<PAGE>
                                                                      EXHIBIT 13
                             [PHOTO APPEARS HERE]





SAN JUAN BASIN ROYALTY TRUST                           1997 ANNUAL REPORT & 10K




<PAGE>




         The San Juan Basin Royalty Trust is building a World Wide Web

               site for the convenience of investors. By mid-May

                     1998, information about the Trust and

                        its functions will be found at

                                 www.sjbrt.com



                                      The

                              principal asset of

                          the San Juan Basin Royalty

                 Trust consists of a 75% net overriding royal-

          ty interest carved out of certain oil and gas leasehold and

      royalty interests in the San Juan Basin of northwestern New Mexico.


<PAGE>

                                   THE TRUST



UNITS OF BENEFICIAL INTEREST

The Units of Beneficial Interest of the Trust ("Units") are traded on the New
York Stock Exchange under the symbol "SJT." From January 1, 1996, to
December 31, 1997, quarterly high and low sales prices and the aggregate amount
of monthly distributions per Unit paid each quarter were as follows:

--------------------------------------------------------------------------------
                                                              Distributions
1995                                       High       Low         Paid
----                                     --------   -------    ----------

First Quarter__________________________  $ 8.8750   $7.5000    $ 0.391930

Second Quarter_________________________    8.3125    7.2500      0.183766

Third Quarter__________________________   10.1250    7.9375      0.206076

Fourth Quarter_________________________   10.5626    8.6875      0.261998
                                                               ----------

   Total for 1997______________________                        $ 1.043770
                                                               ==========


1996
----
First Quarter__________________________  $ 6.8750   $5.8750    $  .084239

Second Quarter_________________________    6.5000    5.6250       .063143

Third Quarter__________________________    7.5000    6.0000       .488979

Fourth Quarter_________________________    8.6250    6.1250       .174711
                                                               ----------

   Total for 1996______________________                        $  .811072
                                                               ==========
-------------------------------------------------------------------------------



At December 31, 1997, 46,608,796 Units outstanding were held by 2,505 Unit
holders of record. The following table presents information relating to the
distribution of ownership Units:

                                                        Number of
TYPE OF UNIT HOLDERS                                   Unit Holders  Units Held
--------------------                                   ------------  ----------
Individuals_______________________________________         2,113      3,520,866
Fiduciaries_______________________________________           356      1,190,649
Institutions______________________________________            16        289,777
Brokers, Dealers and Nominees_____________________             5     39,912,462
Corporations and Partnerships_____________________             8      1,649,092
Miscellaneous_____________________________________             7         45,950
                                                       ------------  ----------
   Total__________________________________________         2,505     46,608,796
                                                       ============  ==========

--------------------------------------------------------------------------------
<PAGE>

                                TO UNIT HOLDERS



     We are pleased to present the 1997 Annual Report of the San Juan Basin
Royalty Trust. The report includes a copy of the Trust's Annual Report on Form
10-K to the Securities and Exchange Commission for the year ended December 31,
1997, without exhibits. Production figures provided in this letter and in the
Trustee's Discussion and Analysis are based on information provided by
Burlington Resources Oil & Gas Company ("BROG").

     The Trust was established in November 1980 by Trust Indenture between
Southland Royalty and The Fort Worth National Bank. Pursuant to the Indenture,
Southland Royalty conveyed to the Trust a 75% net overriding royalty interest
(equivalent to a net profits interest) carved out of Southland Royalty's oil and
gas leasehold and royalty interest in the San Juan Basin of northwestern New
Mexico. This net overriding royalty interest (the "Royalty") is the principal
asset of the Trust. The Form 10-K contains important information concerning,
among other things, the oil and gas reserves attributable to the Royalty and the
properties from which the Royalty was carved.

     Under the Trust Indenture, Bank One, Texas, N.A. (successor trustee) as
Trustee, has the primary function of collecting monthly net proceeds ("Royalty
Income") attributable to the Royalty and making the monthly distributions to the
Unit holders after deducting administrative expenses and any amounts necessary
for cash reserves.

     Income to Unit holders for the year 1997 was $48,648,930 or $1.043770 per
Unit. This distributable income consisted of Royalty Income of $49,497,479 plus
interest income of $99,403, less administrative expenses of $947,952.

     In September 1988, the Trust was advised by Southland Royalty and its
affiliate Meridian Oil, Inc. ("MOI"), both of which were subsidiaries of
Burlington Resources, Inc., that they had initiated a drilling program in the
San Juan Basin of northwestern New Mexico involving development of Fruitland
Coal Seam gas reserves on properties in which the Trust owns an interest. For
more information on the coal seam drilling program and the related Federal
income tax credit associated with gas produced from coal seam wells drilled
before January 1, 1993, please see the "Description of the Properties" section
of this Annual Report.

     On January 2, 1996, Southland Royalty was merged with and became a wholly-
owned subsidiary of MOI. Subsequent to the merger, MOI changed its name to
Burlington Resources Oil & Gas Company.

     Information about the Trust's estimated proved reserves of gas, including
coal seam gas, and of oil as well as the present value of net revenues
discounted at 10% can be found in Item 2 of the accompanying Form 10-K.

     Royalty Income is generally considered portfolio income under the passive
loss rules enacted by the Tax Reform Act of 1986. Therefore, it appears that
Unit holders should not consider the taxable income from the Trust to be passive
income in determining net passive income or loss. Unit holders should consult
their tax advisors for further information.

