##### Table of Contents



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  OR o Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 
 Commission File Number: 1-8424 SABINE ROYALTY TRUST  Texas
    
    75-6297143(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or
    
    Identification No.)organization
 Trust Division
Bank of America, N.A.
Bank of America Plaza
901 Main Street
17th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip Code) (214) 209-2400
(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 o Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of
accelerated and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer o
Accelerated filer x
Non-accelerated filer o Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No
x Number of units of beneficial
interest outstanding at August 4, 2006:
14,579,345




---



TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial Statements.Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.Item 3. Quantitative and Qualitative Disclosures About Market Risk.Item 4. Controls and Procedures.PART II  OTHER INFORMATIONItem 1A. Risk FactorItem 6. Exhibits.SIGNATURESTrustee Certification Pursuant to Section 302Trustee Certification Pursuant to Section 906    Table of Contents  SABINE ROYALTY TRUST 
 PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements. The condensed financial statements included herein have been prepared
by Bank of America, N.A. (as successor to NationsBank, 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. The condensed financial statements of the Trust
presented herein are unaudited except for the balances as of
December 31, 2005,
and, therefore are subject to year-end adjustments. 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, 2005 balance sheet is derived from the audited
balance sheet as 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 June 30, 2006, the distributable income for the three-month and six-month
periods ended June 30, 2006 and 2005 and the changes in trust
corpus for the six-month periods ended June 30, 2006 and 2005, 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 June 30, 2006 and for the
three-month and six-month periods ended June 30, 2006 and 2005, included
herein, have been reviewed by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report appearing herein. 2




---



##### Table of Contents



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM Unit Holders of Sabine Royalty Trust and
Bank of America, N.A., Trustee We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of Sabine Royalty Trust as of June 30, 2006, and the related
condensed statements of distributable income for the three-month and six-month
periods ended June 30, 2006 and 2005 and changes in trust corpus for the six-month periods ended June 30, 2006 and 2005. These condensed financial
statements are the responsibility of the Trustee. We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 standards of the Public Company Accounting Oversight Board (United States),
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 accounting principles
generally accepted in the United States of America. Based on our reviews, 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 standards of the Public
Company Accounting Oversight Board (United States), the statement of assets,
liabilities and trust corpus of Sabine Royalty Trust as of December 31, 2005,
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 10, 2006,
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, 2005, 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
August 7, 2006 3




---



##### Table of Contents



SABINE ROYALTY TRUST CONDENSED STATEMENTS OF ASSETS,
LIABILITIES AND TRUST CORPUS June 30, 2006
    
    December 31,Notes
    
    (Unaudited)
    
    2005AssetsCash and short-term investments
    
    
    
    
    
    $
    5,873,273
    
    
    $
    6,335,822Royalty interests in oil
and gas properties
(less accumulated
amortization of $21,417,319 and $21,359,883 at
June 30, 2006 and
December 31, 2005)
    
    
    
    
    
    
    977,866
    
    
    
    1,035,302TOTAL
    
    
    
    
    
    $
    6,851,139
    
    
    $
    7,371,124Liabilities and Trust CorpusTrust expenses payable
    
    
    
    
    
    $
    143,870
    
    
    $
    148,696Other payables
    
    
    4
    
    
    
    258,310
    
    
    
    176,176402,180
    
    
    
    324,872Contingencies
    
    
    6
    
    
    
    
    
    
    
    Trust corpus - 14,579,345
units of beneficial
interest authorized, issued
and outstanding
    
    
    
    
    
    
    6,448,959
    
    
    
    7,046,252TOTAL
    
    
    
    
    
    $
    6,851,139
    
    
    $
    7,371,124
 The accompanying notes are an integral part of these condensed financial
statements. 4




---



##### Table of Contents



SABINE ROYALTY TRUST CONDENSED STATEMENTS OF
DISTRIBUTABLE INCOME (UNAUDITED) Three Months EndedJune 30,Notes
    
    2006
    
    2005Royalty income
    
    
    
    
    
    $
    14,523,362
    
    
    $
    11,768,560Interest income
    
    
    
    
    
    
    85,859
    
    
    
    38,082Total
    
    
    
    
    
    
    14,609,221
    
    
    
    11,806,642General and administrative
expenses
    
    
    
    
    
    
    (565,466
    )
    
