<PAGE>

                                                                      EXHIBIT 13

                         SAN JUAN BASIN ROYALTY TRUST
                        1996 ANNUAL REPORT & FORM 10-K

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

The powerful energy of natural gas took a very long time to get to the surface
of the beautiful San Juan Basin of New Mexico. Accompanying the text in this
report is an artist's view of that eons-old process.
<PAGE>

THE TRUST

The principal asset of the San Juan Basin Royalty Trust (the "Trust") consists
of a 75% net overriding royalty interest carved out of certain of Southland
Royalty Company's ("Southland Royalty") oil and gas leasehold and royalty
interests in the San Juan Basin of northwestern New Mexico.

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, 1995, to December
31, 1996, quarterly high and low sales prices and the aggregate amount of
monthly distributions per Unit paid each quarter were as follows:

<TABLE>
<CAPTION>

1996                HIGH    LOW    DISTRIBUTION
-----------------------------------------------
<S>                <C>     <C>     <C>
First Quarter      $6.875  $5.875      $.084239
Second Quarter      6.500   5.625       .063143
Third Quarter       7.500   6.000       .488979
Fourth Quarter      8.625   6.125       .174711
                                       --------
 Total for 1996                        $.811072
                                       ========

1995                HIGH    LOW    DISTRIBUTION
-----------------------------------------------
First Quarter      $7.375  $5.875      $.090595
Second Quarter      7.250   5.625       .108430
Third Quarter       7.000   5.875       .071482
Fourth Quarter      6.875   5.750       .025360
                                       --------
 Total for 1995                        $.295867
                                       ========
</TABLE>

At December 31, 1996, 46,608,796 Units outstanding were held by 2,580 Unit
holders of record. The following table presents information relating to the
distribution of ownership Units:

<TABLE>
<CAPTION>

TYPE OF                           NUMBER OF
UNIT HOLDERS                     UNIT HOLDERS  UNITS HELD
---------------------------------------------------------
<S>                              <C>           <C>
Individuals                         2,031       3,475,705
Fiduciaries                           477         882,299
Institutions                           55         942,934
Brokers, Dealers and Nominees           8      39,653,276
Corporations and Partnerships           7       1,614,512
Miscellaneous                           2          40,070
                                    -----      ----------
  Total                             2,580      46,608,796
                                    =====      ==========
</TABLE>

                                       2
<PAGE>

TO UNIT HOLDERS

We are pleased to present the 1996 Annual Report of the San Juan Basin
Royalty Trust. The report includes a copy of the Trust's Annual Report on Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1996, without exhibits. The Form 10-K contains important
information concerning the Trust's properties, including the oil and gas
reserves attributable to the net overriding royalty interest owned by the Trust.
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 Texas American Bank/Fort Worth, N.A. 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.

     Under the Trust Indenture, Bank One, Texas, NA (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 distributed to Unit holders for the year 1996 was $37,803,167 or
$.811072 per Unit. This distributable income consisted of Royalty Income of
$41,236,424 plus interest income of $76,346 less administrative expenses of
$3,509,603. $19,822,005 of the 1996 distributable income is attributable to the
settlement of litigation involving the Trustee and BROG. For further information
regarding the litigation settlement, see Note 5 to the accompanying Financial
Statements.

     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, 1997, and for the year ending December 31, 1997. Unit holders
owning Units in nominee name may obtain monthly tax information from the Trustee
upon request.

Bank One, Texas, NA, Trustee

By: /s/ LEE ANN ANDERSON

Lee Ann Anderson
Vice President

                                       3
<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 "Trust Properties"). The Trust
Properties contain 151,900 (119,000 net) producing acres and 3,180 (960 net)
economic wells, including dual completions.

      The Trust 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, 1996, the production index for the San Juan Basin properties is estimated to
be approximately 10.1 years.

      During 1988, a drilling program was initiated involving development of
Fruitland Coal gas reserves. Wells drilled in the Fruitland Coal range in depth
from 2,500 to 3,500 feet on a 320acre 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 filed
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.

