<PAGE>   1
                                                                      EXHIBIT 13




                   SAN JUAN BASIN            ROYALTY TRUST










POST OFFICE BOX 2604    FORT WORTH, TEXAS 76113    817-884-4630    WWW.SJBRT.COM



<PAGE>   2


 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 Benecial Interest of the Trust ("Units") are traded on the New 
York Stock Exchange under the symbol "SJT." From January 1, 1997, to December 
31, 1998, quarterly high and low sales prices and the aggregate amount of 
monthly distributions per Unit paid each quarter were as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                 Distributions
1998                                High             Low            Paid
----                                ----             ---            ----
<S>                             <C>              <C>            <C>         
First Quarter ..............    $   9.3750       $ 7.1875       $    .245489
Second Quarter .............        8.8750         7.3125            .137462
Third Quarter ..............        7.7500         5.1875            .132248
Fourth Quarter .............        6.8750         5.1250            .119840
                                                                ------------
      Total for 1998 .......                                    $    .635039
                                                                ============


1997
First Quarter ..............    $   8.8750       $ 7.5000       $    .391930
Second Quarter .............        8.3125         7.2500            .183766
Third Quarter ..............       10.1250         7.9375            .206076
Fourth Quarter .............       10.5626         8.6875            .261998
                                                                ------------
      Total for 1997........                                    $   1.043770
                                                                ============
--------------------------------------------------------------------------------
</TABLE>

At December 31, 1998, 46,608,796 Units outstanding were held by 2,436 Unit
holders of record. The following table presents information relating to the
distribution of ownership Units:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                    Number of
Type of Unit Holders               Unit Holders   Units Held
--------------------               ------------   ----------
<S>                                    <C>        <C>      
Individuals .................          2,114      3,685,129
Fiduciaries .................            271        908,232
Institutions ................             27      1,857,713
Brokers, Dealers and Nominees              6     39,946,730
Corporations and Partnerships              4         90,792
Miscellaneous ...............             14        120,200
                                       -----     ----------
      Total .................          2,436     46,608,796
                                       =====     ==========
--------------------------------------------------------------------------------
</TABLE>
                                                                           
 
<PAGE>   3

                                 TO UNIT HOLDERS

We are pleased to present the 1998 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, 1998,
without exhibits. The Form 10-K contains important information concerning the
Underlying 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 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 interests 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
distributed to Unit holders for the year 1998 was $29,598,402 or $.635039 per
Unit. This distributable income consisted of Royalty Income of $30,317,860 plus
interest income of $68,648, less administrative expenses of $788,106. 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 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. Certain 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, 1999, and for the year ending December 31, 1999. Unit holders
owning Units in nominee name may obtain monthly tax information from the Trustee
upon request. For readers' convenience, a glossary which contains definitions
will be found on page four. Please visit our web site at www.sjbrt.com to access
news releases, reports, SEC filings and tax information.

Bank One, Texas, N.A., Trustee
By: /s/ LEE ANN ANDERSON
Lee Ann Anderson
Vice President


                                       2
<PAGE>   4

                                    [PHOTO]


                                       3
<PAGE>   5

   
GLOSSARY OF TERMS

AGGREGATE MONTHLY DISTRIBUTION: an amount paid to unitholders equal to the 
royalty income received by the Trustee during a calendar month plus interest, 
less the general and administrative expenses of the Trust, adjusted by any 
changes in cash reserves.

BBL: Barrel, generally 42 U.S. gallons measured at 60 degrees F.

BCF: Billion cubic feet.

BROG: Burlington Resources Oil & Gas Company.

BTU: British thermal unit; the amount of heat necessary to raise the 
temperature of one pound of water one degree Fahrenheit.

COAL SEAM TAX CREDIT: A federal income tax credit available under Sec. 29 of 
the Internal Revenue Code for producing coal seam gas (and other 
non-conventional fuels) from wells drilled prior to January 1, 1993; and for 
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.

COAL SEAM WELL: A well completed to a coal deposit found to contain and emit 
natural gas.

COMMINGLED WELL: A well which produces from two or more formations through a 
common well casing and a single tubing string.

CONVENTIONAL WELL: A well completed to a formation historically found to 
contain deposits of oil or gas (for example, in the San Juan Basin, the 
Pictured Cliffs, Dakota and Mesa Verde formations) and operated in the 
conventional manner.

