K are forward-looking statements. Such
statements include, without limitation, the reserve information and other
statements contained in Item 2, "Properties" of the accompanying Form 10-K.
Although the Trust believes that the expectations reflected in such forward-
looking statements are reasonable, such expectations are subject to numerous
risks and uncertainties and the Trust can give no assurance that they will prove
correct. There are many factors, none of which is within the Trust's control,
that may cause such expectations not to be realized, including, among other
things, factors identified in this Annual Report and the accompanying Form 10-K
affecting oil and gas prices and the recoverability of reserves, and future
economic, competitive and market conditions.

FINANCIAL STATEMENTS

Audited Statements of Assets, Liabilities and Trust Corpus of the Trust as of
December 31, 1996 and 1995, and the related Statements of Distributable Income
and Changes in Trust Corpus for the years ended December 31, 1996, 1995 and 1994
are included in this Annual Report to Unitholders immediately following the
Independent Auditors' Report below.

The Royalty Interests owned by the Trust burden the Underlying Properties, which
are owned by MOPI and not the Trust. For the information of Unitholders, an
audited Statement of Revenues and Direct Operating Expenses of the Underlying
Properties for each of the three years in the period ended December 31, 1996 has
been prepared and furnished by MOPI to the Trustee for inclusion in this Annual
Report to Unitholders. The financial statements furnished by MOPI appear
immediately preceding the Form 10-K of the Trust.

<PAGE>

INDEPENDENT AUDITORS' REPORT
NATIONSBANK OF TEXAS, N.A.,
AS TRUSTEE OF BURLINGTON RESOURCES COAL SEAM GAS ROYALTY TRUST

We have audited the accompanying statements of assets, liabilities and trust
corpus of Burlington Resources Coal Seam Gas Royalty Trust as of December 31,
1996 and 1995, and the related statements of distributable income and changes in
trust corpus for each of the three years in the period ended December 31, 1996.
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 financial statements
have been prepared on a modified cash basis of accounting, which is a
comprehensive basis of accounting other than generally accepted accounting
principles.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities and trust corpus of the
Burlington Resources Coal Seam Gas Royalty Trust at December 31, 1996, and 1995,
and its distributable income and changes in trust corpus for each of the three
years in the period ended December 31, 1996, on the basis of accounting
described in Note 2.

/SIG/DELOITTE & TOUCHE LLP
Dallas, Texas
March 21, 1997

<PAGE>

FINANCIAL STATEMENTS
BURLINGTON RESOURCES COAL SEAM GAS ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

<TABLE> 
<CAPTION> 
December 31,                                                                                 1996           1995
<S>                                                                                      <C>            <C>  

ASSETS
 
CASH AND CASH EQUIVALENTS..............................................................  $    158,251   $     31,260

Royalty interests in oil and gas properties (less accumulated amortization and.........   107,371,880    123,603,700
 impairment of $73,028,120 and $56,796,300)(Note 10)

      TOTAL ASSETS.....................................................................  $107,530,131   $123,634,960

LIABILITIES AND TRUST CORPUS

Trust expenses payable.................................................................  $    201,966   $    100,220

Trust corpus (8,800,000 units of beneficial interest authorized and outstanding).......   107,328,165    123,534,740

TOTAL LIABILITIES AND TRUST CORPUS.....................................................  $107,530,131   $123,634,960

</TABLE> 
 
STATEMENTS OF DISTRIBUTABLE INCOME
<TABLE> 
<CAPTION> 
<S>                                           <C>          <C>            <C>
YEAR ENDED DECEMBER 31                           1996           1995           1994
                                          
ROYALTY INCOME............................   $10,671,428   $ 14,076,780   $ 17,115,969

Interest income...........................        28,339         37,576         36,323

                                              10,699,767     14,114,356     17,152,292

GENERAL AND ADMINISTRATIVE EXPENSES
 (NOTE 4).................................      (659,226)      (711,959)      (728,713)

DISTRIBUTABLE INCOME......................   $10,040,541   $ 13,402,397   $ 16,423,579

DISTRIBUTABLE INCOME PER UNIT
 (8,800,000 UNITS)........................         $1.14          $1.52          $1.87
Distributions per unit....................         $1.14          $1.52          $1.88