    
    (542,486
    )Distributable income
    
    
    
    
    
    $
    14,043,755
    
    
    $
    11,264,156Distributable income
per unit (basic and
assuming dilution)
(14,579,345 units)
    
    
    1,3,5
    
    
    $
    .96
    
    
    $
    .77
 The accompanying notes are an integral part of these condensed financial
statements. 5




---



##### Table of Contents



SABINE ROYALTY TRUST CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED) Six Months EndedJune
30,Notes
    
    2006
    
    2005Royalty income
    
    
    
    
    
    $
    32,458,787
    
    
    $
    24,122,358Interest income
    
    
    
    
    
    
    168,193
    
    
    
    64,568Total
    
    
    
    
    
    
    32,626,980
    
    
    
    24,186,926General and
administrative expenses
    
    
    3
    
    
    
    (1,159,634
    )
    
    
    (1,204,324
    )Distributable income
    
    
    
    
    
    $
    31,467,346
    
    
    $
    22,982,602Distributable
income per unit
(14,579,345 units)
    
    
    1,3,5
    
    
    $
    2.16
    
    
    $
    1.58
 The accompanying notes are an integral part of these condensed financial
statements. 6




---



##### Table of Contents



SABINE ROYALTY TRUST CONDENSED STATEMENTS OF
CHANGES IN TRUST CORPUS (UNAUDITED) Six
Months EndedJune 30,Note
    
    2006
    
    2005Trust corpus, beginning
of period
    
    
    
    
    
    $
    7,046,252
    
    
    $
    4,523,075Amortization of royalty
interests
    
    
    
    
    
    
    (57,436
    )
    
    
    (70,160
    )Distributable income
    
    
    
    
    
    
    31,467,346
    
    
    
    22,982,602Distributions
    
    
    3
    
    
    
    (32,007,203
    )
    
    
    (22,270,974
    )Trust corpus, end
of period
    
    
    
    
    
    $
    6,448,959
    
    
    $
    5,164,543Distributions per unit
(14,579,345 units)
    
    
    3
    
    
    $
    2.20
    
    
    $
    1.53
 The accompanying notes are an integral part of these condensed financial
statements. 7




---



##### Table of Contents



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 interests, 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. In connection with the transfer of the Royalties to the Trust upon its
formation, Sabine had reserved to itself all executive rights, including rights
to execute leases and to receive bonuses and delay rentals. In January 1993,
Pacific (USA) completed the sale of substantially all its producing oil and gas
assets to a third party. The sale did not include executive rights relating to
the Royalties, and Pacific (USA)s ownership of such rights was not affected by
the sale. Bank of America, N.A. (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). 8




---



##### Table of Contents



Because of the passive nature of the Trust and the restrictions and
limitations on the powers and activities of the Trustee contained in the Trust
Agreement, the Trustee does not consider any of the officers and employees of
the Trustee to be officers or executive officers of the Trust as such terms
are defined under applicable rules and regulations adopted under the Securities
Exchange Act of 1934. The proceeds of production from the Royalties are receivable from hundreds
of separate payors. In order to facilitate creation of the Trust and to avoid
the administrative expense and inconvenience of daily reporting to Unit holders,
the conveyances by Sabine of the Royalties located in five of the six states
provided for the execution of an escrow agreement by Sabine and the initial
trustee of the Trust, in its capacities as trustee of the Trust and as escrow
agent. The conveyances by Sabine of the Royalties located in Louisiana provided
for the execution of a substantially identical escrow agreement by Sabine and a
Louisiana bank in the capacities of escrow agent and of trustee under the name
of Sabine Louisiana Royalty Trust. Sabine Louisiana Royalty Trust, the sole
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. The Trust now only has one escrow
agent, which is the Trustee, and a single escrow agreement. Pursuant to the terms of the escrow agreement 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 Trustee,
as escrow agent, and are
paid to and received by the Trust only on the next monthly record
date. The Trustee, as
escrow agent, has agreed to endeavor to assure that it incurs and pays expenses
and fees for each calendar month only on the next monthly record date. The Trust
Agreement also provides that the Trustee is to endeavor to assure that income of
the Trust will be accrued and received and expenses of the Trust will be
incurred and paid only on each monthly record date. Assuming that the escrow
agreement is recognized for Federal income tax purposes and that the
Trustee is able to control the timing of income and expenses, as
stated above, cash and accrual basis Unit holders should be treated as realizing
income only on each monthly record date. The Trustee is treating the escrow
agreement as effective for tax purposes. However, for financial reporting
purposes, royalty and interest income are recorded in the calendar month in
which the amounts are received by either the escrow agent 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. 9