DEPLETION: The exhaustion of a petroleum reservoir; the reduction in value of 
a wasting asset by removing the minerals; for tax purposes, the removal and 
sale of minerals from a mineral deposit.

DISTRIBUTABLE INCOME: an amount paid to unitholders equal to the royalty 
income received by the Trustee during a given period plus interest, less the 
general and administrative expenses of the Trust, adjusted by any changes in 
cash reserves.

DUAL COMPLETION: The completion of a well into two separate producing formations
at different depths, generally through one string of pipe, inside of which is a 
smaller string of pipe producing from the other formation.

ESTIMATED FUTURE NET REVENUES: An estimate computed by applying current prices 
of oil and gas (with consideration of price changes only to the extent provided
by contractual arrangements and allowed by federal regulation) to estimated
future production of proved oil and gas reserves as of the date of the latest
balance sheet presented, less estimated future expenditures (based on current
costs) to be incurred in developing and producing the proved reserves, and
assuming continuation of existing economic conditions; sometimes referred to as
"estimated future net cash flows."

GRANTOR TRUST: A trust (or portion thereof) with respect to which the grantor or
an assignee of the grantor, rather than the trust, is treated as the owner of
the trust properties and is taxed directly on the trust income for federal
income tax purposes under Sections 671 through 679 of the Internal Revenue Code.

GROSS ACRES OR WELLS: The interests of all persons owning interests in such 
acres or wells.

GROSS PROCEEDS: The amount received by BROG (or any subsequent owner of the 
interests from which the Royalty was carved) from the sale of the production 
attributable to such interests.

LEASE OPERATING EXPENSES: Expenses incurred in the operation of a producing 
property as apportioned among the several parties in interest.

MCF: 1,000 cubic feet; the standard unit for measuring the volume of natural 
gas.

MMBTU: One million British thermal units.

MULTIPLE COMPLETION WELL: A well which produces simultaneously through 
separate tubing strings from two or more producing horizons or alternatively 
from each.

NET ACRES OR WELLS: The interests of BROG (from which the Royalty was carved) 
in such acres or wells.

NET OVERRIDING ROYALTY INTEREST: A share of gross production from a property, 
measured by net profits from operation of the property and carved out of the 
working interest, i.e., a net profits interest.

NET PROCEEDS: The excess of gross proceeds received by BROG during a 
particular period over production costs for such period.

PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES: A computation using the 
estimated future net revenues (as defined above) and a discount rate of 10%.

PRODUCTION COSTS: Costs incurred on an accrual basis by BROG in operating the 
Underlying Properties, including both capital and non-capital costs and 
including, for example, development drilling, production and processing 
costs, applicable taxes, and operating charges.

PROVED DEVELOPED RESERVES: Those proved reserves which can be expected to be 
recovered through existing wells with existing equipment and operating 
methods.

PROVED RESERVES: Those estimated quantities of crude oil, natural gas and 
natural gas liquids, which, upon analysis of geological and engineering data, 
appear with reasonable certainty to be recoverable in the future from known 
oil and gas reservoirs under existing economic and operating conditions.

PROVED UNDEVELOPED RESERVES: Those proved reserves which are expected to be 
recovered from new wells on undrilled acreage, or from existing wells where a 
relatively major expenditure is required.

RECAVITATED WELL: A coal seam well, the production from which has been 
enhanced or extended by the enlargement of the cavity within the coal deposit 
to which the well has been completed.

RECOMPLETED WELL: A well completed by drilling a separate well-bore from an 
existing casing in order to reach the same reservoir, or re-drilling the same
well bore to reach a new reservoir after production from the original reservoir
has been abandoned.

ROYALTY: The principal asset of the Trust; the 75% net overriding royalty
interest conveyed to the Trust on November 3, 1980, by Southland Royalty
Company, the predecessor to BROG, which was carved out of certain oil and gas
working interests and royalty interests owned by it in the San Juan Basin.

SPOT PRICE: The price paid for gas, oil or oil products sold under contracts 
for the purchase and sale of such minerals on a short-term basis.

UNDERLYING PROPERTIES: The working interests and royalty interests in the San 
Juan Basin of northwest New Mexico owned by Southland Royalty Company, the 
predecessor to BROG, out of which the Royalty was carved.

UNITS OF BENEFICIAL INTEREST: The units of ownership of the Trust, equal to 
the number of shares of common stock of Southland Royalty Company outstanding 
at the close of business on November 3, 1980.