     Unit holders of record will continue to receive an individualized tax
information letter for each of the quarters ending March 31, June 30 and
September 30, 1998, and for the year ending December 31, 1998. Unit holders
owning Units in nominee name may obtain monthly tax information from the Trustee
upon request.

     We are pleased to announce that the new Web site for the Trust will be
accessible in mid-May 1998. Please visit the site at www.sjbrt.com to access our
news releases, reports, SEC filings and tax information.



Bank One, Texas, NA., Trustee

By: /s/ LEE ANN ANDERSON

Lee Ann Anderson

Vice President



                                       2

<PAGE>

                             [PHOTO APPEARS HERE]



                                      The

                                   San Juan

                              Basin Royalty Trust

                              is a New York Stock

                         Exchange-listed entity, with

                     Units trading under the symbol "SJT."

<PAGE>

                             [PHOTO APPEARS HERE]



                                     Cash

                                 distributions

                               from the San Juan

                            Basin Royalty Trust are

                         declared and paid monthly to

                 holders of its Units of beneficial interest.


<PAGE>

                         DESCRIPTION OF THE PROPERTIES



     The San Juan Basin properties from which the Trust's net overriding royalty
interest was carved are located in San Juan, Rio Arriba and Sandoval counties of
northwestern New Mexico (the "Underlying Properties"). The Underlying Properties
contain 151,900 gross (119,000 net) producing acres and 3,038 gross (909 net)
producing wells, including dual completions. "Gross" acres or wells, for
purposes of this discussion, means the entire ownership interest of all parties
in such properties, and BROG's interest therein is referred to as the "net"
acres or wells.

     The Underlying Properties have historically produced gas primarily from
conventional wells drilled to three major formations: the Pictured Cliffs, the
Mesa Verde and the Dakota, ranging in depth from 1,500 to 8,000 feet. The
characteristics of these reservoirs result in the wells having very long
productive lives. A production index for oil and gas properties is the number
of years derived by dividing remaining reserves by current production. Based
upon the reserve report prepared by independent petroleum engineers as of
December 31, 1997, the production index for the San Juan Basin properties is
estimated to be approximately 8 years. The production index is subject to change
from year to year based on reserve revisions and production levels.

     Among the factors considered by engineers in estimating remaining reserves
of natural gas is the current sales price for gas. As the sales price increases,
the producer can justify expending higher lifting costs and therefore reasonably
expect to recover more of the known reserves. Accordingly, as gas prices rise
the production index increases and vice versa.

     During 1988, a drilling program was initiated involving development of
Fruitland Coal Seam gas reserves. Wells drilled in the Fruitland Coal Seam range
in depth from 2,500 to 3,500 feet, generally on 320-acre spacing. BROG has
informed the Trust that based on its success in 1997 it anticipates increasing
the density of its drilling operations in the Fruitland Coal, with wells drilled
on 160 and 80 -acre spacing.

     The process of removing coal seam gas is often referred to as
degasification or desorption. Millions of years ago, natural gas was generated
in the process of coal formation and adsorbed into the coal. Water later filled
the natural fracture system. When the water is removed from the natural fracture
system, reservoir pressure is lowered and the gas desorbs from the coal. The
desorbed gas then flows through the fracture system and is produced at the well
bore. The volume of formation water production typically declines with time and
the gas production may increase for a period of time before starting to decline.
In order to dispose of the formation water, surface facilities including pumping
units are required, which results in the cost of a completed well being as much
as $500,000. During 1997, these coal seam wells produced a total of
approximately 9,570,183 MMBtu of gas from the Underlying Properties, which was
sold at an average price of $2.03 per MMBtu.

     Production from coal seam wells drilled prior to January 1, 1993, qualifies
for Federal income tax credits through 2002. For 1997 the credit was
approximately $1.05 per MMBtu. During 1997, potential Section 29 tax credits of
approximately $.215593 per Unit were generated for Trust Unit holders from
production from coal seam wells.

     During 1997, BROG incurred approximately $7.2 million of capital
expenditures for the drilling and completion of 64 gross (3.53 net) conventional
wells, recompletion of 14 gross (5.4 net) conventional wells, drilling and
completion of 1 gross (.84 net) coal seam well, and 21 gross (2.32 net) coal
seam recavitations. There were 5 gross (1.22 net) new conventional wells, 3
gross (1.08 net) conventional recompletions, 11 gross (.42 net) coal seam
recompletion, 5 gross (.20 net) coal seam recavitations, and 1 gross (.04 net)
coal seam well in progress as of December 31, 1997. During 1996, BROG
participated in the completion of 13 gross (1.96 net) conventional wells,
drilling and recompletion of 8 gross (4.80 net) conventional wells as coal seam
wells, recompleting 44 gross (12.96 net) conventional wells and other
maintenance activities and facilities costs at a total cost of $9,409,000.

     Due to size of the coal seam drilling program in the San Juan Basin in the
late 1980s by various operators, there was more gas deliverability than
available pipeline capacity. As a result, several natural gas transportation
companies commenced pipeline expansion projects which almost doubled the
available transportation capacity out of the San Juan Basin. These projects were
completed during 1992 and production increased to 26.6 Bcf for 1992 and to 40.7
Bcf for 1994. BROG has advised the Trustee that current mainline capacity out of
the San Juan Basin is estimated at 3 Bcf per day for El Paso Natural Gas
Pipeline and 1.5 Bcf per day for Transwestern Pipeline Company and that
pipelines from the San Juan Basin are now capable of transporting approximately
1.2 Bcf per day to markets east of the San Juan Basin.

