<PAGE>

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

                                   Form 10-Q

        [X]     Quarterly Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934
                 For the quarterly period ended March 31, 1998
                                                --------------

                                      OR

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

                        Commission File Number:  1-8424

                             SABINE ROYALTY TRUST
            (Exact name of registrant as specified in its charter)

              Texas                                75-6297143
     (State or other jurisdiction            (I.R.S. Employer Identi-
         of incorporation or                     fication No.)
            organization)

                                Trust Division
                          NationsBank of Texas, N.A.
                               NationsBank Plaza
                                901 Main Street
                                  17th Floor
                              Dallas, Texas 75202
                   (Address of principal executive offices)
                                  (Zip Code)

                                (214) 508-2400
             (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.  Yes  X  No 
                                        ---    ---    

Number of units of beneficial interest outstanding at May 11, 1998:
14,579,345

                              Page 1 of 13 Pages
 
<PAGE>
 
                             SABINE ROYALTY TRUST

                        PART I - FINANCIAL INFORMATION
                        ------------------------------

Item 1.  Financial Statements.

      The condensed financial statements included herein have been prepared by
NationsBank of Texas, N.A., as Trustee (the "Trustee") of Sabine Royalty Trust
(the "Trust"), pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements have been condensed or omitted pursuant
to such rules and regulations, although the Trustee believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in the Trust's latest annual
report on Form 10-K. The December 31, 1997 balance sheet is derived from the
audited balance sheet of that date. In the opinion of the Trustee, all
adjustments necessary to present fairly the assets, liabilities and trust corpus
of the Trust as of March 31, 1998, and the distributable income and the changes
in trust corpus for the three-month periods ended March 31, 1998 and 1997, have
been included. The distributable income for such interim periods is not
necessarily indicative of the distributable income for the full year.

     The condensed financial statements as of March 31, 1998 and for the
three-month periods ended March 31, 1998 and 1997, included herein, have been
reviewed by Deloitte & Touche LLP, independent public accountants, as stated in
their report appearing herein.

                                       2
<PAGE>
 
                        INDEPENDENT ACCOUNTANTS' REPORT

 
NationsBank of Texas, N.A., as Trustee
  of Sabine Royalty Trust:


We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of Sabine Royalty Trust as of March 31, 1998, and the related
condensed statements of distributable income and changes in trust corpus for the
three-month periods ended March 31, 1998 and 1997. These financial statements
are the responsibility of the Trustee.

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

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

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

We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of Sabine 
Royalty Trust as of December 31, 1997, and the related statements of
distributable income and changes in trust corpus for the year then ended (not
presented herein); and in our report dated March 20, 1998, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed statement of assets,
liabilities and trust corpus as of December 31, 1997, is fairly stated, in all
material respects, in relation to the statement of assets, liabilities and trust
corpus from which it has been derived.

/s/ Deloitte & Touche LLP

Dallas, Texas
May 6, 1998


                                       3
<PAGE>
 
SABINE ROYALTY TRUST
--------------------

CONDENSED STATEMENTS OF ASSETS,
LIABILITIES AND TRUST CORPUS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                               MARCH 31,                 
                                                 1998       DECEMBER 31, 
ASSETS                                 NOTES  (UNAUDITED)       1997
------                                 -----  ------------  ------------
<S>                                    <C>    <C>           <C>
                                     
Cash and short-term investments                $3,138,334     $3,857,558
Royalty interests in oil             
  and gas properties                 
  (less accumulated                  
  amortization of                    
  $19,457,911 and                    
  $19,315,915 at                     
  March 31, 1998 and                 
  December 31, 1997)                       1    2,937,274      3,079,270
                                               ----------    -----------
                                     
TOTAL                                          $6,075,608     $6,936,828
                                               ==========    ===========
                                     
                                     
LIABILITIES AND TRUST CORPUS         
----------------------------         
                                     
Trust expenses payable                         $  166,529     $  222,322
Other payables                             4      324,357        774,399
                                     