WORKING INTEREST: The operating interest under an oil and gas lease.


                                       4


<PAGE>   6

                          DESCRIPTION OF THE PROPERTIES

     The working interests and the royalty interests in the San Juan Basin from
which the Trust's net overriding royalty interest was carved (the "Underlying
Properties") are located in San Juan, Rio Arriba and Sandoval Counties of
northwestern New Mexico. The Underlying Properties contain 151,900 gross
(119,000 net) producing acres and 2,951 gross (812 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
Mesaverde 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, 1998, the production index for the San Juan Basin properties is estimated to
be approximately 9 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.

     BROG announced that the New Mexico Oil Conservation Division has approved
plans for 80-acre infill drilling of the Mesaverde Formation in the San Juan
Basin. The Mesaverde Formation was originally developed in the 1950s on 320-acre
spacing, with infill drilling initiated in the early 1970s on 160-acre spacing.
In 1994, BROG undertook an extensive study of the Mesaverde Formation. Results
indicated that downspaced drilling (infill drilling) on 80-acre spacing could
significantly increase recoverable gas reserves in this massive reservoir. A
pilot program began in 1997 and was expanded in 1998 to include two additional
areas.

     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, 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 1998, these coal seam wells produced a total of
approximately 16,059,564 MMBtu of gas from the Underlying Properties, which was
sold at an average price of $1.57 per MMBtu.

     Production from coal seam wells drilled prior to January 1, 1993, qualifies
for Federal income tax credits through 2002. For 1998 the credit was
approximately $1.06 per MMBtu. During 1998, potential Section 29 tax credits of
approximately $.168314 per Unit were generated for Trust Unit holders from
production from coal seam wells.

     During 1998, BROG incurred approximately $12.8 million of capital
expenditures for the drilling and completion of 36 gross (11.89 net)
conventional wells, recompletion of 25 gross (13.8 net) conventional wells, 2
gross (.08 net) coal seam well recompletions, and 37 gross (2.28 net) coal seam
well recavitations.

     There were 17 gross (1.46 net) new conventional wells, 1 gross (.045 net)
coal seam recompletion and 3 gross (.12 net) coal seam recavitations in progress
as of December 31, 1998.

     During 1997, BROG participated in 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 and other maintenance activities and
facilities costs at a total cost of $7,231,699.

     Due to the 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 


                                       5
<PAGE>   7

                          DESCRIPTION OF THE PROPERTIES


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 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.

     BROG has advised the Trust that capital projections for 1999 are estimated
to be $9.5 million. Approximately 95% of the $9.5 million will be attributable
to conventional projects. Of the 400 planned projects, 38 will be conventional
new drill locations at a cost of approximately $3 million. There are 21 planned
Fruitland Coal recavitations at an estimated cost of $40,000. BROG anticipates
adding compressors to 10 Fruitland Coal wells at a cost of approximately
$127,000. There are approximately 104 miscellaneous conventional projects
planned at a cost estimated to be $3.4 million. These projects will be aimed at
improving production from existing wells and will include payadds into the Lewis
Shale and Menefee Coal formations of the Mesaverde. Additionally, BROG plans to
undertake 177 miscellaneous facilities projects at a cost of approximately
$2,150,400. BROG anticipates that non-operated projects would be at a cost of
approximately $699,008. 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.



                                     [MAP]


                                       6


<PAGE>   8

                        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, 1998,
distributable income decreased to $29,598,402 from $48,648,930 distributed in
1997. The decrease was primarily attributable to significantly lower gas and oil
prices. Interest income decreased from $99,403 in 1997 to $68,648 in 1998
primarily due to decreased funds available for investment.
 