                                       5
<PAGE>

                         DESCRIPTION OF THE PROPERTIES



     Based on available geological and pricing information, the Trust has been
advised that approximately 71 net conventional wells are projected to be drilled
on the Underlying Properties. Proved undeveloped reserves have been assigned to
these wells. BROG has advised the Trust that its 1998 capital projections for
Trust working interests are estimated to be $10 million. Fruitland Coal is
estimated to be approximately 15% of the total and the remainder would be
conventional projects. Of the 300 planned projects, 47 will be conventional new
drill locations at a cost of approximately $3.2 million. There are 47 planned
Fruitland Coal recavitations at an estimated cost of $500,000, 39 of which will
be in the 39-6 Federal Unit. BROG anticipates adding compressors to 56 Fruitland
Coal wells at a cost of approximately $700,000. There are approximately 100
miscellaneous conventional projects planned, mostly projects aimed at improving
production from existing wells, at a cost estimated to be $5 million. BROG
anticipates that non-operated projects would be at a cost of approximately
$600,000. Development plans are dependent upon numerous factors, including, but
not limited to, drilling results of gas wells, anticipated demand for gas, the
sales price of gas, cost to drill the wells and other factors that BROG may deem
appropriate.

     The Federal Energy Regulatory Commission is primarily responsible for
federal regulation of natural gas. For a further discussion of gas pricing, gas
purchasers, gas production and regulatory matters affecting gas production see
Item 2, "Properties" in the accompanying Form 10-K.

                             [PHOTO APPEARS HERE]

                                       6
<PAGE>

                       TRUSTEE'S DISCUSSION AND ANALYSIS



     Distributable income consists of Royalty Income plus interest, less the
general and administrative expenses of the Trust and any changes in cash
reserves established by the Trustee. For the year ended December 31, 1997,
distributable income increased to $48,648,930 from $37,803,167 distributed in
1996. The increase was primarily attributable to significantly higher gas
prices. Interest income increased from $76,346 in 1996 to $99,403 in 1997
primarily due to increased funds available for investment.

     Total gas and oil production from the Underlying Properties for the five
years ended December 31, 1997, were as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                   1997                 1996               1995               1994          1993
                                ----------           ----------         ----------         ----------    ----------
<S>                             <C>                  <C>                <C>                <C>           <C>
Gas - Mcf_________________      41,948,567           40,738,422         34,387,190         34,222,189    40,736,391
Mcf per day_______________         114,928              111,307             94,211             93,759       111,607
Oil - Bbls________________          89,492               83,552             75,014             84,648        88,466
Bbls per day______________             245                  228                206                232           242
-------------------------------------------------------------------------------------------------------------------
</TABLE>

     Since the oil and gas sales attributable to the Royalty are based on an
allocation formula dependent on such factors as price and cost, including
capital expenditures, the aggregate volumes from the Underlying Properties may
not provide a meaningful comparison to volumes attributable to the Royalty.

     Royalty Income for the calendar year is associated with actual gas and oil
production during the period from November of the preceding year through October
of the current year. Gas and oil sales attributable to the royalty for the past
five years, (excluding portions attributable to the litigation settlement
proceeds described in Note 5 to accompanying Financial Statements), are
summarized in the following table:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                   1997                 1996               1995               1994          1993
                               -----------          -----------        -----------        -----------   -----------
<S>                            <C>                  <C>                <C>                <C>           <C>
Gas - Mcf_________________      24,236,419           17,927,785         13,331,758         15,459,542    23,895,506
Average Price (per Mcf)___           $2.21                $1.30              $1.25              $1.66         $1.70
Oil - Bbls________________          50,860               36,792             29,424             36,769        51,921
Average Price (per Bbl)___          $19.35               $19.64             $14.43             $13.09        $15.58
-------------------------------------------------------------------------------------------------------------------

</TABLE>

     The fluctuations in annual gas production that have occurred during these
five years generally resulted from changes in the demand for gas during that
time, marketing conditions and production from new wells. Production from the
Underlying Properties is influenced by the line pressures of the gas gathering
systems in the San Juan Basin. Expansion during 1992 of the gas transmission
systems that transport gas out of the San Juan Basin resulted in increased
production beginning in 1992. Higher volumes in 1993 can be partially attributed
to gas balancing in the San Juan 30-6 Federal Unit which occurred in the 3rd and
4th quarters of 1993. Production from the 30-6 Unit was more normalized
beginning in 1994. Production increased from 1995 to 1996 primarily due to
increased coal seam volumes.