</TABLE>

STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                        1996           1995           1994
<S>                                       <C>            <C>            <C>
 
TRUST CORPUS, BEGINNING OF PERIOD.......  $123,534,740   $147,459,837   $172,153,000

Amortization and impairment of royalty
 interests..............................   (16,231,820)   (23,913,096)   (24,564,144)

DISTRIBUTABLE INCOME....................    10,040,541     13,402,397     16,423,579

DISTRIBUTIONS TO UNITHOLDERS............   (10,015,296)   (13,414,398)   (16,552,598)
Trust corpus, end of period.............  $107,328,165   $123,534,740   $147,459,837
 
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

NOTES TO FINANCIAL STATEMENTS

1. TRUST ORGANIZATION AND PROVISIONS

Burlington Resources Coal Seam Gas Royalty Trust (the "Trust") was formed as a
Delaware business trust pursuant to the terms of the Trust Agreement of
Burlington Resources Coal Seam Gas Royalty Trust (the "Trust Agreement") entered
into effective as of May 1, 1993 by and among Meridian Oil Production Inc., a
Delaware corporation ("MOPI"), as trustor, Burlington Resources Inc., a Delaware
corporation ("Burlington Resources"), and NationsBank of Texas, N.A., a national
banking association (the "Trustee"), and Mellon Bank (DE) 
<PAGE>
 
National Association, a national banking association (the "Delaware Trustee"),
as trustees. Effective January 1, 1996, MOPI was merged with and into Meridian
Oil Inc. ("MOI"), a wholly owned subsidiary of Burlington Resources. Effective
July 11, 1996, MOI changed its name to Burlington Resources Oil & Gas
Company("BROG"), and Meridian Oil Trading Inc. ("MOTI") and Meridian Oil
Gathering Inc.("MOGI"), both affiliates of MOI, changed their names to
Burlington Resources Trading Inc. ("BRTI") and Burlington Resources Gathering
Inc.("BRGI"), respectively. Accordingly, references in this Annual Report to
MOPI refer to BROG, references to MOTI refer to BRTI and references to MOGI
refer to BRGI. The trustees are independent financial institutions.

The Trust is a grantor trust formed to acquire and hold certain net profits
interests (the "Royalty Interests") in MOPI's interest in the Fruitland coal
formation underlying the Northeast Blanco Unit in the San Juan Basin of New
Mexico (the "Underlying Properties"). The Trust was initially created by the
filing of a Certificate of Trust with the Secretary of State of Delaware on May
5, 1993. In accordance with the Trust Agreement, MOPI contributed $1,000 as the
initial trust corpus of the Trust. On June 17, 1993, the Royalty Interests were
conveyed to the Trust by MOPI pursuant to the Net Profits Interest Conveyance
(the "Conveyance") dated effective as of May 1, 1993, in consideration for all
8,800,000 authorized units of beneficial interest ("Units") in the Trust. MOPI
transferred its Units by dividend to its parent, Meridian Oil Holding Inc.,
which transferred such Units by dividend to its parent, Burlington Resources,
which sold such Units to the public through various underwriters in June 1993
(the "Public Offering"). All of the production attributable to the Underlying
Properties is from the Fruitland coal formation and currently constitutes "coal
seam" gas that entitles the owners of such production, provided certain
requirements are met, to tax credits pursuant to Section 29 of the Internal
Revenue Code of 1986, as amended.

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

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

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

The only assets of the Trust, other than cash and cash equivalents being held
for the payment of expenses and liabilities and for distribution to Unitholders,
are the Royalty Interests. The Royalty Interests consist primarily of a net
profits interest (the "NPI") in MOPI's interest in the Underlying Properties.
The NPI generally entitles the Trust to receive 95 percent of the NPI Net
Proceeds, as defined below. The Royalty Interests also include a 20 percent
interest in the Infill Net Proceeds, as defined below, from the sale of
production if well spacing rules are effectively modified and additional wells
are drilled on producing drilling blocks in the Northeast 
<PAGE>
 