Trust corpus - 14,579,345            
  units of beneficial                
  interest authorized, issued        
  and outstanding                               5,584,722      5,940,107
                                               ----------    -----------
                                     
TOTAL                                          $6,075,608     $6,936,828
                                               ==========    ===========
</TABLE>


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

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

                                       4
<PAGE>
 
SABINE ROYALTY TRUST
--------------------

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
--------------------------------------------------------
<TABLE>
<CAPTION>
 
                                      THREE MONTHS ENDED MARCH 31,
                                      ----------------------------
 
                              NOTES     1998               1997    
                              -----   ----------        ---------- 
<S>                           <C>     <C>               <C>        
                                                                   
Royalty income                        $7,765,806        $7,440,234
Interest income                           51,856            41,797
                                      ----------        ---------- 
Total                                  7,817,662         7,482,031
General and administrative                                         
 expenses                               (372,936)         (363,612)
                                      ----------        ---------- 
                                                                   
Distributable income                  $7,444,726        $7,118,419
                                      ==========        ========== 
                                                                   
Distributable income                                               
 per unit (basic and 
 assuming dilution)                                                          
 (14,579,345 units)
                              1,3,5   $      .51        $      .49 
                                      ==========        ========== 
</TABLE>                                              
                                                      
The accompanying notes are an integral part of these condensed financial
statements.
                                                      
--------------------------------------------------------------------------
                                                                               
                                                      
                                       5              
                                                      
                                                      
                                                      
                                                      
<PAGE>
 
SABINE ROYALTY TRUST
--------------------

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 
                                 THREE MONTHS ENDED MARCH 31,
                                 ----------------------------
                           NOTE      1998             1997    
                           ----  -----------     ------------ 
<S>                        <C>   <C>             <C>          
                                                              
Trust corpus, beginning                                       
 of period                       $ 5,940,107      $ 5,885,543
Amortization of royalty                                       
 interests                          (141,996)        (129,737)
Distributable income               7,444,726        7,118,419
Distributions                3    (7,658,115)      (6,914,891)
                                 -----------     ------------ 
                                                              
Trust corpus, end                                             
 of period                       $ 5,584,722      $ 5,959,334
                                 ===========     ============ 
                                                             
Distributions per unit                                       
 (14,579,345 units)
                             3   $       .53     $        .47 
                                 ===========     ============ 
</TABLE> 

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

                                       6
<PAGE>
 
SABINE ROYALTY TRUST
--------------------

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)                         
------------------------------------------------------------------------------- 

1.  TRUST ORGANIZATION AND PROVISIONS

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

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

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

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

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

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

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

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

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

                                       7
<PAGE>
 
      Because of the passive nature of the Trust and the restrictions and
limitations on the powers and activities of the Trustee contained in the Trust
Agreement, the Trustee does not consider any of the officers and employees of
the Trustee to be "officers" or "executive officers" of the Trust as such terms
are defined under applicable rules and regulations adopted under the Securities
Exchange Act of 1934.

      The proceeds of production from the Royalties are receivable from hundreds
of separate payors. In order to facilitate creation of the Trust and to avoid
the administrative expense and inconvenience of daily reporting to Unit holders,
the conveyances by Sabine of the Royalties located in five of the six states
provided for the execution of an escrow agreement by Sabine and the initial
trustee of the Trust, in its capacities as trustee of the Trust and as escrow
agent. The conveyances by Sabine of the Royalties located in Louisiana provided
for the execution of a substantially identical escrow agreement by Sabine and a
Louisiana bank in the capacities of escrow agent and of trustee under Sabine
Louisiana Royalty Trust. Sabine Louisiana Royalty Trust, the sole beneficiary of
which is the Trust, was established in order to avoid uncertainty under
Louisiana law as to the legality of the Trustee's holding record title to the
Royalties located in Louisiana.