      From 1988 through December 31, 1996, BROG has participated in the
completion of 113 gross (75.05 net) and recompletions of 110 gross (65.96 net)
coal seam wells on Trust Properties. At December 31, 1996, 167 coal seam wells
had been connected to pipeline facilities. During 1996, these coal seam wells
produced a total of approximately 16,250,517 MMBtu of gas from the Trust
Properties, which was sold at an average price of $1.02 per MMBtu.    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 qualifying coal seam formation which
are later completed into such formation, also qualifies for the tax credit. For
1996 the credit was approximately $1.03 per MMBtu. During 1995, potential
Section 29 tax credits of approximately $1.02 per Unit were generated for Trust
Unit holders from production from coal seam wells.

      During 1996, BROG incurred approximately $7,223,281 of capital
expenditures for the drilling and completion of 14 gross (1.50 net) conventional
wells, recavition of 17 gross (5.63 net) coal seam wells, recompleting 4 gross
(.16 net) conventional wells as coal seam wells, recompleting 9 gross (5.93 net)
conventional wells and other maintenance activities. There was 1 gross (.05 net)
coal seam well, 3 gross (.14 net) coal seam recompletions and 17 gross (1.96
net) conventional wells in progress at December 31, 1996. During 1995, Southland
Royalty participated in the completion of 24 gross (11.41 net) conventional
wells, drilling and completion of 5 gross (2.54 net) coal seam wells,
recompleting 38 gross (8.61 net) conventional wells and other maintenance
activities and facilities costs at a cost of $6,560,276.

      Due to the size of the coal seam drilling program in the San Juan Basin
during the last several years by various operators, there was more gas
deliverability than available pipeline capacity. Consequently, these properties
produced only 20.4 Bcf during 1991. 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 40.7 in 1996.
BROG has advised the Trustee that mainline capacity out of the San Juan Basin is
estimated at 3.05 Bcf per day for El Paso Natural Gas Pipeline Company and
approximately 1.51 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.

      Based on existing geological and pricing information, there are
approximately 72 net conventional wells remaining to be drilled on the Trust
Properties. Proved undeveloped reserves have been assigned to these wells. BROG
has advised the Trust that its 1997 capital expense estimate for Trust working
interests is estimated to be $1.7 million. Fruitland Coal is estimated to be
approximately 16% of the total and the remainder would be conventional projects,
including 43 new drill locations. There are 13 other projects planned, half of
which would involve conventional locations. 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.

     Gas production from the Trust Properties is sold in both interstate and
intrastate commerce. For a further discussion of gas pricing, gas purchasers,
gas production and regulatory matters affecting gas production see Item 2 in the
accompanying Form 10-K.

                                       4
<PAGE>

Millenniums of intense heat and pressure on fossilized marine life and other
organic matter formed the San Juan Basin's natural gas and petroleum resources.

                                       5
<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, 1996,
distributable income increased to $37,803,167 from $13,790,101 distributed in
1995. The increase was primarily attributable to the payment by Burlington to
the Trust in September 30, 1996, of $19,822,005 in settlement of litigation
involving Bank One, Texas, NA, as Trustee and BROG (the "Litigation"). Interest
income increased from $31,978 in 1995 to $76,346 in 1996 primarily due to
increased funds available for investment.

      The Trustee announced on September 4, 1996, the settlement of the
Litigation. The Litigation, which was filed in the state district court of Santa
Fe County, New Mexico, was dismissed on September 12, 1996.

      The claims asserted on behalf of the Trust in the Litigation 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 an
injunction relating to marketing the production from the Trust Properties. BROG
denied and continues to deny the allegations made against it in the Litigation,
but the parties agreed to settle the Litigation as outlined below.