---



##### Table of Contents



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 accounting principles generally accepted in the United States of
America (GAAP):  
    
    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 accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted in the United States of
America. This comprehensive basis of accounting other than GAAP corresponds to the
accounting permitted for royalty trusts by the U.S. Securities and Exchange
Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial
Statements of Royalty Trusts. Use of Estimates The preparation of financial statements in conformity with the basis of
accounting described above requires the Trustee 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 The Trustee routinely reviews the Trusts 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. New
Accounting Standards In February 2006, the FASB amended issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments  an amendment of FASB Statements No. 133 Accounting for Derivative
Instruments and No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.This statement resolves issues address in Statement 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets. This statement is effective for all financial instruments
acquired or issued after the beginning of an entitys first fiscal year that begins after
September 15, 2006. The Trust has no financial instruments and accordingly, the impact of
this new Standard will not impact the financial statements of the Trust. In March 2006, the FASB amended issued SFAS No. 156, Accounting for Servicing of Financial
Assets  an amendment of FASB Statements No. 140 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.This statement requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in certain situations. This
statement is effective as of the beginning of an entitys first fiscal year that begins
after September 15, 2006. The Trust does not believe that the adoption of this statement will
have a material effect on its financial statements. In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, which clarifies the accounting
for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Trust does not believe that the
adoption of this statement will have a material effect of its
financial statements. Distributable Income per Unit Basic distributable income per Unit is computed by dividing distributable income by the weighted
average Units outstanding. Distributable income per Unit assuming dilution is computed by
dividing distributable income by the weighted average number of Units and equivalent
Units outstanding. The Trust had no equivalent Units outstanding for any period
presented. Therefore, basic distributable income per Unit and distributable income per Unit assuming dilution are the
same. Federal
Tax Considerations The Internal Revenue Service has ruled that the Trust is 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 (on the applicable monthly record
date) if the escrow arrangement discussed in Note 1
to these financial statements is respected by the Internal Revenue Service. In
the absence of the escrow arrangement, Unit holders would be deemed to receive
or accrue income from production from the royalty properties (and interest
income) on a daily basis, in accordance with their method of accounting, as the
proceeds from production and interest thereon were received or accrued by the
Trust. The Trustee is treating the escrow arrangement as effective for tax
purposes and furnishes tax information to Unit holders on that basis. Each Unit holder should consult his tax advisor regarding Trust tax
compliance matters.       10




---



##### Table of Contents



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 as of the monthly record date
(the 15th day of each calendar month except in limited circumstances) are
entitled to have distributed to them the calculated Monthly Income Amount for
such month on or before 10 business days after the monthly record date. The
Monthly Income Amount per Unit is declared by the Trust no later than 10 days
prior to the monthly record date. The cash received by the Trust from purchasers of the Trusts oil and gas
production consists of gross sales of production less applicable severance
taxes. 4. 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 June 30, 2006, the Trust declared the following
distributions: MonthlyRecord
    
    Payment
    
    DistributionDate
    
    Date
    
    per UnitJuly 17
    
    July 31
    
    $
    .37996August 15
    
    August 29
    
    $
    .34502
 6. CONTINGENCIES Contingencies related to the royalty properties that are unfavorably
resolved would generally be reflected by the Trust as reductions to future
royalty income payments to the Trust with corresponding reductions to cash
distributions to Unit holders. The Trustee is aware of no such items as of
August 4, 2006. 11