                                       7
<PAGE>

                       TRUSTEE'S DISCUSSION AND ANALYSIS


Royalty Income for the five years ended December 31, 1997, was determined as
shown in the following table:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                         1997            1996            1995            1994            1993
                                      -----------     -----------     -----------     -----------     -----------
<S>                                   <C>             <C>             <C>             <C>             <C>
GROSS PROCEEDS FROM
THE UNDERLYING PROPERTIES:
--------------------------

Gas_______________________________    $91,495,060     $51,865,730     $41,483,305     $54,375,586     $69,266,623

Oil_______________________________      1,728,296       1,638,753       1,084,262       1,140,738       1,384,468

Other_____________________________           -0-              -0-             -0-             -0-             -0-
                                      -----------     -----------     -----------     -----------     -----------

  Total___________________________     93,223,356      53,504,483      42,570,159      55,498,324      70,651,091
                                      ===========     ===========     ===========     ===========     ===========


LESS PRODUCTION COSTS:
---------------------
Capital Costs ____________________      7,231,696       7,223,281       6,560,277       9,409,462       3,988,136

Severance Tax - Gas_______________      8,989,202       5,654,831       4,694,750       5,864,834       6,543,615

Severance Tax - Oil ______________        167,844         176,379         115,474         117,028         153,072

Other_____________________________         61,832          59,089             117             -0-             -0-

Leasing Operating Expenses________     10,776,145      11,838,345      10,991,152       9,066,750       9,864,773
                                      -----------     -----------     -----------     -----------     -----------

  Total___________________________     27,226,719      24,951,925      22,361,770      24,458,074      20,549,596
                                      -----------     -----------     -----------     -----------     -----------

Net Profits_______________________     65,996,637      28,552,558      20,208,389      31,040,250      50,101,495

Royalty Percentage_______________             75%             75%             75%             75%             75%

Royalty Income____________________    $49,497,479     $21,414,419     $15,156,292     $23,280,188     $37,576,121
                                      ===========     ===========     ===========     ===========     ===========
-----------------------------------------------------------------------------------------------------------------
</TABLE>

     The higher capital costs in 1994 were primarily attributable to
recompletions into the coal seam as part of a program which was initiated in
1988. The capital costs incurred by BROG on the Underlying Properties for the
year ended December 31, 1997, amounted to $7,231,696 versus $7,223,281 for 1996.
The increase was primarily attributable to increased drilling activity. The
Royalty Income amount of $21,414,419 for 1996 does not include the $19,822,005
paid to the Trust on September 30, 1996, in settlement of the litigation
described in Note 5 to the accompanying Financial Statements. Operating costs in
1997 include the impact of the receipt of $250,000 from BROG as an offset to
lease operating expense in connection with the settlement of that litigation.
Excluding the impact of the offset, monthly operating costs in 1997 averaged
approximately $899,000, which is lower than the $955,000 average in 1996.

                                       8
<PAGE>

     Distributable income for three months ended December 31, 1997, totaled
$12,211,435 ($.261999 per Unit) as compared to $8,143,076 ($.174711 per Unit)
for the quarter ended December 31, 1996. The amount distributed in the fourth
quarter of 1997 was higher than that of 1996 primarily because of the higher
average gas prices.

      Royalty Income of the Trust for the fourth quarter is associated with
actual gas and oil production during August through October of each year. Gas
and oil sales for the quarters ended December 31, 1997 and 1996 were as follows:

--------------------------------------------------------------------------------
UNDERLYING PROPERTIES                       1997                    1996
--------------------                    ----------              ----------

Gas - Mcf___________________________    10,441,818              10,535,177
  Average Price (per Mcf)___________         $2.15                   $1.64
Oil - Bbls__________________________        19,438                  19,460
  Average Price (per Bbl)___________        $17.90                  $21.06

ATTRIBUTABLE TO ROYALTY
-----------------------
Gas - Mcf____________________________    6,113,834               5,478,137
Oil - Bbls___________________________       11,400                  10,260

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

     The average price of gas increased the fourth quarter of 1997 primarily due
to increases in spot prices. The average of oil decreased compared to the prior
year. Gas production decreased slightly primarily due to a decrease in coal seam
production. During the fourth quarter of 1997, coal seam production from the
Underlying Properties averaged 1,547,000 Mcf per month compared to 1,728,000 Mcf
per month during the fourth quarter of 1996.

     Capital costs for the fourth quarter of 1997 totaled $1,579,932 compared to
$1,996,490 during the same period of 1996. The decrease was due to a decrease in
drilling activity in the fourth quarter of 1997. Operating costs in 1997
include the impact of the receipt of $250,000 from BROG as an offset to lease
operating expense in connection with the settlement of litigation. Excluding the
impact of the offset, lease operating costs for the fourth quarter of 1997
averaged $858,000 per month compared to $926,000 per month in the fourth quarter
of 1996.


                                       9
<PAGE>

                         SAN JUAN BASIN ROYALTY TRUST

Statements of Assets, Liabilities and Trust Corpus
December 31, 1997 and 1996
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
ASSETS                                                                             1997             1996
------                                                                          -----------      -----------
<S>                                                                             <C>              <C>
Cash and Short-term investments______________________________                   $ 5,111,832      $ 3,127,828
Net Overriding Royalty Interests in Producing Oil and
    Gas Properties - Net (Notes 2 and 3)_____________________                    56,119,448       62,808,148
                                                                                -----------      -----------
                                                                                $61,231,280      $65,935,976
                                                                                ===========      ===========