      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 intended to provide the Trustee and its
representatives improved access to BROG's books and records applicable to the
Trust Properties. Agreement was also reached regarding marketing arrangements
for the sale of Trust gas, oil and natural gas liquids products going forward as
follows:

1. BROG's preexisting contract with a third-party purchaser as pertains to base
load gas volumes in the firm amount of 45,000 MMBtu per day will remain
effective for a period of one year from July 1, 1996. Negotiations for the sale
of these volumes after June 30, 1997, will be entered into prior to the
expiration of the primary term of that contract;

2. The remaining volumes of Trust gas will be marketed by an independent
marketer, El Paso Energy Marketing Company ("El Paso"), a subsidiary of El Paso
Energy Corporation, beginning October 1, 1996, under an arrangement which
provides for a sharing of amounts, if any, earned in excess of established gas
price thresholds. El Paso's compensation for its marketing services consists
solely of its proportionate part of any amount for which the gas sold in
excess of the thresholds. BROG's contract with El Paso is for a two-year term
beginning October 1, 1996, subject to renewal by agreement of the parties;

3. 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; and

4. The marketer of the Trust gas will have 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 may utilize
BROG's contractual rights for delivery on the El Paso Natural Gas Company
pipeline to pipelines in West Texas for up to 13,333 MMBtu per day of gas
produced from the Trust Properties for a period of one year commencing October
1, 1996.

      Confidentiality agreements with purchasers of the gas produced from the
Trust 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 of the
marketer to compete effectively in the marketplace for the sale of gas produced
from the Trust Properties.

      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. Gas and oil sales attributable to the Royalty for the past five years,
excluding portions attributable to the litigation settlement proceeds (See Note
6 to accompanying Financial Statements), are summarized in the following table:

<TABLE>
<CAPTION>

                              1996         1995         1994        1993           1992
------------------------------------------------------------------------------------------
<S>                        <C>          <C>          <C>          <C>           <C>
Gas - Mcf                  17,927,785   13,331,758   15,459,542   23,895,506    13,984,645
Average Price (per Mcf)         $1.30        $1.25        $1.66        $1.70         $1.57
Oil - Bbls                     36,792       29,424       36,769       51,921        41,087
Average Price (per Bbl)        $19.64       $14.43       $13.09       $15.58        $17.65
</TABLE>

                                       6
<PAGE>

      Due to the increase in the average price of gas in the first quarter of
1993, the average price for the year increased. Gas prices plummeted in 1995.
Since the oil and gas sales attributable to the Royalty are based on an
allocation formula that is dependent on such factors as price and cost, the
production amounts do not provide a meaningful comparison.

      Total gas and oil production from the properties from which the Royalty
was carved for the five years ended December 31, 1996, were as follows:

<TABLE>
<CAPTION>

                   1996        1995        1994        1993        1992
--------------------------------------------------------------------------
<S>             <C>         <C>         <C>         <C>         <C>
Gas -           40,738,422  34,222,189  34,222,189  40,736,391  26,642,265
Mcf per day        111,307      94,211      93,759     111,607      72,993
Oil - Bbls          83,552      75,014      84,648      88,466      79,600
Bbls per day           228         206         232         242         218
</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
properties from which the Royalty was carved 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.

      Royalty Income for the five years ended December 31, 1996, was determined
as shown in the following table:

<TABLE>
<CAPTION>

                                             1996         1995           1994         1993           1992
------------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>           <C>          <C>            <C>
GROSS PROCEEDS FROM THE SOUTHLAND
ROYALTY PROPERTIES FROM WHICH THE
TRUST'S OVERRIDING ROYALTY WAS CARVED:

Gas                                       $51,865,730   $41,483,305   $54,375,586   $69,266,623   $41,961,599
Oil                                         1,638,753     1,084,262     1,140,738     1,384,468     1,409,179
Other                                             -0-         2,952           -0-           -0-           -0-
1990 Litigation Settlement                        -0-           -0-           -0-           -0-    16,118,174
                                          -----------   -----------   -----------    ----------   -----------
  Total                                    53,504,483    42,570,159    55,498,324    70,651,091    59,488,952
                                          -----------   -----------   -----------    ----------   -----------
LESS PRODUCTION COSTS:
Capital Costs                               7,223,281     6,560,277     9,409,462     3,988,136     2,530,833
Severance Tax - Gas                         5,654,831     4,694,750     5,864,834     6,543,615     3,696,172
Severance Tax - Oil                           176,379       115,474       117,028       153,072       155,663
Severance Tax - Other                          59,089           117           -0-           -0-           -0-
Severance Tax - Litigation                        -0-           -0-           -0-           -0-       356,944
Lease Operating Expenses                   11,838,345    10,991,152     9,066,750     9,864,773     9,423,403
                                          -----------   -----------   -----------    ----------   -----------
  Total                                    24,951,925    22,361,770    24,458,074    20,549,596    16,163,015
                                          -----------   -----------   -----------    ----------   -----------
Net Profits                                28,552,558    20,208,389    31,040,250    50,101,495    43,325,937
Royalty Percentage                                75%           75%           75%           75%           75%
Royalty Income                            $21,414,419   $15,156,292   $23,280,188   $37,576,121   $32,494,453
                                          ===========   ===========   ===========   ===========   ===========
</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 properties from which the
Royalty was carved for the year ended December 31, 1996, amounted to $7,223,281
versus $6,560,277 for 1995. The increase was primarily attributable to increased
drilling activity. The litigation settlement and the related severance taxes
for 1992 pertain to The Public Service Company of New Mexico litigation which
was settled during 1990. 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. See Note 5 to the accompanying Financial
Statements. Monthly operating costs in 1996 averaged approximately $955,000,
which is higher than the $876,000 average in 1995.

                                       7
<PAGE>

Coal seams lying relatively near the surface of the earth yield much of the
natural gas produced in the San Juan Basin.

                                       8
<PAGE>

RESULTS OF THE 4TH QUARTERS OF 1996 AND 1995

Distributable income for the three months ended December 31, 1996, totaled
$8,143,076 ($.174711 per Unit) as compared to $1,182,038 ($.025361 per Unit) for
the quarter ended December 31, 1995. The amount distributed in the fourth
quarter of 1996 was higher than that of 1995 primarily because of the higher
average price of gas sold.

      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, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                                    1996            1995
----------------------------------------------------------
<S>                                 <C>         <C>
PROPERTIES FROM WHICH
THE ROYALTY WAS CARVED
Gas  Mcf                         10,535,177      8,929,852
     Average Price (per Mcf)          $1.64           $.98
Oil - Bbls                           19,460         17,681
      Average Price (per Bbl)        $21.06         $14.72

ATTRIBUTABLE TO THE ROYALTY
Gas - Mcf                         5,478,137      1,864,559
Oil - Bbls                           10,260         17,681
</TABLE>

      The average price of gas increased in the fourth quarter of 1996 primarily
due to increases in spot prices. The average price of oil increased compared to
the prior year because of increases in the posted prices. Gas production
increased primarily due to increased coal seam production and demand from gas
purchasers.  During the fourth quarter of 1996, coal seam production from the
properties from which the Royalty was carved averaged 1,728,000 Mcf per month
compared to 1,173,000 Mcf per month during the fourth quarter of 1995.

      Capital costs for the fourth quarter of 1996 totaled $1,996,490 compared
to $2,413,744 during the same period of 1995. The decrease was due to a decrease
in drilling activity in the fourth quarter of 1996. Lease operating costs for
the fourth quarter of 1996 averaged $926,000 per month in the fourth quarter
compared to $1,025,000 per month in the fourth quarter of 1995.

                                       9
<PAGE>

SAN JUAN BASIN ROYALTY TRUST

<TABLE>
<CAPTION>

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
DECEMBER 31, 1996 AND 1995

                                                                         1996               1995
---------------------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>
ASSETS
Cash and Short-term Investments                                      $  3,127,828      $    421,446
Net Overriding Royalty Interest in Producing Oil and
 Gas Properties - Net (Notes 2 and 3)                                  62,808,148        70,133,536
                                                                     ------------      ------------
                                                                     $ 65,935,976      $ 70,554,982
                                                                     ============      ============
LIABILITIES AND TRUST CORPUS

Distribution Payable to Unit Holders                                 $  3,127,828      $    421,446
Contingencies (Note 5)                                                          -                 -
Trust Corpus - 46,608,796 Units of Beneficial
 Interest Authorized and Outstanding                                   62,808,148        70,133,536
                                                                     ------------      ------------
                                                                     $ 65,935,976      $ 70,554,982
                                                                     ============      ============
</TABLE>