---



##### Table of Contents



Item 2.
Trustees Discussion and Analysis of Financial Condition and
Results of Operations. Liquidity and Capital
Resources The Trust makes monthly distributions to the holders of 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. Results of Operations 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 June 30, 2006 was
$14,043,755 or $.96 per Unit.  Royalty income amounted  to $14,523,362 while interest income was $85,859.
General and administrative  expenses totaled $565,466. Distributions
during the period $.48123, $.24292, and $.34031 per Unit
payable to Unit holders of record on April 17, May 15, and
June 15, 2006,
respectively. Royalty income for the quarter
ended June 30, 2006 increased approximately $2,755,000, or 23%, compared with the second quarter of 2005 due to
increases in the prices of oil and gas.  These increases were offset somewhat by decreases in the production of both
oil and gas.  Compared to the preceding quarter ended March 31, 2006, royalty income decreased approximately $3,412,000,
or 19%, due to a decrease in the price of gas as well as decreases in  the production of both oil and gas.
These decreases were tempered by an increase in the price
of oil. Royalty income for the six months ended June 30, 2006 increased approximately   $8,336,000 or 35%
compared with the same time period of 2005 due mainly to increases in the price of both oil and gas.
These increases were offset somewhat by decreases in the production of both gas and oil. The following tables illustrate average prices received for the periods
discussed above and the related oil and gas production volumes: Quarter EndedJune 30,
    
    June 30,
    
    March 31,2006
    
    2005
    
    2006ProductionOil (Bbls)
    
    
    122,325
    
    
    
    136,733
    
    
    
    127,689Gas (Mcfs)
    
    
    1,252,720
    
    
    
    1,271,939
    
    
    
    1,353,052Average PriceOil (per Bbl)
    
    $
    55.57
    
    
    $
    39.34
    
    
    $
    52.46Gas (per Mcf)
    
    $
    7.06
    
    
    $
    5.86
    
    
    $
    9.50Six-Months EndedJune 30, 2006
    
    June 30, 2005ProductionOil (Bbls)
    
    
    
    
    
    
    250,015
    
    
    
    282,957Gas (Mcfs)
    
    
    
    
    
    
    2,605,772
    
    
    
    2,641,615Average PriceOil (per Bbl)
    
    
    
    
    
    $
    53.98
    
    
    $
    37.52Gas (per Mcf)
    
    
    
    
    
    $
    8.33
    
    
    $
    5.94
 Gas revenues received for the
three months ended June 30, 2006, related primarily to production for January 2006 through March 2006.
The average price of gas as reported by the Henry Hub for the same time period was $6.94 per Mcf.
The average price of gas for the Henry Hub was $6.40 per Mcf for January 2006 through June 2006. Oil
revenues for the three months ended June 30, 2006 related primarily to production for February 2006
through April 2006.  The average price of oil as reported by Nymex for that time period was $64.44 per barrel.
The average  price of oil was $66.88 per barrel for January 2006 through June 2006.  As of July 26, 2006,
the average price of gas  for the Henry Hub was $6.02 per Mcf and the average price of oil reported by Nymex
was $73.41 per barrel. It is difficult to accurately estimate future prices of oil and gas, and any assumptions
concerning future  prices may prove to be incorrect. 12