     Total gas and oil production from the Underlying Properties for the five
years ended December 31, 1998, were as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                       1998           1997           1996           1995           1994
                       ----           ----           ----           ----           ----
<S>                 <C>            <C>            <C>            <C>            <C>       
Gas - Mcf .....     41,507,353     41,948,567     40,738,422     34,387,190     34,222,189
Mcf per day....        113,719        114,928        111,307         94,211         93,759
Oil - Bbls ....         81,888         89,492         83,552         75,014         84,648
Bbls per day...            224            245            228            206            232
---------------------------------------------------------------------------------------------
</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 sales amounts from the Underlying Properties
may not provide a meaningful comparison to sales 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>
-------------------------------------------------------------------------------------------------------------------------
                                      1998               1997               1996               1995               1994
                                      ----               ----               ----               ----               ----
<S>                                <C>                <C>                <C>                <C>                <C>       
Gas - Mcf ................         18,904,906         24,236,419         17,927,785         13,331,758         15,459,542
Average Price (per Mcf)...  $            1.75  $            2.21  $            1.30  $            1.25  $            1.66
Oil - Bbls ...............             37,067             50,860             36,792             29,424             36,769
Average Price (per Bbl)...  $           13.55  $           19.35  $           19.64  $           14.43  $           13.09
-------------------------------------------------------------------------------------------------------------------------
</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. Production increased from 1995 to 1996 primarily
due to increased coal seam volumes. As noted above, oil and gas sales
attributable to the Royalty are based on an allocation formula dependent on many
factors, including oil and gas prices and capital expenditures.


                                       7
<PAGE>   9

 TRUSTEE'S DISCUSSION AND ANALYSIS   

Royalty Income for the five years ended December 31, 1998, was determined as
shown in the following table:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                  1998             1997             1996             1995             1994
                                  ----             ----             ----             ----             ----
<S>                            <C>              <C>              <C>              <C>              <C>        
Gross Proceeds from
the underlying properties:
Gas .......................... $71,247,501      $91,495,060      $51,865,730      $41,483,305      $54,375,586
Oil ..........................   1,088,228        1,728,296        1,638,753        1,084,262        1,140,738
Other ........................         -0-              -0-              -0-            2,952              -0-
                               -----------      -----------      -----------      -----------      -----------
      Total ..................  72,335,729       93,223,356       53,504,483       42,570,159       55,498,324
                               ===========      ===========      ===========      ===========      ===========

Less Production Costs:
Capital Costs ................  12,828,300        7,231,696        7,223,281        6,560,277        9,409,462
Severance Tax - Gas ..........   7,341,098        8,989,202        5,654,831        4,694,750        5,864,834
Severance Tax - Oil ..........     117,454          167,844          176,379          115,474          117,028
Other ........................      66,892           61,832           59,089              117              -0-
Leasing Operating Expenses ...  11,558,172       10,776,145       11,838,345       10,991,152        9,066,750
                               -----------      -----------      -----------      -----------      -----------

      Total ..................  31,911,916       27,226,719       24,951,925       22,361,770       24,458,074
                               -----------      -----------      -----------      -----------      -----------

Net Profits ..................  40,423,813       65,996,637       28,552,558       20,208,389       31,040,250
Royalty Percentage ...........          75%              75%              75%              75%              75%
Royalty Income ............... $30,317,860      $49,497,479      $21,414,419      $15,156,292      $23,280,188
                               ===========      ===========      ===========      ===========      ===========
--------------------------------------------------------------------------------------------------------------
</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 increase in capital costs incurred by BROG on the Underlying
Properties for the year ended December 31, 1998, 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 and 1998 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 1998 averaged approximately $964,669, which is higher than
the $899,000 average in 1997.

YEAR 2000 ISSUE

     Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by the Year 2000.
The Year 2000 issue affects virtually all companies and organizations. If a
company or organization does not successfully address its Year 2000 issues, it
may face material adverse consequences.

     As the Trust does not directly maintain any systems, the Trust will not
incur any direct costs related to the Year 2000 issue. However, the Trust is
reliant on the performance of others, including the Trustee, BROG and third
party vendors (collectively, the "suppliers") for such things as the calculation
and receipt of Royalty income, payment of expenses and disbursement of
distributable income. The Trust has made formal inquiries to the suppliers
requesting information on their state of readiness for the Year 2000. Based upon
responses received and reviewed by the Trust with respect to its material
suppliers, all are currently addressing the Year 2000 issue and making efforts
to be compliant prior to the Year 2000. The Trust can provide no assurance as to
whether the suppliers will successfully address the Year 2000 issue. Failure to
successfully address the Year 2000 issue by the suppliers could have a material
adverse impact on the Trust and its Unit holders. At this time, the Trust
believes the most adverse impact as a result of the suppliers' failure to
successfully address the Year 2000 issue is that the Trust would not receive and
in turn would not be able to distribute royalty income to the Unit holders.