<TABLE>
<CAPTION>

STATEMENTS OF DISTRIBUTABLE INCOME
FOR THE THREE YEARS ENDED
DECEMBER 31, 1996

                                                        1996               1995             1994
------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>               <C>
Royalty Income (Notes 2, 3 and 5)                  $ 41,236,424       $ 15,156,292     $ 23,280,188
Interest Income                                          76,346             31,978           38,129
                                                   ------------       ------------     ------------
                                                     41,312,770         15,188,270       23,318,317
Expenditures- General and Administrative              3,509,603          1,398,169          685,824
                                                   ------------       ------------     ------------
Distributable Income                               $ 37,803,167       $ 13,790,101     $ 22,632,493
                                                   ------------       ------------     ------------
Distributable Income per Unit (46,608,796 Units)   $    .811072       $    .295867     $    .485584
                                                   ============       ============     ============

STATEMENTS OF CHANGES IN TRUST CORPUS
FOR THE THREE YEARS ENDED
DECEMBER 31, 1996

                                                       1996               1995             1994
---------------------------------------------------------------------------------------------------
Trust Corpus, Beginning of Period                  $ 70,133,536       $ 74,942,040     $ 79,898,032
Amortization of Net Overriding Royalty
 Interest (Notes 2 and 3)                            (7,325,388)        (4,808,504)      (4,955,992)
Distributable Income                                 37,803,167         13,790,101       22,632,493
Distributions Declared                              (37,803,167)       (13,790,101)     (22,632,493)
                                                   ------------       ------------     ------------
Trust Corpus, End of Period                        $ 62,808,148       $ 70,133,536     $ 74,942,040
                                                   ============       ============     ============
</TABLE>

The accompanying Notes to Financial Statements are an integral part of this
statement.

                                       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, NA ("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 is 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, 1996 and 1995 aggregated $70,467,380
and $63,141,992, 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
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.

                                       11
<PAGE>

[_]   SAN JUAN
      BASIN

[_]   GAS
      FIELDS

[_]   OIL
      FIELDS

[_]   LEASEHOLD
      ACREAGE

[_]   MINERAL
      ACREAGE

                                       12
<PAGE>

4. FEDERAL INCOME TAXES

For Federal income tax purposes, the Trust constitutes a taxed 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 concerning 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 qualifying coal seam formation
which are later completed into such formation, also qualifies for the tax
credit. This tax credit was approximately $1.03 per MMBtu for the year 1996 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. COMMITMENTS AND CONTINGENCIES

On June 4, 1992, the Trustee filed suit against MOI and Southland in the state
district court in Rio Arriba County, New Mexico, Cause No. RA 92-1211(C). MOI
and Southland were the operators of the Trust 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").

      In a decision filed August 8, 1994, the Supreme Court of New Mexico ruled
that venue was not proper in Rio Arriba County and remanded the case for
dismissal without prejudice to its refiling. In its ruling, the Supreme Court of
New Mexico also ruled that venue was proper in Santa Fe County, New Mexico. Such
decision did not relate to merits of the Trust's claims. The Trustee refiled the
lawsuit in Santa Fe County, New Mexico on August 31, 1994, in Cause No.
SF 94-1982(C).

      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 "Trust Properties").

      The claims asserted on behalf of the Trust in the Santa Fe County, New
Mexico, 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 Trust
Properties.

      In response to the Trustee's lawsuit, Southland filed suit on August 7,
1992 against the Trustee in Probate Court in Tarrant County, Texas, Cause No.
92-1927-2. Non-binding mediation, which had been ongoing with regard to the
lawsuit filed in Santa Fe County, New Mexico, was not successful in resolving
the claims asserted by the Trust.

      On September 4, 1996, the Trustee announced the settlement of the
litigation (the "Litigation"). The Litigation was dismissed on September 12,
1996.

      BROG has 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

                                       13
<PAGE>

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
Trust Properties.