---



##### Table of Contents



Interest income for
the quarter ended June 30, 2006 increased approximately $47,800 compared with the second
quarter of 2005. Compared to the preceding quarter ended March 31, 2006, interest income
increased approximately $3,500.  Changes in interest income are the result of changes in
interest rates and funds available for investment. General and administrative expenses for the quarter
ended June 30, 2006 increased by approximately $23,000 compared to the same quarter of 2005 primarily due to increases in
engineering fees of $44,300  and escrow agent/trustee fees of approximately $25,500.  These  increases were offset somewhat
by a decrease in printing costs of approximately $36,600 associated with the timing of payment for printing of yearly reports.
Compared to the previous quarter ended January 31, 2006, general and administrative expenses decreased approximately $28,700.
This decrease was mainly due to annual expenses paid in the first quarter such as the New York Stock Exchange listing fee of
$38,000 and printing and distribution of  yearly reports of approximately $24,300.  The timing of payments for audit services
of approximately $33,300 as well as legal fees incurred as a result of the January proxy solicitation of $20,000 also contributed
to the decrease between the first and second quarter of this year.  These decreases were offset somewhat by the  timing of the
 payment of engineering expenses in the second quarter related to the reserve report of approximately $81,400.  General and
administrative expenses for the six months ended June 30, 2006 decreased approximately $44,700 compared to the first six
months of 2005.  This decrease can be attributed mainly to the timing of payment and quantity of yearly reports printed of
approximately $45,700; decreases in professional expenses for
Sarbanes-Oxley Section 404 compliance of approximately $51,100 and timing of payment for audit services of approximately
$33,900.  These decreases were tempered somewhat by increases in the escrow agent/trustee fees of approximately $28,200;
legal services related to the proxy solicitation of approximately $20,000, and an increase in the engineering
fees related to the reserve report of approximately $47,600. Proxy Solicitation On
January 4, 2006, proxy solicitation materials were mailed to Unit
holders of record and Unit holders who hold the Units
through brokerage accounts. The solicitation received by Unit holders concerns an initiative created by Sabine Production Partners, LP. Despite
the similarity of the name of Sabine Production Partners, LP
(SPP), it is not
an entity that is affiliated with the Trust. In the proposals SPP sets forth in its proxy solicitation, SPP seeks to gain control of the assets of the Trust by liquidating the Trust in a manner
whereby the assets of the Trust are sold to SPP in exchange for
partnership interests in SPP that would be distributed to Unit holders
of the Trust upon its liquidation. On
January 31, 2006, SPP announced that it is suspending indefinitely its previously-announced
solicitation of proxies from Unit holders of the Trust. SPP is not withdrawing or abandoning its Registration Statement
or Proxy Statement/Prospectus. SPP has stated that no recommencement of the solicitation will occur without a public announcement to that effect by SPP and the making of
appropriate filings with SEC. Until such announcement and filings,
SPP has stated that it will not attempt to call a meeting of the
Trusts Unit holders using
any proxies that have been submitted prior to recommencement. Critical Accounting Policies and Estimates The Trusts financial statements reflect the selection and application of
accounting policies that require the Trust to make significant estimates and
assumptions. The following are some of the more critical judgement areas in the
application of accounting policies that currently affect the Trusts financial
condition and results of operations. 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 accounting principles generally accepted in the United States
of America:  
    
    Royalty income, net of severance and ad valorem taxes, and interest
income are recognized in the month in which amounts are received by
the Trust.
    
    Trust expenses, consisting principally of routine general and
administrative costs, include payments made during the accounting
period. Expenses are accrued to the extent of amounts that become
payable on the next monthly record date following the end of the
accounting period. Reserves for liabilities that are contingent or
uncertain in amount may also be established if considered necessary.
    
    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. The financial statements of the Trust differ from financial statements
prepared in conformity with accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted in the United
States of America. 13




---



##### Table of Contents



This comprehensive basis of accounting other than GAAP corresponds to the
accounting permitted for royalty trusts by the U.S. Securities and Exchange
Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial
Statements of Royalty Trusts. Revenue Recognition Revenues from royalty interests are recognized in the period in which
amounts are received by the Trust. Royalty income received by the Trust in a
given calendar year will generally reflect the proceeds, on an entitlements
basis, from natural gas produced for the twelve-month period ended September
30th in that calendar year. Reserve Disclosure Independent petroleum engineers estimate the net proved reserves
attributable to the royalty interests. In accordance with Statement of Financial
Standards No. 69, Disclosures About Oil and Gas Producing Activities,
estimates of future net revenues from proved reserves have been prepared using
year-end contractual gas prices and related costs. Numerous uncertainties are
inherent in estimating volumes and the value of proved reserves and in
projecting future production rates and the timing of development of
non-producing reserves. 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 reserve
estimates. Other than those filed with the SEC, our estimated
reserves have not been filed with or included in any reports to any
Federal agency. Contingencies Contingencies related to the royalty properties that are unfavorably
resolved would generally be reflected by the Trust as reductions to future
royalty income payments to the Trust with corresponding reductions to cash
distributions to Unit holders. The Trustee is aware of no such items as of
August 4, 2006. 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 The Trustee routinely reviews the Trusts 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. New
Accounting Standards In February 2006, the FASB amended issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments  an amendment of FASB Statements No. 133 Accounting for Derivative
Instruments and No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.This statement resolves issues address in Statement 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets. This statement is effective for all financial instruments
acquired or issued after the beginning of an entitys first fiscal year that begins after
September 15, 2006. The Trust has no financial instruments and accordingly, the impact of
this new Standard will not impact the financial statements of the Trust. In March 2006, the FASB amended issued SFAS No. 156, Accounting for Servicing of Financial
Assets  an amendment of FASB Statements No. 140 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.This statement requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in certain situation. This
statement is effective as of the beginning of an entitys first fiscal year that begins
after September 15, 2006. The Trust does not believe that the adoption of this statement will
have a material effect on its financial statements. In
July 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, which