Blanco Unit ("Infill Wells") during the term of the Trust. With respect to the
NPI, the term "NPI Net Proceeds" generally means the aggregate proceeds
attributable to MOPI's net revenue interest in the Underlying Properties
(excluding the proceeds, if any, from Infill Wells) calculated at the price paid
by MOTI at any one of four central delivery points in the Northeast Blanco Unit
gathering system or either of two wellhead delivery points (collectively, the
"Central Gathering Point") for the entitled volume of gas produced and sold from
MOPI's interest in the Underlying Properties less MOPI's working interest share
of (i) property, production and related taxes (including severance taxes); (ii)
lease operating expenses; (iii) capital costs (if paid after January 1, 1994);
(iv) royalties, if any, required to be paid that are based on the value of
Section 29 tax credits attributable to such working interest share; and (v)
interest on the unrecovered portion, if any, of the foregoing costs at a rate
equal to the base rate (compounded quarterly) as announced from time to time by
Citibank, N.A. ("Citibank's Base Rate"). The term "Infill Net Proceeds"
generally means the aggregate proceeds attributable to MOPI's net revenue
interest calculated at the price paid by MOTI at the Central Gathering Point for
the entitled volume of gas produced and sold from MOPI's interest in any Infill
Wells less MOPI's working interest share of (a) property, production and related
taxes (including severance taxes) on such Infill Wells; (b) lease operating
expenses with respect to such Infill Wells; (c) capital costs with respect to
such Infill Wells; and (d) interest on the unrecovered portion, if any, of the
foregoing costs at Citibank's Base Rate. The complete definitions of NPI Net
Proceeds and Infill Net Proceeds are set forth in the Conveyance.

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 the applicable rules and regulations adopted under the Securities Exchange
Act of 1934.

2. BASIS OF ACCOUNTING

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

 .Royalty income and interest income are recorded in the period in which amounts
are received by the Trust rather than in the months of production.
 .General and administrative expenses recorded are based on liabilities paid and
cash reserves established out of cash received.
 .Amortization of the Royalty Interests is calculated on a unit-of-production
basis and charged directly to trust corpus based upon when revenues are
received.
 .Distributions to Unitholders are recorded when declared by the Trustee (see
Note 5).

The financial statements of the Trust differ from financial statements prepared
in accordance with GAAP because royalty income is not accrued in the period of
production, general and administrative expenses recorded are based on
liabilities paid and cash reserves established rather than on an accrual basis,
and amortization and impairment of the Royalty Interests is not charged against
operating results.

Burlington Resources sold an aggregate of 8,800,000 Units in the Public
Offering. Accordingly, the carrying value of the Trust's Royalty interest in oil
and gas properties at December 31, 1996 and 1995 reflect 8,800,000 Units at the
public offering price of $20.50 per Unit, less accumulated amortization and
impairment.
<PAGE>
 
The net amount of royalty interests in gas properties is limited to the sum of
the future net cash flows attributable to the Trust's gas reserves at year end
using current product prices plus the estimated future Section 29 credits for
federal income tax purposes. If the net cost of royalty interests in gas
properties exceeds this amount, an impairment provision is recorded and charged
to the trust corpus.

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.

NEW ACCOUNTING STANDARDS

Statements of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. SFAS No. 121 requires the review of long-lived assets and
certain identifiable intangibles for impairment. If an impairment event occurs
and it is determined that the carrying value of the asset may not be
recoverable, an impairment loss will be recognized as measured by the amount by
which the carrying amount of the assets exceeds the fair value of the asset. The
Trustee adopted SFAS No. 121 effective January 1, 1996 . Such implementation did
not have any impact on the financial statements of the Trust (see Note 10).

3. FEDERAL INCOME TAXES

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

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

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

4. RELATED PARTY TRANSACTIONS

Burlington Resources provides accounting, bookkeeping and informational services
to the Trust in accordance with an Administrative Services Agreement effective
May 1, 1993. The fee is $75,000 per quarter, adjusted annually, based upon the
change in the Producer's Price Index each January 1 commencing January 1, 1994.
Aggregate fees paid by the Trust to Burlington Resources in 1996, 1995 and 1994
were $313,157, $305,695 and $300,600, respectively.