LIABILITIES AND TRUST CORPUS
----------------------------
Distribution Payable to Unit Holders_________________________                   $ 5,111,832      $ 3,127,828
Contingencies (Note 5)
Trust Corpus - 46,608,796 Units of Beneficial interest
     Authorized and Outstanding______________________________                    56,119,448       62,808,148
                                                                                -----------      -----------
                                                                                $61,231,280      $65,935,976
                                                                                ===========      ===========
------------------------------------------------------------------------------------------------------------
</TABLE>
Statements of Distributable Income
for the Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                   1997            1996             1995
                                                                ------------    -----------      -----------
<S>                                                             <C>             <C>              <C>
Royalty Income (Notes 2, 3 and 5)____________________________   $ 49,497,479    $41,236,424      $15,156,292
Interest Income______________________________________________         99,403         76,346           31,978
                                                                ------------    -----------      -----------
                                                                  49,596,882     41,312,770       15,188,270

Expenditures - General and Administrative____________________        947,952      3,509,603        1,398,169
                                                                ------------    -----------      -----------
Distributable Income_________________________________________   $ 48,648,930    $37,803,167      $13,790,101
                                                                ============    ===========      ===========
Distributable Income per Unit (46,608,796 Units)_____________   $   1.043770    $   .811072      $   .295867
                                                                ============    ===========      ===========
------------------------------------------------------------------------------------------------------------
</TABLE>
Statements of Changes in Trust Corpus
for the Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                    1997           1996             1995
                                                                ------------    -----------      -----------
<S>                                                             <C>             <C>              <C>
Trust Corpus, Beginning of Period____________________________   $ 62,808,148    $70,133,536      $74,942,040
Amortization of Net Overriding Royalty Interest
   (Notes 2 and 3)___________________________________________     (6,688,700)    (7,325,388)      (4,808,504)
Distributable Income_________________________________________     48,648,930     37,803,167       13,790,101
Distributions Declared_______________________________________    (48,648,930)   (37,803,167)     (13,790,101)
                                                                ============    ===========      ===========
Trust Corpus, End of Period__________________________________   $ 56,119,448    $62,808,148      $70,133,536
                                                                ============    ===========      ===========
------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.

                                      10
<PAGE>

          SAN JUAN BASIN ROYALTY TRUST NOTES TO FINANCIAL STATEMENTS

1.   TRUST ORGANIZATION AND PROVISIONS

The San Juan Basin Royalty Trust ("Trust") was established as of November 1,
1980. Bank One, Texas, N.A. ("Trustee") is Trustee for the Trust. Southland
Royalty Company ("Southland") conveyed to the Trust a 75% net overriding
royalty interest ("Royalty") in Southland's working interests and royalty
interests in the San Juan Basin in northwestern New Mexico.

     On November 3, 1980, units of beneficial interest ("Units") in the Trust
were distributed to the Trustee for the benefit of Southland shareholders of
record as of November 3, 1980, who received one Unit in the Trust for each
share of Southland common stock held. The Units are traded on the New York Stock
Exchange.

     The terms of the Trust Indenture provide, among other things, that:

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

 .    the Trustee may not sell all or any part of the Royalty unless approved by
     holders of 75% of all Units outstanding, in which case the sale must be for
     cash and the proceeds promptly distributed;

 .    the Trustee may establish a cash reserve for the payment of any liability
     which is contingent or uncertain in amount;

 .    the Trustee is authorized to borrow funds to pay liabilities of the Trust;
     and

 .    the Trustee will make monthly cash distributions to Unit holders
     (see Note 2).

2.   NET OVERRIDING ROYALTY INTEREST AND DISTRIBUTION TO UNIT HOLDERS

The amounts to be distributed to Unit holders ("Monthly Distribution Amounts")
are determined on a monthly basis. The Monthly Distribution Amount is an amount
equal to the sum of cash received by the Trustee during a calendar month
attributable to the Royalty, 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. If the Monthly Distribution Amount for
any monthly period is a negative number, then the distribution will be zero for
such month. To the extent the distribution amount is a negative number, the
amount will be carried forward and deducted from future monthly distributions
until the cumulative distribution calculation becomes a positive number, at
which time a distribution will be made. Unit holders of record will be entitled
to receive the calculated Monthly Distribution Amount for each month on or
before ten business days after the monthly record date, which is generally the
last business day of each calendar month.

     The cash received by the Trustee consists of the amounts received by the
owner of the interest burdened by the Royalty from the sale of production less
the sum of applicable taxes, accrued production costs, development and drilling
costs, operating charges and other costs and deductions, multiplied by 75%.
Royalty income for 1996 was comprised of $21,414,419, which represents the net
overriding royalty interest in the net profits of the properties from which the
net overriding royalty was carved, and $19,822,005 paid to the Trust as a result
of the settlement of litigation involving the Trustee, Meridian Oil Inc. ("MOI")
and Southland. For more information regarding the settlement of the litigation,
see Note 5.

     The initial carrying value of the Royalty ($133,275,528) represented
Southland's historical net book value at the date of the transfer to the Trust.
Accumulated amortization as of December 31, 1997 and 1996 aggregated $77,156,080
and $70,467,380, respectively.

3.   BASIS OF ACCOUNTING

The financial statements of the Trust are prepared on the following basis:

 .    Royalty income recorded for a month is the amount computed and paid by
     the working interest owner, Southland, to the Trustee on behalf of the
     Trust. Royalty income consists of the amounts received by the owner of the
     interest burdened by the net overriding royalty interest from the sale of
     production less accrued production costs, development and drilling costs,
     applicable taxes, operating charges, and other costs and deductions,
     multiplied by 75%.