clarifies the accounting for uncertainty in income taxes recognized in the financial statements
in accordance with SFAS No. 109, Accounting for Income
Taxes.  FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Trust does not believe that the adoption of this statement will have a material effect on its financial statements. State Tax Considerations In May 2006, the State of Texas passed legislation to implement a new margin tax at a rate of 1% to be imposed on revenues less certain costs, as specifically set forth in the new legislation.  The effective date of the new legislation is January 1, 2008, but the tax

generally will be imposed on revenues generated in 2007 and
thereafter.  Entities subject to tax generally include trusts unless
otherwise exempt, and most other types of entities.  Trusts that meet
certain statutory requirements are generally exempt from the margin
tax as passive entities. Although the income of the Trust is passive as it consists primarily of royalty income from the sale of crude oil and natural gas, there is no clear authority

that the Trust satisfies all the margin tax statutory requirements for the exemption for passive entities to apply.  Therefore, pending additional legislative action or the issuance of applicable administrative rules promulgated by the Texas Comptroller, it is uncertain whether the Trust would be exempt from the margin tax as a passive entity or subject to

the margin tax at the Trust level.  Approximately 65% of the
Trusts royalty income is generated in Texas. If the Trust is exempt from the margin tax at the Trust level
as a passive entity, each Unit holder that is a taxable entity would
generally include its share of the Trusts revenue in its margin
tax computation.  If, however, the margin tax is imposed on the Trust
at the Trust level, each Unit holder would generally exclude its
share of the Trusts net income from its margin tax calculation. Each Unit holder is urged to consult his own tax advisor regarding the requirements for filing state tax returns. Forward Looking Statements 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 affecting oil and gas prices and the recoverability of reserves,
general economic conditions, actions and policies of petroleum-producing nations
and other changes in the domestic and international energy markets. 14




---



##### Table of Contents



The Trust has an Internet website and has made available its annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act at http://www.sbr-sabineroyalty.com as soon as reasonably
practicable after such information is electronically filed with or furnished to
the SEC. 
 Item 3. Quantitative
and Qualitative Disclosures About Market Risk. The Trust invests in no derivative financial instruments, and has no
foreign operations or long-term debt instruments. Other than the Trusts ability
to periodically borrow money as necessary to pay expenses, liabilities and
obligations of the Trust that cannot be paid out of cash held by the Trust, the
Trust is prohibited from engaging in borrowing transactions. The amount of any
such borrowings is unlikely to be material to the Trust. The Trust periodically
holds short-term investments acquired with funds held by the Trust pending
distribution to Unit holders and funds held in reserve for the payment of Trust
expenses and liabilities. Because of the short-term nature of these borrowings
and investments and certain limitations upon the types of such investments which
may be held by the Trust, the Trustee believes that the Trust is not subject to
any material interest rate risk. The Trust does not engage in transactions in
foreign currencies which could expose the Trust or Unit holders to any foreign
currency related market risk. 
 Item 4. Controls and
Procedures. As of the end of the period covered by this report, the Trustee carried
out an evaluation of the effectiveness of the design and operation of the
Trusts disclosure controls and procedures pursuant to Exchange Act Rules 13a-15
and 15d-15. Based upon that evaluation, the Trustee concluded that the Trusts
disclosure controls and procedures are effective in timely alerting the Trustee
to material information relating to the Trust required to be included in the
Trusts periodic filings with the Securities and Exchange Commission. There has
not been any change in the Trusts internal control over financial reporting
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Trusts internal control over
financial reporting. 
 PART II  OTHER INFORMATION Item 1. not applicable. 
 
 Item 1A. Risk Factors. There
have been no material changes in the risk factors disclosed under
Part I, Item 1A of the Trusts Annual Report on
Form 10-K for the year ended December 31, 2005.
 Items 2-5 not
applicable. 
 Item 6. Exhibits. Exhibit Numberand Description(31) Trustee Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002(32) Trustee Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 15




---



##### Table of Contents



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 TRUSTBy:
    Bank of America, N.A.TrusteeBy:
    /s/ Ron E. HooperRon E. HooperSenior Vice President and
Trust Administrator Date:
August 8, 2006 (The Trust has no directors or executive officers.) 16