                                       8
<PAGE>   10

                  RESULTS OF THE 4TH QUARTERS OF 1998 AND 1997

     Distributable income for the three months ended December 31, 1998, totaled
$5,585,582 ($.119840 per Unit) as compared to $12,211,435 ($.261998 per Unit)
for the quarter ended December 31, 1997. The amount distributed in the fourth
quarter of 1998 was lower than that of 1997 primarily because of the lower
average gas and oil 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, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Underlying Properties                       1998           1997
---------------------                       ----           ----
<S>                                      <C>            <C>
Gas - Mcf ..........................     10,243,360     10,441,818
      Average Price (per Mcf).......     $     1.44     $     2.15
Oil - Bbls .........................         18,194         19,438
      Average Price (per Bbl).......     $    11.50     $    17.90
Attributable to the royalty
Gas - Mcf ..........................      4,183,417      6,113,834
Oil - Bbls .........................          7,361         11,400
--------------------------------------------------------------------------------
</TABLE>


     The average price of gas and oil decreased compared to the prior year. The
price per barrel of oil during the fourth quarter of 1998 was $6.40 per Bbl
lower than that received in the fourth quarter of 1997 due to decreases in oil
prices in world markets generally, including the posted prices applicable to the
Royalty. Gas production decreased slightly primarily due to a decrease in coal
seam production. During the fourth quarter of 1998, coal seam production from
the Underlying Properties averaged 1,401,000 Mcf per month compared to 1,547,000
Mcf per month during the fourth quarter of 1997.

     Capital costs for the fourth quarter of 1998 totaled $2,780,132 compared to
$1,579,932 during the same period of 1997. The increase was due to an increase
in drilling activity in the fourth quarter of 1998. Operating costs in 1998 and
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 1998 averaged $1,073,500 per month in the fourth quarter compared to $858,000
per month in the fourth quarter of 1997.


                                       9


<PAGE>   11

                          SAN JUAN BASIN ROYALTY TRUST

Statements of Assets, Liabilities and Trust Corpus
December 31, 1998 and 1997


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Assets                                                        1998            1997
------                                                        ----            ----
<S>                                                        <C>             <C>        
Cash and Short-term Investments ......................     $ 2,665,562     $ 5,111,832
Net Overriding Royalty Interests in Producing Oil and
      Gas Properties - Net (Notes 2 and 3) ...........      51,088,020      56,119,448
                                                           -----------     -----------
                                                           $53,753,582     $61,231,280
                                                           ===========     ===========

Liabilities and Trust Corpus
Distribution Payable to Unit Holders .................     $ 2,665,562     $ 5,111,832
Contingencies (Note 5)
Trust Corpus - 46,608,796 Units of Beneficial Interest
      Authorized and Outstanding .....................      51,088,020      56,119,448
                                                           -----------     -----------
                                                           $53,753,582     $61,231,280
                                                           ===========     ===========
--------------------------------------------------------------------------------------
</TABLE>


Statements of Distributable Income
for the Three Years Ended December 31, 1998


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                                         1998            1997            1996
                                                         ----            ----            ----
<S>                                                  <C>             <C>             <C>        
Royalty Income (Notes 2, 3 and 5) ..............     $30,317,860     $49,497,479     $41,236,424
Interest Income ................................          68,648          99,403          76,346
                                                     -----------     -----------     -----------
                                                      30,386,508      49,596,882      41,312,770
Expenditures - General and Administrative ......         788,106         947,952       3,509,603
                                                     -----------     -----------     -----------
Distributable Income ...........................     $29,598,402     $48,648,930     $37,803,167
                                                     ===========     ===========     ===========
Distributable Income per Unit (46,608,796 
  Units) .......................................     $   .635039     $  1.043770     $   .811072
                                                     ===========     ===========     ===========
------------------------------------------------------------------------------------------------
</TABLE>


Statements of Changes in Trust Corpus
for the Three Years Ended December 31, 1998


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                         1998              1997              1996
                                                         ----              ----              ----
<S>                                                 <C>               <C>               <C>         
Trust Corpus, Beginning of Period .............     $ 56,119,448      $ 62,808,148      $ 70,133,536
Amortization of Net Overriding Royalty Interest
      (Notes 2 and 3) .........................       (5,031,428)       (6,688,700)       (7,325,388)
Distributable Income ..........................       29,598,402        48,648,930        37,803,167
Distributions Declared ........................      (29,598,402)      (48,648,930)      (37,803,167)
                                                    ============      ============      ============
Trust Corpus, End of Period ...................     $ 51,088,020      $ 56,119,448      $ 62,808,148
                                                    ============      ============      ============
-----------------------------------------------------------------------------------------------------
</TABLE>
                                                             
 
The accompanying Notes to Financial Statements are an integral part of these 
statements.


