Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Discussion of Years Ended December 31, 2007, 2006, and 2005 Because a modified cash basis of accounting is utilized by the Trust, Net Proceeds attributable to the Underlying Properties for the years ended December 31, 2007, 2006 and 2005 are derived from actual oil and gas production from October 1, 2006 through September 30, 2007, October 1, 2005 through September 30, 2006 and October 1, 2004 through September 30, 2005, respectively. The following tables set forth oil and gas sales attributable to the Underlying Properties during the three years ended December 31, 2007.

Bbls of Oil 2007 2006 2005 Chalkley Field 4,027 4,520 5,155 Robinson's Bend Field - - - Cotton Valley Fields 1,855 1,529 1,852 Austin Chalk Fields 9,229 12,787 15,315 Total 15,111 18,836 22,322 Mcf of Gas 2007 2006 2005 Chalkley Field 976,994 1,102,855 1,226,513 Robinson's Bend Field 1,666,553 1,761,754 1,825,667 Cotton Valley Fields 643,745 664,283 684,434 Austin Chalk Fields 190,591 187,423 177,512 Total 3,477,883 3,716,315 3,914,126

For the year ended December 31, 2007, net profits income was $4.8 million, as compared to $7.8 million and $5.8 million for the same periods in 2006 and 2005, respectively. The decrease in net profits income during 2007 as compared to 2006 is due to lower average oil and gas prices paid to the Trust in 2007 combined with payments received by the Trust in 2006 with respect to the Robinson's Bend Field. The increase in net profits income during 2006 as compared to 2005 is due to higher average gas prices paid to the Trust in 2006 combined with payments received by the Trust in 2006 with respect to the Robinson's Bend Field. Commencing with the second quarter of 2003 distribution (pertaining to the quarter ended March 31, 2003 production) lease operating expenses and capital expenditures have been deducted in calculating Robinson's Bend Net Proceeds. The Trust received no payments for distributions to Unitholders with respect to the Robinson's Bend Field during each of the years ended December 31, 2007 and 2005. The Trust received approximately $0.6 million in 2006 (pertaining to production during the twelve month period ended September 30, 2006) for payments for distributions to Unitholders with respect to the Robinson's Bend Field. The Robinson's Bend Field Cumulative Deficit (pertaining to production as of September 30, 2007) is approximately $326,000. Neither the Trust nor Unitholders are liable to pay such deficit. However, the

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Torch Energy Royalty Trust Trust will receive no payments with respect to the Robinson's Bend Field until future proceeds exceed the Robinson's Bend Cumulative Deficit.
Gas production attributable to the Underlying Properties in the Chalkley, Cotton Valley and Austin Chalk Fields was 1,811,330 Mcf, 1,954,561 Mcf and 2,088,459 Mcf in 2007, 2006 and 2005, respectively. Gas production attributable to the Underlying Properties in the Robinson's Bend Field was 1,666,553 Mcf, 1,761,754 Mcf and 1,825,667 Mcf in 2007, 2006 and 2005, respectively. Gas production decreased during each of the years ended December 31, 2007 as a result of normal production declines. Oil production attributable to the Underlying Properties for the year ended December 31, 2007 was 15,111 Bbls as compared to 18,836 Bbls and 22,322 Bbls for the same periods in 2006 and 2005, respectively. The average price used to calculate Net Proceeds for gas, before gathering, treating and transportation deductions, during the year ended December 31, 2007 was $4.33 per MMBtu as compared to $5.28 and $4.43 per MMBtu for the years ended December 31, 2006 and 2005, respectively. The average price used to calculate Net Proceeds for oil during the years ended December 31, 2007, 2006 and 2005 was $57.51, $58.56 and $46.14 per Bbl, respectively. When TEMI pays a purchase price for gas based on the Minimum Price, TEMI receives Price Credits which it is entitled to deduct in determining the purchase price when the Index Price for gas exceeds the Minimum Price. As of December 31, 2007, TEMI had no outstanding Price Credits. No Price Credits were deducted in calculating the purchase price related to distributions during the three years ended December 31, 2007. See Item 1. Business and Item 3. Legal Proceedings.
Additionally, if the Index Price for gas exceeds $2.10 per MMBtu, adjusted annually for inflation ($2.26 per MMBtu, $2.22 per MMBtu and $2.18 per MMBtu for 2007, 2006 and 2005 production, respectively), TEMI is entitled to deduct 50% of such excess in calculating the purchase price. Such price sharing arrangement reduced Net Proceeds during the years ended December 31, 2007, 2006, and 2005 by $7.1 million, $11.1 million and $8.9 million, respectively. During the years ended December 31, 2007, 2006 and 2005, the Trust was distributed approximately $400,000 $516,000 and $708,000, respectively, of Infill Well Proceeds generated from Infill Wells located in the Cotton Valley Fields.
Lease operating expenses and capital expenditures attributable to the Underlying Properties in the Chalkley, Cotton Valley and Austin Chalk Fields deducted in calculating distributions during the years ended December 31, 2007, 2006 and 2005 totaled $2.8 million, $3.0 million and $3.4 million, respectively. The increase in costs and expenses during the year ended December 31, 2005 as compared to the years ended December 2007 and 2006 is mainly due to workovers performed on certain wells in 2005 in the Chalkley, Cotton Valley and Austin Chalk Fields.
General and administrative expenses during the year ended December 31, 2007 was $1.2 million as compared to $1.0 million and $0.9 million during each of the years ended December 31, 2006 and 2005, respectively. The increase in general and administrative expenses in 2007 as compared to 2006 is mainly due to an increase during 2007 for legal fees in connection with the termination of the Trust and for accounting fees in connection with Sarbanes-Oxley compliance. During each of the three years ended December 31, 2007, general and administrative expenses primarily relate to administrative services provided by Torch and the Trustee, legal fees, accounting fees and Unitholder report printing fees.
For the year ended December 31, 2007, distributable income was $4.1 million, or $0.48 per Unit, as compared to $7.3 million, or $0.84 per Unit, and $5.6 million, or $0.65 per Unit, for the same periods in 2006 and 2005, respectively. Total cash distributions of $4.1 million, or $0.48 per Unit, were made during the year ended December 31, 2007 as compared to $7.3 million, or $0.84 per Unit, and $5.6 million, or $0.65 per Unit, for the same periods in 2006 and 2005, respectively.