 .    Trust expenses recorded are based on liabilities paid and cash reserves
     established from Royalty income for liabilities and contingencies.

 .    Distributions to Unit holders are recorded when declared by the Trustee.

 .    The conveyance which transferred the overriding royalty interests to the
     Trust provides that any excess of production costs over gross proceeds must
     be recovered from future net profits. The financial statements of the Trust
     differ from financial statements prepared in accordance with generally
     accepted accounting principles ("GAAP") because revenues are not accrued in
     the month of production and certain cash reserves

                                       11
<PAGE>

                         SAN JUAN BASIN ROYALTY TRUST


     may be established for contingencies which would not be accrued in
     financial statements prepared in accordance with GAAP. Amortization of the
     Royalty calculated on a unit-of-production basis is charged directly to
     trust corpus.

4.   FEDERAL INCOME TAXES

For Federal income tax purposes, the Trust constitutes a fixed investment trust
which is taxed as a grantor trust. A grantor trust is not subject to tax at the
trust level. The Unit holders are considered to own the Trust's income and
principal as though no trust were in existence. The income of the Trust is
deemed to have been received or accrued by each Unit holder at the time such
income is received or accrued by the Trust rather than when distributed by the
Trust.

     The Royalty constitutes an "economic interest" in oil and gas properties
for Federal income tax purposes. Unit holders must report their share of the
revenues of the Trust as ordinary income from oil and gas royalties, and are
entitled to claim depletion with respect to such income. The Royalty is treated
as a single property for depletion purposes.

     The Trust has on file technical advice memoranda confirming the tax
treatment described above.

     The Trust began receiving royalty income from coal seam wells beginning in
1989. Under Section 29 of the Internal Revenue Code, production from coal seam
gas wells drilled prior to January 1, 1993, qualifies for the Federal income tax
credit for producing non-conventional fuels. Production from coal seam wells
drilled prior to January 1, 1993, qualifies for Federal income tax credits
through 2002. Production from wells drilled after December 31, 1979, but prior
to January 1, 1993, to a formation beneath a qualifing coal seam formation which
are later completed into such formation, also qualifies for the tax credit. This
tax credit was approximately $1.05 per MMBtu for the year 1997 and is adjusted
for inflation annually. The credit currently applies to production through the
year 2002. Each Unit holder must determine his pro rata share of such production
based upon the number of Units owned during each month of the year and apply the
tax credit against his own income tax liability, but such credit may not reduce
his regular tax liability (after the foreign tax credit and certain other
nonrefundable credits) below his tentative minimum tax. Section 29 also provides
that any amount of Section 29 credit disallowed for the tax year solely because
of this limitation will increase his credit for prior year minimum tax
liability, which may be carried forward indefinitely as a credit against the
taxpayer's regular tax liability, subject, however, to the limitations described
in the preceding sentence. There is no provision for the carryback or
carryforward of the Section 29 credit in any other circumstances.

     The classification of the Trust's income for purposes of the passive loss
rules may be important to a Unit holder. As a result of the Tax Reform Act of
1986, royalty income will generally be treated as portfolio income and will not
reduce passive losses.

5.   LITIGATION SETTLEMENT

On June 4, 1992, the Trustee filed suit (the "Litigation") against MOI and
Southland in New Mexico. The principal asset of the Trust consists of a 75% net
overriding royalty interest carved out of certain of Southland's oil and gas
leasehold and royalty interests in the San Juan Basin located in San Juan, Rio
Arriba and Sandoval counties of northwestern New Mexico (the "Underlying
Properties"). MOI and Southland were the operators of the Underlying Properties.
On January 2, 1996, Southland was merged with and became a wholly owned
subsidiary of MOI. Subsequent to the merger, MOI changed its name to Burlington
Resources Oil & Gas Company ("BROG").

     The claims asserted on behalf of the Trust in the lawsuit included breach
of contract, breach of the covenant of good faith and fair dealing, breach of
express good faith duty, constructive fraud, unjust enrichment, prima facie
tort, intentional interference with contract and conspiracy. The relief sought
included compensatory and punitive damages, an accounting and a permanent
injunction relating to the operation of the Underlying Properties.

     On September 4, 1996, the Trustee announced the settlement of the
Litigation. The Litigation was dismissed on September 12, 1996. BROG denied and
continues to deny the allegations made against it in the Litigation, but the
parties agreed to settle the Litigation as outlined herein.

     BROG agreed (i) to pay $19,750,000 in cash plus interest earnings thereon
from September 5, 1996, in settlement of underpayment of royalty claims of the
Trust; and (ii) commencing in 1997, to credit the Trust with $250,000 per year
for five years as an offset against lease operating expenses chargeable to the
Trust. BROG also agreed to make certain adjustments that represent cost
reductions favorable to the Trust in the ongoing charges for coal seam gas
gathering and treating on BROG's Val Verde system. Additionally, the Trustee and
BROG established a formal protocol that will provide the Trustee and its
representatives improved access to BROG's books and records applicable to the
Underlying Properties.

     Agreement was also reached regarding marketing arrangements for the sale of
gas, oil and natural gas liquids products from the Underlying Properties going
forward as follows:

                                       12
<PAGE>

                             [PHOTO APPEARS HERE]



                                      The

                                  Trust made

                             distributions total-

                           ing $1.04377 per Unit of

                         beneficial interest in 1997.