Aggregate fees paid by the Trust to the Trustee in 1996, 1995  and 1994 were
$39,147, $38,192  and $37,080, respectively. The Delaware Trustee was paid a
flat fee of $10,000 for each of the respective years.
<PAGE>
 
5. DISTRIBUTIONS TO UNITHOLDERS

The Trustee determines for each quarter the amount of cash available for
distribution to Unitholders. Such amount (the "Quarterly Distribution Amount")
is an amount equal to the excess, if any, of the cash received by the Trust, on
or before the last business day before the 50th day following the end of each
calendar quarter from the Royalty Interests attributable to production during
such quarter, plus, with certain exceptions, any other cash receipts of the
Trust during such quarter, over the liabilities of the Trust paid during such
quarter, subject to adjustments for changes made by the Trustee during such
quarter in any cash reserves established for the payment of contingent or future
obligations of the Trust.

The Quarterly Distribution Amount for each quarter is payable to Unitholders of
record on the 63rd day following the end of such calendar quarter unless such
day is not a business day in which case the record date is the next business day
thereafter. The Trustee distributes the Quarterly Distribution Amount on or
prior to the 75th day after the end of each calendar quarter to each person who
was a Unitholder of record on the associated record date, together with interest
estimated to be earned on such amount from the date of receipt thereof by the
Trustee to the payment date.

The Royalty Interests may be sold under certain circumstances and will be sold
following termination of the Trust. A special distribution will be made of
undistributed net sales proceeds and other amounts received by the Trust
aggregating in excess of $10,000,000 (a "Special Distribution Amount"). The
record date for a Special Distribution Amount will be the 15th day following
receipt of amounts aggregating a Special Distribution Amount by the Trust
(unless such day is not a business day in which case the record date will be the
next business day thereafter) unless such day is within 10 days prior to the
record date for a Quarterly Distribution Amount in which case the record date
will be the date as is established for the next Quarterly Distribution Amount.
Distribution to Unitholders of a Special Distribution Amount will be made no
later than 15 days after the Special Distribution Amount record date.

6. CONTINGENCIES

Under the terms of the gas purchase contract entered into between MOPI and an
affiliate of MOPI (the "Gas Purchase Contract"), additional revenues may be paid
to the Trust to meet the minimum purchase price provision of $1.60 per MMBtu
(the "Minimum Purchase Price") (less applicable deductions). This additional
revenue is subject to recoupment by MOPI from future revenues received from
production when the applicable index price in such month exceeds the Minimum
Purchase Price.

The applicable index price was below the Minimum Purchase Price during 1996
except for the months of August, November and December, and in each month during
1995 and during the second, third and fourth quarters of 1994. Pursuant to the
terms of the Gas Purchase Contract, MOTI established a price credit account.
MOTI estimates that, as of December 31, 1996, MOTI had aggregate price credits
in the price credit account of approximately $8.9 million of which the Trust's
95 percent interest was approximately $8.5 million. The applicable index price
was above the Minimum Purchase Price in January and February 1997.

The Trustee has been advised by MOPI that the Minerals Management Service
("MMS"), a subagency of the U.S. Department of the Interior, has from time to
time considered the inclusion of the value of the Section 29 tax credits
attributable to coal seam gas production in the calculation of gross proceeds
for purposes of calculating the royalty that is payable to the MMS. On August
31, 1993, the U.S. Office of the Inspector General (the "OIG") issued an audit
report stating the view that Section 29 tax credits should be included in the
calculation of gross proceeds and recommended that the MMS pursue collection of
additional royalties with respect to past and future production. On December 8,
1993, however, the Office of the Solicitor of the U.S. Department of the
Interior gave its opinion to the MMS that the report of the OIG was 
<PAGE>
 
incorrect and that Section 29 tax credits are not part of gross proceeds for the
purpose of Federal royalty calculations. MOPI believes that any inclusion of the
value of Section 29 tax credits for purposes of calculating royalty payments
required to be made on Federal lands would be inappropriate since all mineral
interest owners, including royalty owners, are entitled to Section 29 tax
credits for their proportionate share of qualifying coal seam gas production.
MOPI has advised the Trustee that it would vigorously oppose any attempt by the
MMS to require the inclusion of the value of Section 29 tax credits in the
calculation of gross proceeds. However, if such regulations were adopted and
upheld, royalty payments would be increased which would decrease NPI Net
Proceeds and, therefore, amounts payable to the Trust. The reduction in amounts
payable to the Trust would cause a corresponding reduction in associated Section
29 tax credits available to Unitholders. 