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Torch Energy Royalty Trust Net profits received by the Trust during the years ended December 31, 2007, 2006 and 2005, derived from production sold during the twelve months ended September 30, 2007, 2006 and 2005, respectively, was computed as shown in the following table (in thousands):

Year Ended December 31, 2007 2006 2005 Chalkley, Chalkley, Chalkley, Cotton Cotton Cotton Valley and Valley and Valley and Austin Robinson's Austin Robinson's Austin Robinson's Chalk Bend Chalk Bend Chalk Bend Fields Field Total Fields Field Total Fields Field Total Oil and gas revenues $ 8,649 $ 6,391 $ 11,409 $ 8,292 $ 10,330 $ 7,258 Direct operating expenses: Lease operating expenses (including property tax) 2,195 5,986 2,078 6,051 2,126 5,873 Severance tax 741 568 877 797 778 652 2,936 6,554 2,955 6,848 2,904 6,525 Net proceeds before capital expenditures 5,713 (163 ) 8,454 1,444 7,426 733 Capital expenditures 616 141 929 189 1,302 876 5,097 (304 ) 7,525 1,255 6,124 (143 ) Cumulative Deficit - - - (763 ) - - 5,097 (304 ) 7,525 492 Net profits percentage 95 % - (a) 95 % - (a) 95 % - (a) Net profits income $ 4,842 $ - $ 4,842 $ 7,149 $ 647 $ 7,796 $ 5,818 $ - $ 5,818

(a) With respect to the Robinson's Bend Field, the Trust received no cash distributions during each of the years ended December 31, 2005 and 2007 (pertaining to production during the twelve months ended September 30, 2005 and 2007, respectively) and during the quarter ended September 30, 2006 (pertaining to production during the quarter ended June 30, 2006).

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Torch Energy Royalty Trust Critical Accounting Policy
Reserve Estimates
The proved reserves of the Trust are estimated quantities of oil and gas which geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation, and judgement. For example, estimates are made regarding the amount and timing of future operating costs, production volumes and severance taxes, all of which may in fact vary considerably from actual results. In addition, as prices and cost levels change from year to year, the estimate of proved reserves also change. Any variance in these assumptions could materially affect the estimated quantity and value of the Trust's reserves. Independent petroleum engineering firms are engaged to estimate the Trust's proved hydrocarbon liquid and gas reserves. Modified Cash Basis
The financial statements of the Trust are prepared on a modified cash basis although financial statements filed with the Securities and Exchange Commission are normally required to be prepared in accordance with accounting principles generally accepted in the United States. Since the operations of the Trust are limited to the distribution of income from the Net Profits Interests, the item of primary importance to the reader of the financial statements of the Trust is the amount of cash distributions to the Unitholders for the period reported. Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Trust is exposed to market risk, including adverse changes in commodity prices. The Trust's assets constitute Net Profits Interests in the Underlying Properties. As a result, the Trust's operating results can be significantly affected by fluctuations in commodity prices caused by changing market forces and the price received for production from the Underlying Properties. All production from the Underlying Properties during the period applicable to this report was sold pursuant to a Purchase Contract between TRC, Velasco, and TEMI. Pursuant to the Purchase Contract, TEMI is obligated to purchase all net production attributable to the Underlying Properties for an Index Price, less certain other charges, which are calculated monthly. The Index Price calculation is based on market prices of oil and gas and therefore is subject to commodity price risk. The Purchase Contract expired upon termination of the Trust and provides a Minimum Price paid by TEMI for gas. See Item 1. Business and Item 1A. Risk Factors relating to the termination of the Trust and the arbitration proceeding relating to the proper calculation of the Net Profits Interests payments owed to the Trust following termination of the Trust. The Minimum Price is adjusted annually for inflation and was $1.83, $1.80 and $1.77 per MMBtu for 2007, 2006 and 2005, respectively. When TEMI pays a purchase price based on the Minimum Price, it receives Price Credits equal to the difference between the Index Price and the Minimum Price that it is entitled to deduct when the Index Price exceeds the Minimum Price. Additionally, if the Index Price exceeds the Sharing Price, TEMI is entitled to deduct such excess, the Price Differential. The Sharing Price was $2.26, $2.22 and $2.18 per MMBtu in 2007, 2006 and 2005, respectively. TEMI has an annual option to discontinue the Minimum Price commitment. However, if TEMI discontinues the Minimum Price commitment, it will no longer be entitled to deduct the Price Differential and will forfeit all accrued Price Credits. TEMI has not exercised its option to discontinue the Minimum Price Commitment.

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Torch Energy Royalty Trust