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

      1) BROG's pre-existing contract with a third-party purchaser as pertains
to baseload gas volumes in the firm amount of 45,000 MMBtu per day will remain
effective for a period of one year from July 1, 1996. Negotiations for the sale
of these volumes after June 30, 1997, will be entered into prior to the
expiration of the primary term of that contract;

      2) The remaining volumes of Trust gas were marketed by an independent
marketer, El Paso Energy Marketing Company ("El Paso"), a subsidiary of El Paso
Energy Corporation, beginning October 1, 1996, under an arrangement which
provides for a sharing of amounts, if any, earned in excess of established gas
price thresholds. El Paso's compensation for its marketing services consists
solely of its proportionate part of any amounts for which the gas is sold in
excess of the thresholds. BROG's contract with El Paso is for a two year term
beginning October 1, 1996, subject to renewal by agreement of the parties;

      3) 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; and

      4) 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 may 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 Trust Properties for a period of one year
commencing October 1, 1996.

      Confidentiality agreements with purchasers of gas produced from the Trust
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 Trust
Properties.

      The $19,822,005 (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 Trust 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 wellhead 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 properties from which the Royalty was carved.

      To continue to maximize production and revenues from Trust

                                       14
<PAGE>

properties, Southland again informed the Trustee that it negotiated an agreement
with Sunterra 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 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.

      Southland also advised the Trust 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 Trust has further been advised by Southland that MOTI negotiated an
agreement with Gas Company providing for transportation service on Gas Company's
Albuquerque mainline. This agreement was effective on the closing date of the
sale of Gas Company's gathering and processing facilities to Williams. This
transportation agreement will be necessary to deliver volumes of gas behind the
Lybrook processing plant to mainline delivery points.

      Southland further informed the Trust that on September 13, 1994, MOTI
entered into a gas sales agreement with Gas Company for the five winter periods
beginning November 1, 1995, and ending March 31, 2000. MOTI purchased the gas
supplied for this sale from MOI producing affiliates and third party sellers.
Sales were based on a monthly published index. BROG has informed the Trust that
as a result of the Litigation (as hereinafter defined), no gas produced from the
properties from which the Royalty was carved will be applied in performance of
such agreement with Gas Company. It is the understanding of the Trustee that Gas
Company is now known as PNM Gas Services.

      While it is impossible to determine the exact economic value to be derived
under these agreements, Southland has advised the Trust that it considers the
terms of these agreements to be favorable, and of substantial additional value.

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, 1996 (in thousands, except unit
amounts):

<TABLE>
<CAPTION>
                                            DISTRIBUTABLE
                                               INCOME AND
                                            DISTRIBUTABLE
                           DISTRIBUTABLE           INCOME
1996              ROYALTY         INCOME         PER UNIT
---------------------------------------------------------
<S>                <C>            <C>        <C>
First Quarter     $ 4,708        $ 3,926         $.084239
Second Quarter      4,048          2,943          .063143
Third Quarter      24,135         22,791          .488979
Fourth Quarter      8,345          8,143          .174711
                  -------        -------         --------
 Total            $41,236        $37,803         $.811072
                  =======        =======         ========

1995
---------------------------------------------------------
First Quarter     $ 4,476        $ 4,222         $.090595
Second Quarter      5,458          5,054          .108430
Third Quarter       3,542          3,332          .071482
Fourth Quarter      1,680          1,182          .025360
                  -------        -------         --------
 Total            $15,156        $13,790         $.295867
                  =======        =======         ========
</TABLE>

                                       15
<PAGE>

INDEPENDENT AUDITOR'S REPORT


BANK ONE, TEXAS, NA 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, 1996 and
1995, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Trustee. Our responsibility
is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by 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, 1996 and 1995 and the distributable income and changes
in trust corpus for each of the three years in the period ended December 31,
1996 on the basis of accounting described in Note 3.


/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
Fort Worth, Texas
March 25, 1997




San Juan Basin Royalty Trust
Bank One, Texas, NA, Trustee
Post Office Box 2604
Fort Worth, Texas 76113

Auditors
Deloitte & Touche LLP
Fort Worth, Texas


Legal Counsel
Vinson & Elkins L.L.P
Dallas, Texas


Tax Counsel
Butler & Binion, L.L.P.
Houston, Texas


Transfer Agent
Harris Trust & Savings Bank
Chicago, Illinois

                                       16