Per the terms of the Gas Purchase Contract, all royalty income of the Trust was
derived from MOPI.

7. SUBSEQUENT EVENT

Subsequent to December 31, 1996, the Trust declared the following distribution:
 
 
Quarterly Record Date              Payment Date            Distribution per Unit
March 4, 1997                      March 14, 1997          $.147801
 

The Trustee has estimated the Section 29 tax credit associated with the March
14, 1997 quarterly distribution to be $.18 per Unit (unaudited).

8. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for the periods ended December 31, 1996
and 1995 are as follows (in thousands except per unit amount):

<TABLE>
<CAPTION>
Calendar Quarter              Royalty Income   Distributable       Distributable 
                                               Income              Income per Unit
<S>                           <C>             <C>                  <C>
                                                                   
1996                                                               
                                                                   
First                            $ 3,101          $ 2,920              $ .33
                                                                      
Second                             2,852            2,638                .30
                                                                      
Third                              2,423            2,309                .26
                                                                      
Fourth                             2,295            2,174                .25
                                                                      
                                 $10,671          $10,041              $1.14
1995                                                                  
                                                                      
First                            $ 3,308          $ 3,174              $ .36
                                                                      
Second                             3,812            3,517                .40
                                                                      
Third                              3,528            3,398                .39
                                                                      
Fourth                             3,429            3,313                .37

                                 $14,077          $13,402              $1.52
</TABLE> 
<PAGE>
 
Selected 1996 fourth quarter data are as follows (in thousands except per unit
amounts):

<TABLE> 
<S>                                                      <C>  
Royalty income.........................................  $ 2,295

Interest income........................................        6

General and administrative expenses....................     (127)
                                                         -------

Distributable income...................................  $ 2,174
                                                         =======

Distributable income per unit..........................  $   .25
                                                         =======

Distribution per unit..................................  $   .25
                                                         =======
</TABLE>

Due to the significant upward revision in estimated reserve quantities (see Note
9), estimated amortization of royalty interests was adjusted downward by
approximately $3.3 million during the fourth quarter of 1996. This adjustment
did not have an impact on the Trust's distributable income.

9. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

The net proved reserves attributable to the Royalty Interests, all located
within the United States, have been estimated as of December 31, 1996, 1995 and
1994  by independent petroleum engineers.

In accordance with Statement of Financial Accounting Standards No. 69, estimates
of future net revenues from proved reserves have been prepared either using end-
of-period or contractual gas prices as appropriate and related costs. The
standardized measure of future net revenues from the gas reserves is calculated
based on discounting such future net revenues at an annual rate of 10 percent.
At December 31, 1996, the price the Trust was entitled to receive under the Gas
Purchase Contract was $2.74 per MMBtu subject to accrued and unrecouped price
credits (see Note 6). For purposes of preparation of the reserve report as of
December 31, 1996, however, pricing was held constant at the minimum purchase
price ($1.60 per MMBtu) until the accrued price credits were recouped by MOTI, 
after which $2.74 per MMBtu was utilized for the remaining life of the Royalty
Interests.

Numerous uncertainties are inherent in estimating volumes and value of proved
developed reserves and in projecting future production rates. Such reserve
estimates are subject to change as additional information becomes available. The
reserves actually recovered and the timing of production may be substantially
different from the original estimates.

The reserve estimates for the Royalty Interests are based on a percentage share
of NPI Net Proceeds payable to the Trust of 95 percent. A net profits interest
does not entitle the Trust to a specific quantity of gas but to a portion of gas
sufficient to yield a specified portion of the net proceeds derived therefrom.
Proved reserves attributable to a net profits interest are calculated by
deducting an amount of gas sufficient, if sold at the prices used in preparing
the reserve estimates for such net profits interest, to pay the future estimated
costs and expenses deducted in the calculation of the net proceeds of such
interest. Accordingly, the reserves presented for the Royalty Interests reflect
quantities of gas that are free of future costs and expenses if the price and
cost assumptions used in the reserve report prepared as of December 31, 1996
occur.
<TABLE>
<CAPTION>
 
