Summary of TEL OFFSHORE TRUST

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

On the last business day of each calendar quarter, the Working Interest Owners pay to the Partnership 25% of the Net Proceeds for the immediately preceding Quarterly Period. A Quarterly Period is each period of three months commencing on the first day of February, May, August and November. In turn, the Partnership distributes funds to its partners on the last business day of each calendar quarter. Cash distributions from the Trust are made in January, April, July and October of each year, and are payable to Unit holders of record as of the last business day of each calendar quarter. Thus, the cash conveyed to the Trust from the Royalty during the quarter ended December 31, 2008 substantially represents the revenues and expenses from the Royalty Properties from August through October 2008. The financial and operating information included in this Form 10-K for the 12 months ended December 31, 2008 represents financial and operating information with respect to the Royalty Properties for the months of November 2007 through October 2008. As such, the impact of Hurricane Ike will not be fully reflected in the discussion of 2008 operations, as such discussion does not include a discussion of operations of the Royalty Properties in November or December 2008. Similarly, the financial and operating information included in this Form 10-K for the 12 months ended December 31, 2007 represents financial and operating information with respect to the Royalty

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Properties for the months of November 2007 through October 2008. Income from the Royalty is recorded by the Trust on a cash basis, when it is received by the Trust from the Partnership.

Critical Accounting Policies

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

º (a)
º Royalty income is recorded when received, including the effect of overtaken or undertaken positions and negative or positive adjustments, by the Corporate Trustee on the last business day of each calendar quarter. In addition, Royalty income includes amounts related to funds deposited or released from the Special Cost Escrow account-see (c);

º (b)
º Trust general and administrative expenses are recorded when paid, except for the cash reserved for future general and administrative expenses; and

º (c)
º The funds deposited or released from the Special Cost Escrow account are recorded at the time of payment or receipt. The Special Cost Escrow account is an account of the Working Interest Owners and is not reflected in the financial statements of the Trust.

This manner of reporting income and expenses is considered to be the most meaningful because the quarterly distributions to Unit holders are based on net cash receipts received from the Working Interest Owners. The financial statements of the Trust differ from financial statements prepared in accordance with generally accepted accounting principles, because, under such principles, Royalty income and Trust general and administrative expenses for a quarter would be recognized on an accrual basis. In addition, amortization of the net overriding royalty interest, calculated on a units-of-production basis, is charged directly to Trust corpus since such amount does not affect distributable income.

The Trustees, including the Corporate Trustee, have no authority over, have not evaluated and make no statement concerning, the internal control over financial reporting of any of the Working Interest Owners.

Liquidity and Capital Resources

The Trust's source of capital is the Royalty Income received from its share of the Net Proceeds from the Royalty Properties. Reference is made to Note 9 in the Notes to Financial Statements under Item 8 of this Form 10-K, which contains certain unaudited supplemental reserve information, for an estimate of future Royalty income attributable to the Partnership, of which the Trust has a 99.99% interest.

On October 7, 2008, the Trust announced that production from the two most significant oil and gas properties associated with the Trust had ceased following damage inflicted by Hurricane Ike in September 2008. The platforms and wells on Eugene Island 339 were completely destroyed by Hurricane Ike. Crude oil revenues from Eugene Island 339 represented approximately 48% of the crude oil and condensate revenues for the Royalty Properties in 2007. While Hurricane Ike caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. The more productive wells on the properties produce both oil and gas, and there is currently no downstream transmission available for any gas produced from the wells. Crude oil revenues from Ship Shoal 182/183 represented approximately 50% of the crude oil and condensate revenues for the Royalty Properties in 2007. There can be no assurance that production at Eugene Island 339 will be restored. While production is expected to remain limited at Ship Shoal 182/183 until the natural gas pipeline is fully repaired and tested, which is anticipated to occur in the second quarter of 2009, there can be no assurance as to when, or if at all, meaningful production may be restored at Ship Shoal 182/183. See "-Operations."

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In addition, production from West Cameron 643 and East Cameron 371 ceased following damage inflicted by Hurricane Ike in September 2008 to third-party transporters' pipelines. The Managing General Partner of the Partnership understands that the pipelines are in the process of being restored; however, the pipeline for West Cameron 643 is not expected to be able to take production until at least the end of 2009. At this point in time, there can be no assurance as to when, or if at all, production may be restored at West Cameron 643 or East Cameron 371. For additional information, see "-Operations."