                                       10


<PAGE>   12


                                    [PHOTO]


                                       11


<PAGE>   13


                                    [PHOTO]


                                       12
<PAGE>   14

 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 properties located in the San Juan Basin in northwestern New 
Mexico out of which the Royalty was carved (the "Underlying Properties").

      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:

     o    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;

     o    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;

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

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

     o    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 and such negative 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, 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, 1998 and 1997 aggregated $82,187,508
and $77,156,080, respectively.


3. BASIS OF ACCOUNTING

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

     o    Royalty income recorded for a month is the amount computed and paid by
          the working interest owner 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%.

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

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

     o    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 


                                       13
<PAGE>   15

                          SAN JUAN BASIN ROYALTY TRUST



          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.

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 gas wells in 1989.
Under Section 29 of the Internal Revenue Code, coal seam gas production from
wells drilled prior to January 1, 1993 (including certain wells recompleted in
coal seams formations thereafter), generally qualifies for the federal income
tax credit for producing non-conventional fuels if such production and the sale
thereof occurs before January 1, 2003. For 1998, this tax credit is expected,
subject to the determination of the Treasury Department no later than April 1,
1999, to be in the range of approximately $1.05 (the approximate 1997 rate) to
$1.09 per MMBtu. For qualifying production of the Trust, 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 liability
(after the foreign tax credit and certain other non-refundable 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 Trustee is provided Section 29 tax credit information related to Trust
Properties by BROG. In 1997, the Tax Court upheld the IRS position that
nonconventional fuel such as coal seam gas does not qualify for the Section 29
credit unless the producer received a formal certification from the Federal
Energy Regulatory Commission ("FERC"). The FERC's certification authority
expired effective January 1, 1993. Many producers believe that wells meeting the
certification requirements are eligible for the Section 29 credit regardless of
FERC certification. However, this position is not in accordance with the IRS
position or the decision of the Tax Court. The court decision is on appeal and
it is not possible to predict the likely outcome. In the event the appeal is not
successful, the ability of the Unit holders to utilize allocated Section 29
credits in full could be in question.

     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 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, prim a 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.

      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 


                                       14
<PAGE>   16

                          SAN JUAN BASIN ROYALTY TRUST


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 Trust 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:

     1. BROG agreed that 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 oil and natural gas liquids from the
Underlying Properties 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.

     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

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 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. The gas marketing consultant
currently advising the Trust is in communication with BROG concerning BROG's
plans for the marketing of gas subject to the Royalty following the expiration
of the contract with El Paso at the end of 1999.

     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, 1998 (in thousands, 
except unit amounts):


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                         Distributable
                                                          Income and  
                            Royalty    Distributable     Distribution 
1998                        Income       Income            Per Unit   
----                        ------       ------            --------   
<S>                         <C>         <C>               <C>         
First Quarter...........    $11,663     $11,442           $ .245489   
Second Quarter..........      6,679       6,407             .137462   
Third Quarter...........      6,277       6,164             .132248   
Fourth Quarter..........      5,699       5,585             .119840   
                                                                      
      Total ............    $30,318     $29,598           $ .635039   
                                                                      
1997                                                                  
----                                                                  
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   
--------------------------------------------------------------------------------
</TABLE>


                                       15
<PAGE>   17


                          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,
1998 and 1997, and the related statements of distributable income and changes in
trust corpus for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the distributable income and changes
in trust corpus for each of the three years in the period ended December 31,
1998, on the basis of accounting described in Note 3.

/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Fort Worth, Texas
March 22, 1999


--------------------------------------------------------------------------------
SAN JUAN BASIN ROYALTY TRUST
Bank One, Texas, N.A., Trustee
Post Office Box 2604
Fort Worth, Texas 76113
817-884-4630
Web site: www.sjbrt.com

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
311 West Monroe Street, 11th Floor
Chicago, Illinois 60606
For questions about distribution checks, 
address changes, and transfer procedures, 
call 800-573-4048 or 312-461-6001.


                                       16

<PAGE>   18



                          SAN JUAN BASIN ROYALTY TRUST
                         1998 ANNUAL REPORT & FORM 10K