                                            Natural Gas (MMcf)
<S>                                         <C> 
 
Proved reserves at  January 1, 1994......        108,025

Revisions of previous estimates..........         (1,752)

Production...............................        (15,941)
                                                 -------

Proved reserves at December 31, 1994.....         90,332

Revisions of previous estimates..........            208

Production...............................        (13,995)
                                                 -------

Proved reserves at December 31, 1995.....         76,545

Revisions of previous estimates..........          6,671

Production...............................        (11,582)
                                                 -------

Proved reserves at December 31,1996......         71,634
                                                 =======

</TABLE>
<PAGE>
 
All proved reserve estimates presented above are proved developed.

Proved reserves are estimated quantities of natural gas which geological and
engineering data indicate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating conditions.
Proved developed reserves are proved reserves which can be expected to be
recovered through existing wells with existing equipment and operating methods.

The following table sets forth the standardized measure of discounted future net
revenues at December 31, 1996, 1995 and 1994 relating to proved reserves (in
thousands):
<TABLE>
<CAPTION>
 
                                         1996           1995           1994
<S>                                   <C>             <C>             <C> 
                                                   
Future cash inflows.................  $ 143,716       $  94,079      $ 110,439

Future production taxes,
  operating costs, and capital 
  expenditures......................    (27,410)         19,048        (24,470)
                                      ---------       ---------      ---------

Future net cash flows...............    116,306          75,031         85,969

10% discount factor.................    (49,001)        (27,461)       (30,286)
                                      ---------       ---------      ---------
Standardized measure of
  discounted future net revenues....  $  67,305       $  47,570      $  55,683
                                      =========       =========      =========
 
</TABLE>

The following table sets forth the changes in the aggregate standardized measure
of discounted future net revenues from proved reserves during the years ended
December 31, 1996, 1995 and 1994 (in thousands):

<TABLE>
<CAPTION>
                                      1996      1995       1994
<S>                                 <C>       <C>        <C>
 
Balance at January 1..............  $47,570   $ 55,683   $ 91,423

Increase (decrease) due to:

 Net sales of coal seam gas.......   (9,042)   (13,826)   (15,906)

 Net changes in prices and costs..   18,444        (80)   (25,600)

 Changes in estimated volumes.....    5,576        225     (3,376)

Accretion of discount.............    4,757      5,568      9,142
                                    -------   --------   --------

Balance at December 31............  $67,305   $ 47,570   $ 55,683
                                    =======   ========   ========
</TABLE>

The above reserves do not include undiscounted Section 29 tax credits of
approximately $36,055,600 as estimated by an independent petroleum engineer. The
present discounted (10%) value of these tax credits is approximately
$28,479,900.

Subsequent to year end 1996, the price of gas decreased significantly. As of
March 21,1997, published natural gas prices were approximately 1.53 per MMBtu as
compared to prices utilized in the Trust's calculation of its year end
standardized measure of discounted future net cash flow. The use of prices
currently being received would result in a lower standardized measure of
discounted future net cash flows.
<PAGE>
 
10. IMPAIRMENT OF ROYALTY INTERESTS

At December 31, 1995 and 1994, the Trust's net carrying value of its investment
in royalty interests exceeded the sum of the future net cash flows plus the
estimated future Section 29 tax credit benefits from the production of the
Trust's reserves by $561,809 and $995,048, respectively. Accordingly, the Trust
was required to record an impairment allowance during 1995 and 1994 to reduce
its carrying value of royalty interests in gas reserves. The reduction in the
carrying value of its investments was charged directly to trust corpus. There
was no impairment in 1996. For further discussion of impairment see Note 2. As
more fully discussed in Note 2, beginning in 1996 the Trust was required to
adopt SFAS No. 121. SFAS No. 121 requires that 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. Should the aggregate dollar amount of the Trust's reserves and Section 29
credits decline, an additional impairment provision, which could be material,
will be required. There can be no assurance such a writedown will not occur.