<PAGE>

                         SAN JUAN BASIN ROYALTY TRUST


[MAP OF SAN JUAN BASIN APPEARS HERE]

     1.   BROG's pre-existing contract with a third-party purchaser covering
baseload gas volumes in the firm amount of 45,000 MMBtu per day remained
effective for a period of one year from July 1, 1996.

     The remaining volumes of gas from the Underlying Properties were marketed
by an independent marketer, El Paso Energy Marketing Company, a subsidiary of El
Paso Energy Corporation, beginning October 1, 1996. BROG agreed that subsequent
contracts for the sale of gas from the Underlying Properties would require the
written approval of an independent gas marketing consultant acceptable to the
Trust. For a discussion of the current contract covering the sale of gas from
the Underlying Properties, see Note 6.

     2.   BROG will continue to market the Trust oil and natural gas liquids but
will remit to the Trust actual proceeds from such sales. BROG will no longer use
posted prices as the basis for calculating proceeds to the Trust nor make a
deduction for marketing fees associated with sales of oil or natural gas liquids
products.

     3.   The Trust retained access to BROG's current gas transportation,
gathering, processing and treating agreements with third parties through the
remainder of their primary terms. Additionally, El Paso could utilize BROG's
eastern transportation agreement for delivery from the San Juan Basin on El Paso
Natural Gas Company pipeline to pipelines in West Texas of up to 13,333 MMBtu
per day of gas produced from Underlying Properties for a period of one year
commencing October 1, 1996.

     The $19,822,005 settlement proceeds of the Litigation (or $.425285 per Unit
of beneficial interest) was paid to the Trust on September 30 and distributed on
October 15, 1996, to Unit holders of record as of September 30, 1996 (the
"Record Date"). The distribution was taxable to Unit holders as of such Record
Date. This distribution was in addition to the regular monthly distribution on
October 15.

6.   CERTAIN CONTRACTS

Southland entered into five-year gas, gas processing and gas gathering
agreements with Sunterra Gas Gathering Company (a subsidiary of Public Service
Company of New Mexico) ("Sunterra") and Gas Company of New Mexico (a division of
Public Service Company of New Mexico) ("Gas Company") that were effective as of
July 1,1990. The new contracts applied to all lands previously dedicated to
Sunterra and Gas Company for first sales of natural gas sold into interstate or
intrastate markets, except that the new gas purchase contracts excluded all gas
produced and sold from coal seam wells. The new gas purchase contracts provided
for purchases by Sunterra and Gas Company for winter heating season only. During
the remainder of the year, Southland could market the gas through any
arrangements it deemed advisable. Under the new gas purchase contracts,
Southland received prices, inclusive of severance taxes, ranging from
approximately $2.35 per MMBTu to $3.37 per MMBtu over the life of the contracts.
The contracts also provided for certain "take-or-pay obligations" if certain
minimum levels of natural gas sales are not reached.

     In 1991, due to the low level of natural gas prices, Sunterra informed
Southland that it would not take any significant volume of gas during the 1991-
1992 winter heating season and would simply pay the "take-or-pay obligation"
amount. Consequently, the majority of the wells subject to the contracts would
have remained shut-in during the winter heating season. In an attempt to
maximize production and revenues from the Underlying Properties, Southland
informed the Trustee that it entered into an agreement with Sunterra and Gas
Company that amended the terms of the contracts discussed above for only the
1991-1992 winter heating season. The amendment provided that Sunterra and Gas
Company could purchase approximately 35% of the contract provided take levels at
a wellhead price slightly higher than the spot market well-head index price for
the San Juan Basin. Any gas purchased by Sunterra and Gas Company above this
level averaged $2.63 per MMBtu. Southland was free to market the remaining
deliverable gas to other purchasers. During 1992, Sunterra and Gas Company
purchased 3,241,550 Mcf and 702,629 Mcf, respectively, at average prices of
$1.98 and $2.25 per Mcf, respectively, from the Underlying Properties.

     To continue to maximize production and revenues from Trust Properties,
Southland again informed the Trustee that it negotiated an agreement with
Sunrerra and Gas Company that amended the terms of the original contracts
discussed above for only the 1992-1993 winter heating season. The amendment
provided that Gas Company and Sunterra were required to purchase a minimum of
11,500 MMBtu per day at $2.695 per MMBtu under the intrastate and a minimum of
16,550 MMBtu per day at $2.94 per MMBtu under the interstate contracts. A
portion of the excess gas

                                       14
<PAGE>

                         SAN JUAN BASIN ROYALTY TRUST

was released for spot sales, with a recall provision at an average contract
price.

     Southland informed the Trust that a similar amendment was entered into for
the 1993-1994 winter heating season. Gas Company and Sunterra paid the contract
specified prices of $2.88 and $3.15 per MMBtu, respectively, on a minimum
purchase of 1.4 Bcf and 1.2 Bcf, respectively. All remaining gas was released
for spot sales with a recall provision at an average contract price. Southland
waived any claims for deficiency payment under the reservation fee.

     Southland informed the Trust an amendment had also been entered into for
the 1994-1995 winter heating season. Gas Company and Sunterra were required to
purchase, at the wellhead, an average volume of 10,529 MMBtu per day at $2.884
per MMBtu for the period beginning November 1,1994, and ending March 31, 1995,
and an additional 14,900 MMBtu per day at $3.146 per MMBtu for the period
beginning December 1, 1994, and ending February 28, 1995. Gas Company and
Sunterra were granted a make-up period of four months beginning April 1, 1995,
to fulfill this purchase obligation.