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

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

                                       8
<PAGE>
 
2.  ACCOUNTING POLICIES

    Basis of Accounting
    -------------------

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

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

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

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

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

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

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

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

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

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

     Use of Estimates
     ----------------

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

     Impairment
     ----------

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

     Federal Income Taxes
     --------------------

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

                                       9
<PAGE>
 
3.  DISTRIBUTION TO UNIT HOLDERS

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

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

4.  OTHER PAYABLES

     Other payables consist primarily of royalty receipts suspended pending
verification of ownership interest or title.

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


5.  SUBSEQUENT EVENTS

     Subsequent to March 31, 1998, the Trust declared the following
distributions:
 
                  Monthly
                  Record            Payment    Distribution
                  Date               Date        per Unit  
                  ---------------   -------    ------------
         
                  April 15          April 29      $.18210
                  May 15            May 29        $.12215
 

                                       10
<PAGE>
 
Item 2.  Trustee's Discussion and Analysis of Financial Condition
         and Results of Operations.

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

     Distributable income consists of royalty income plus interest income plus
any decrease in cash reserves established by the Trustee less general and
administrative expenses of the Trust less any increase in cash reserves
established by the Trustee. Distributable income for the three months ended
March 31, 1998 was $7,444,726 or $.51 per Unit. Royalty income amounted to
$7,765,806 while interest income was $51,856. General and administrative
expenses totaled $372,936.

     Distributions during the period were $.19698, $.18597 and $.14231 per Unit
to Unit holders of record on January 15, February 17 and March 16, 1998,
respectively.

     Royalty income for the quarter ended March 31, 1998 increased approximately
$326,000 or 4% compared with the first quarter of 1997, due to the net effect of
an increase in oil and gas production and a decline in oil and gas prices in the
first quarter of 1998 compared to the same quarter a year ago. Compared to the
preceding quarter ended December 31, 1997, royalty income increased
approximately $1,965,000. The increase was due in part to an increase in oil and
gas production, offset somewhat by a decline in oil and gas prices, in the first
quarter of this year, and to the payment of ad valorem taxes of approximately
$931,000 in the fourth quarter of 1997.

     The following table illustrates average prices received for the periods
discussed above and the related oil and gas production volumes:

                                             Quarter Ended
                        --------------------------------------------------------
                        March 31, 1998       March 31, 1997    December 31, 1997
Production                                                     
  Oil (Bbls)                 161,613              150,880            149,728
  Gas (Mcfs)               2,325,765            1,638,605          1,702,990
                                                               
Average Price                                                  
  Oil (per bbl)               $15.47               $20.68             $17.76
  Gas (per Mcf)                $2.13                $2.90              $2.53

     It is difficult to accurately estimate future prices of oil and gas, and
any assumptions concerning future prices may prove to be incorrect.

     Interest income for the quarter ended March 31, 1998 increased
approximately $10,100 compared with the first quarter of 1997 due to an increase
in short term interest rates. Compared to the quarter ended December 31, 1997,
interest income increased approximately $18,400 due to an increase in funds
available for investment.

     General and administrative expenses for the quarter ended March 31, 1998
increased approximately $9,300 compared to the same quarter of 1997 due to the
timing of payment of printing and certain other costs associated with the
Trust's year-end reporting. Compared to the preceding quarter ended December 31,
1997, general and administrative expenses increased approximately $56,300 due
primarily to the payment in the first quarter of certain costs related to the
preparation and distribution of annual year-end information to Unit holders.

     This 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 Report are forward-looking statements.
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 the Trust's most recent Annual Report on
Form 10-K effecting 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.

                                       11
<PAGE>
 
                          PART II - OTHER INFORMATION
                          ---------------------------

Item 6.  Exhibits and Reports on Form 8-K.

         (a)  Exhibit 27 - Financial Data Schedule.

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

                                       12
<PAGE>
 
                                 SIGNATURES
                                 ----------

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                    SABINE ROYALTY TRUST

                                    By: NationsBank of Texas, N.A.
                                        (as successor), Trustee


                                    By:  /s/ Ron E. Hooper
                                        --------------------------------------
                                        Ron E. Hooper
                                        Vice President and
                                        Trust Administrator

Date:  May 11, 1998

    (The Trust has no directors or executive officers.)

                                       13