SUPPLEMENTAL INFORMATION REGARDING THE UNDERLYING PROPERTIES

The Royalty Interests owned by the Trust burden MOPI's interest in the
Underlying Properties. The Royalty Interests are passive in nature and neither
the Trustee nor the Delaware Trustee has any control over or responsibility
relating to the operation of the Underlying Properties or MOPI's interest
therein. For the information of Unitholders, the following Statement of Revenues
and Direct Operating Expenses of MOPI's interest in the Underlying Properties
for each of the three years in the period ended December 31, 1996, auditied by
Coopers & Lybrand L.L.P., independent accountants, has been prepared and
furnished by MOPI to the Trustee for inclusion herein.


<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS
TO BOARD OF DIRECTORS OF
BURLINGTON RESOURCES INC.:

We have audited the accompanying Statement of Revenues and Direct Operating
Expenses ("Statement") of certain coal seam gas producing properties of
Burlington Resources Oil & Gas Company ("the Underlying Properties") for each of
the three years in the period ended December 31, 1996. In 1996, Meridian Oil
Inc., the successor by merger of Meridian Oil Production Inc., changed its name
to Burlington Resources Oil & Gas Company (the "Company"). The financial
statement is the responsibility of Company's management. Our responsibility is
to express an opinion on this financial statement based upon 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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.

The accompanying Statement reflects the revenue and direct operating expenses
attributable to the Company's interest in the Underlying Properties as described
in Note 2 and is not intended to be a complete presentation of the revenues and
expenses of the Company's interest in the Underlying Properties.

In our opinion, the Statement presents fairly, in all material respects, the
revenues and direct operating expenses of the Company's interest in the
Underlying Properties as described in Note 2 for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

/SIG/COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
March 21, 1997
<PAGE>
 
BURLINGTON RESOURCES OIL & GAS COMPANY'S INTEREST IN THE UNDERLYING PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
(In thousands)
 
                                           Years Ended December 31,
                                            1996     1995    1994
<S>                                       <C>      <C>      <C>
 
Revenues                                  $12,682  $16,009  $19,573
                                          -------  -------  -------
Direct operating expenses                                   
                                                            
 Taxes on production and property           1,228    1,111    1,871
                                                            
 Lease operating expenses                     455      433      624
                                          -------  -------  -------
 
                                            1,683    1,544    2,495
                                          -------  -------  -------

Excess of revenues over direct            
 operating expenses                       $10,999  $14,465  $17,078
                                          =======  =======  =======
</TABLE>

The accompanying notes are an integral part of this financial statement.

BURLINGTON RESOURCES OIL & GAS COOMPANY'S INTEREST IN THE UNDERLYING PROPERTIES
NOTES TO THE FINANCIAL STATEMENTS

1. BURLINGTON RESOURCES OIL & GAS COMPANY'S INTEREST IN THE UNDERLYING
PROPERTIES

The interest of Burlington Resources Oil & Gas Company in certain coal seam gas
producing properties (the "Underlying Properties") consists of certain interests
in the Fruitland Coal formation owned by Burlington Resources Inc. through the
Company. The Underlying Properties, substantially all of which are located in
the Northeast Blanco Unit in the San Juan Basin of New Mexico, are burdened by a
Net Profits Interest Conveyance from Meridian Oil Production Inc. to the
Burlington Resources Coal Seam Gas Royalty Trust ("Trust") dated May 1, 1993
("Conveyance"). In 1996, Meridian Oil Inc., the successor by merger of Meridian
Oil Production Inc., changed its name to Burlington Resources Oil & Gas Company
(the "Company").

2. BASIS OF PRESENTATION

The accompanying financial statement does not include depreciation, depletion
and amortization, interest, general and administrative expenses or income taxes
as such information is either not readily available on an individual property
basis or relevant for purposes of the Trust. During the periods presented, the
Underlying Properties were not accounted for as a separate entity. Accordingly,
the financial statement is not intended to represent the financial position,
results of operations, or cash flows of the Underlying Properties in conformity
with generally accepted accounting principles.

Revenues are presented on an accrual basis using the production entitlement
method as set forth in the Conveyance. The Company's revenues are recorded based
upon its Net Revenue Interest Percentage (as defined in the Conveyance).
Revenues are reflected net of existing royalties, overriding royalties and
gathering, treating and processing expenses. The Company's actual cash receipts
may vary from accrued revenues due to timing delays of receipt of cash from the
operators of the Underlying Properties or purchasers, and due to wellhead and
pipeline volume balancing agreements or practices. The Company produced and sold
more gas than its entitled share based upon its working interest in the
Underlying Properties, and thus is in an over-produced position of approximately
297 million cubic feet ("MMcf"), 258 MMcf and 1,100  MMcf as of December 31,
1996, 1995 and 1994, respectively. Expenses are presented on an accrual basis.