On December 19, 2008, the Trust announced its fourth quarter distribution of approximately $0.7 million, which was paid on January 9, 2009. Based on the damage caused by Hurricane Ike, the Trust's scheduled distribution for the fourth quarter of 2008 was severely negatively impacted, although there were funds available for distribution given that there was some production from Eugene Island 339 and Ship Shoal 182/183 in August and September 2008. On March 25, 2009, the Trust announced that there would be no trust distribution for the first quarter of 2009. There are no Net Proceeds expected to be distributed to the Trust for the first quarter of 2009. Future distributions by the Trust are expected to be severely negatively impacted, and there may not be sufficient Net Proceeds from the Royalty Properties to make one or more future distributions. At this time, the ultimate outcome of these various matters cannot be determined.

Future Net Proceeds may take into account the Trust's share of project costs and other related expenditures that are not covered by insurance of the operator of the Royalty Properties. If development and production costs of the Royalty exceed the proceeds of production from the Royalty Properties, the Trust will not receive Net Proceeds until future proceeds from production exceed the total of the excess costs plus accrued interest, at a rate equal to one-fourth of
(i) one-half of one percent plus (ii) the median between the prime interest rate at the end of a quarterly period in which there are excess costs and the prime interest rate at the end of the preceding quarterly period, during the deficit period. Development activities may not generate sufficient additional revenue to repay the costs. Accordingly, there may not be sufficient Net Proceeds to make a particular distribution.

Substantial uncertainties exist with regard to future oil and gas prices, which are subject to material fluctuations due to changes in production levels and pricing and other actions taken by major petroleum producing nations, as well as the regional supply and demand for gas, weather, industrial growth, conservation measures, competition, economic conditions generally and other variables.

In accordance with the provisions of the Trust Agreement, generally all Net Proceeds received by the Trust, net of Trust general and administrative expenses and any cash reserves established for the payment of contingent or future obligations of the Trust, are distributed currently to the Unit holders. In 1994, in anticipation of future periods when the cash received from the Royalty may not be sufficient for payment of Trust expenses, the Trust determined, in accordance with the Trust Agreement, to begin further increasing the Trust's cash reserve each quarter. In the first quarter of 1998, the Trust determined that the Trust's cash reserve was then sufficient to provide for future administrative expenses in connection with the winding up of the Trust. The Trust determined that a cash reserve equal to three times the average expenses of the Trust during each of the past three years was sufficient at such time to provide for future administrative expenses in connection with the winding up of the Trust.

The calculated reserve amount at December 31, 2008 and 2007 was $2,233,291 and $1,883,726, respectively.

Operations

The following operational information has been based on information provided to the Corporate Trustee by Chevron as the Managing General Partner of the Partnership. The Trustees have no control over these operations or internal controls relating to this information.

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During 2005, Hurricane Katrina and Hurricane Rita caused significant damage to various platforms and third-party transportation systems, which resulted in oil and gas production delays in the Royalty Properties. At the end of October 2005, approximately half of Chevron oil-equivalent production in the Gulf of Mexico remained shut-in due to damages from hurricanes in the third quarter. During 2006, several of the platforms and facilities on the Royalty Properties were restored, and by the third quarter of 2007 all but one of the platforms and facilities had been restored. One of the platforms and facilities on Eugene Island was destroyed from hurricanes in the third quarter of 2005 and was never restored. Eugene Island 339 oil production increased during the second half of 2006 and the first quarter of 2007 as the B-5 well gas injection project, which allows the operator to increase oil production and to limit flaring of gas, was completed. On Ship Shoal 182/183, gas production and sales resumed in July 2006 following the hurricanes in the third quarter of 2005, and full production resumed in the fourth quarter of 2006. On West Cameron 643, production was shut in from September 2005 following Hurricane Rita's major damage to various platforms, but limited gas production resumed in late July 2006 before the wells loaded up and additional repairs were required thus requiring the well to be shut in again during the second quarter 2006. Production at West Cameron 643 resumed May 2007.