     Gas Company and Sunterra were also granted recall rights on volumes up to
15,000 MMBtu per day at the tailgate of the Kutz and Lybrook plants, provided
they nominated the full contract volume specified above. The price for recall
gas was the average of the first and second issues of the Inside FERC EPNG SJ
Index.

     The Trust was advised that effective July 1, 1995, Williams Field Services
("Williams") purchased the Kutz and Lybrook processing plants and the gathering
systems behind these plants which were owned by Sunterra, Gas Company and
Sunterra Gas Processing Company ("SGPC") and that new gathering and processing
agreements with Williams were entered into which contain acceptable rates, terms
and conditions. The new agreements replaced the then current gathering and
processing agreements with Gas Company, Sunterra and SGPC effective on the
closing date of the sale of these facilities to Williams.

     The gas purchase contracts described in Note 5 were continued, by agreement
of the parties until December 31, 1997. Effective January 1, 1998, all volumes
of Trust gas became subject to the terms of a Natural Gas Sales and Purchase
Contract between BROG and El Paso Energy Marketing Company ("El Paso"). That
contract is for a term of two years through and including December 31, 1999 and
provides for the sale of Trust gas at prices which will fluctuate in accordance
with published indices for gas sold in the San Juan Basin of New Mexico. BROG
entered into the contract with El Paso after soliciting and receiving
competitive bids in late 1997 from six major gas marketing firms to market
and/or purchase the Trust gas. While it is impossible to predict the exact
economic value of gas contracts, the Trust has been advised by its independent
gas marketing consultant that the contract with El Paso should provide for the
average highest sales price for natural gas in the San Juan Basin over the two-
year term of the contract.

     Confidentiality agreements with purchasers of gas produced from the
Underlying Properties prohibit public disclosure of certain terms and conditions
of gas sales contracts with those entities, including specific pricing terms,
gas receipt points, etc. Such disclosure could compromise the ability to compete
effectively in the marketplace for the sale of gas produced from the Underlying
Properties.

7.   SIGNIFICANT CUSTOMERS

Information as to significant purchasers of oil and gas production attributable
to the Trust's economic interests is included in Item 2 of the Trust's annual
report on Form 10-K which is included in this report.

8.   PROVED OIL AND GAS RESERVES (UNAUDITED)

Proved oil and gas reserve information is included in Item 2 of the Trust's
annual report on Form 10-K which is included in this report.

9.   QUARTERLY SCHEDULE OF DISTRIBUTABLE INCOME (UNAUDITED)

The following is a summary of the unaudited quarterly schedule of distributable
income for the two years ended December 31, 1997 (in thousands, except unit
amounts):

=============================================================
                                                Distributable
                                                 Income and
                        Royalty  Distributable  Distribution
1997                    Income      Income        Per Unit
----                    -------  -------------  -------------

First Quarter_________  $18,471        $18,267      $ .391930

Second Quarter________    8,900          8,565        .183766

Third Quarter_________    9,764          9,605        .206076

Fourth Quarter________   12,363         12,212        .261998
                         ------         ------      ---------

  Total_______________  $49,498        $48,649      $1.043770
                        =======        =======      =========

1996
----

First Quarter_________  $ 4,708        $ 3,926      $ .084239

Second Quarter________    4,408          2,943        .063143

Third Quarter_________   24,135         22,791        .488979

Fourth Quarter________    8,345          8,143        .174711
                        -------        -------      ---------

  Total_______________  $41,236        $37,803      $ .811072
                        =======        =======      =========
=============================================================


                                       15
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Bank One, Texas, N.A. as Trustee for the San Juan Basin Royalty Trust:

We have audited the accompanying statements of assets, liabilities and trust
corpus of the San Juan Basin Royalty Trust ("Trust") as of December 31, 1997 and
1996, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1997. 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 the
Trustee, 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 3 to the financial statements, these financial
statements were prepared on a modified cash basis, which is a comprehensive
basis of accounting other than generally accepted accounting principles.

     In our opinion, such financial statements present fairly, in all material
respects, the assets, liabilities and trust corpus of the San Juan Basin Royalty
Trust as of December 31, 1997 and 1996, and the distributable income and changes
in trust corpus for each of the three years in the period ended December 31,
1997, on the basis of accounting described in Note 3.


/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
Fort Worth, Texas
March 25, 1998

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


SAN JUAN BASIN ROYALTY TRUST            TAX COUNSEL

Bank One, Texas, NA., Trustee           Butler & Binion, L.L.P.
Post Office Box 2604                    Houston, Texas
Fort Worth, Texas 76113
817-884-4630
Web site: www.sjbrt.com                 TRANSFER AGENT

                                        Harris Trust & Savings Bank
AUDITORS                                311 West Monroe Street, 11th Floor
                                        Chicago, Illinois 60606
Deloitte & Touche LLP
Fort Worth, Texas                       For questions about distribution checks,
                                        address changes, and transfer
                                        procedures, call 800-573-4048 or
LEGAL COUNSEL                           312-461-6001.

Vinson & Elkins L.L.P
Dallas, Texas


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