The preparation of the financial statement requires the Company to make
estimates and assumptions that affect the reported amounts of revenues and
direct operating expenses during the reporting periods. Actual results could
differ from such estimates.
<PAGE>
 
3. RELATED PARTY TRANSACTIONS

Prior to May 1, 1993, the Company's production from the Underlying Properties
was sold to Meridian Oil Trading Inc. ("MOTI"), an affiliate of the Company,
based on MOTI's posted price. Beginning May 1, 1993, the Company's production
from the Underlying Properties was sold to MOTI under the terms of the Gas
Purchase Contract between the Company and MOTI dated May 1, 1993 ("Gas Purchase
Contract"). In 1996, MOTI changed its name to Burlington Resources Trading Inc.
("BRTI"). The monthly price paid by BRTI for natural gas purchased pursuant to
the Gas Purchase Contract is (i) the greater of (a) $1.60 per million British
thermal units ("Minimum Purchase Price") and (b) the Index Price (as defined in
the Gas Purchase Contract) up to the Sharing Price (as defined in the Gas
Purchase Contract), less, in each case, (ii) gathering, treating and processing
charges incurred in connection with such production, and plus (iii) a price
differential, if any, when the Index Price exceeds the Sharing Price. After
December 31, 1993, to the extent BRTI was required pursuant to the Gas Purchase
Contract to pay a price based on the Minimum Purchase Price rather than the
Index Price, BRTI is entitled to accrue certain price credits that will be used
to reduce the purchase price of gas under the Gas Purchase Contract when the
Index Price exceeds the Minimum Purchase Price. BRTI has the right to recover
price credits of $8.9 million and $7.4  million as of December 31, 1996 and
1995, respectively. During 1996, BRTI accrued an additional $2.7 million in
price credits and recovered price credits totaling $1.2 million.

The Company's production from the Underlying Properties is gathered, treated and
processed  under the terms of the Gas Gathering, Dehydrating and Treating
Agreement between the Company and Meridian Oil Gathering Inc. ("MOGI") dated May
3, 1990, as amended May 1, 1993 ("Gas Gathering , Dehydrating and  Treating
Agreement"). In 1996, MOGI changed its name to Burlington Resources Gathering
Inc. ("BRGI"). The fees charged by BRGI totaled approximately $4.1 million, $4.8
million and $5.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively, and are in accordance with the rates defined in the Gas Gathering,
Dehydrating and Treatment Agreement.

TRUSTEE
NationsBank of Texas, N.A.
Dallas, Texas
Delaware Trustee
Mellon Bank(DE) National Association
Wilmington, Delaware

TRANSFER AGENT AND REGISTRAR
Boston Equiserve Shareholder Service
Boston, Massachusetts and New York, New York

TRUST AUDITORS
Deloitte & Touche LLP
Dallas, Texas

TRUST ENGINEERING CONSULTANTS
Netherland, Sewell & Associates, Inc.
Houston, Texas

TRUSTEE COUNSEL
Thompson & Knight,
A Professional Corporation
Dallas, Texas

FORM 10-K
A copy of the Form 10-K of the Trust for the year ended December 31, 1996 as
filed with the Securities and Exchange Commission has been provided with this
Annual Report to Unitholders. Additional copies of the Form 10-K will be
provided, without charge, upon written request to:

Burlington Resources Coal Seam Gas Royalty Trust
NationsBank of Texas, N.A., Trustee
NationsBank Plaza
901 Main Street, Suite 1700
Dallas, Texas 75283-0650
<PAGE>
 
BURLINGTON RESOURCES COAL SEAM GAS ROYALTY TRUST
NATIONSBANK OF TEXAS, N.A., TRUSTEE
NATIONSBANK PLAZA
901 MAIN STREET, SUITE 1700
DALLAS, TEXAS 75283-0650
1-800-365-6547