The platforms and wells on Eugene Island 339 were completely destroyed by Hurricane Ike in September 2008. Crude oil revenues from Eugene Island 339 represented approximately 48% of the crude oil and condensate revenues for the Royalty Properties in 2007 and approximately 47% of such revenues for the nine months ended September 30, 2008. Eugene Island 339 contributed approximately 12% of the revenues from natural gas sales from the Royalty Properties in 2007 and approximately 41% of such revenues for the nine months ended September 30, 2008. Based on a prior reserve study of DeGolyer and MacNaughton, independent petroleum engineering consultants, Eugene Island 339 accounted for approximately 34% of the total future net revenues attributable to the Partnership's interest in the royalty as of October 31, 2007. Chevron is proceeding to plug and abandon the existing wells, to clear debris and otherwise to deal with the remaining infrastructure, with estimated costs relating thereto for 2009 alone of approximately $61 million. In order to restore production, Chevron expects that it would need to redevelop the facility and drill new wells. Chevron is still assessing its alternatives and the economic feasibility for restoring production at the property. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Eugene Island 339. Generally, if production ceases from an outer continental shelf lease, like that for Eugene Island 339, production must be restored or drilling operations must commence within 180 days of the cessation (which was in early March 2009), or the lease will be terminated. A lease operator may seek approval from the regional supervisor of the Mineral Management Service to allow additional time to restore production. Chevron has submitted such a request with respect to Eugene Island
339. There can be no assurance that production at Eugene Island 339 will be restored or that such requested extension will be granted.

Production at Ship Shoal 182/183 ceased following damage inflicted by Hurricane Ike in September 2008. While the hurricane caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. The more productive wells on the properties produce both oil and gas, and there was no downstream transmission available for any gas produced from the wells. Crude oil revenues from Ship Shoal 182/183 represented approximately 50% of the crude oil and condensate revenues for the Royalty Properties in 2007 and approximately 51% of such revenues for the nine months ended September 30, 2008. Ship Shoal 182/183 contributed approximately 77% of the revenues from natural gas sales from the Royalty Properties in 2007 and approximately 42% of such revenues for the nine months ended September 30, 2008. A limited volume of oil production was restored in November 2008, with an average rate of daily oil production from November 20, 2008 through January 31, 2009 of approximately 831 barrels per day. The volume of oil production that can be produced is limited by the amount of gas that is also produced by the oil wells. Production is expected

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to remain limited until the natural gas pipeline is fully repaired and tested, which is anticipated to occur in the second quarter of 2009, but which is also in the control of the pipeline owner. There may also be related regulatory approval requirements that must be satisfied before gas transportation may commence. At this point in time, there can be no assurance as to when, or if at all, gas production may be restored at Ship Shoal 182/183.

The Trust has engaged an outside auditor for the purpose of reviewing the books and records of certain Working Interest Owners with respect to the Royalty Properties and the related payments to the Trust. Based on the initial report of this auditor, the Trustees believe that certain errors have occurred and are involved in ongoing discussions with such Working Interest Owners to resolve these items. As part of this ongoing process, certain adjustments resulted in an additional cash distribution to the Trust during the first quarter of 2008. These amounts are comprised of a one-time increase of approximately $31,716 in gas revenues, a one-time increase of approximately $43,287 in oil revenues, and a one-time credit of approximately $123,900 in capital expenditures. An additional $127,973 related to the outside audit was included in the second quarter 2008 distribution. An additional $135,551 related to the outside audit was included in the third quarter 2008 distribution. An additional credit adjustment of $352,317 related to the outside audit was made in the fourth quarter of 2008. No assurance can be provided as to the ultimate outcome of the remaining items under discussion.

Years 2008 and 2007

Royalty income increased approximately 41% from $10,257,485 in 2007 to $14,451,252 in 2008 primarily due to an increase in gas revenues and crude oil and condensate revenues as discussed below.

For 2008, the Trust had a collection of prior undistributed net income of $33,169. For 2007, the Trust had undistributed net loss of $9,297. An increase in undistributed net income represents revenues generated during the respective period, but not distributed by the Working Interest Owners. Collection of undistributed net income is the subsequent receipt in future periods from the related Working Interest Owner(s) of revenues generated in prior periods but not yet distributed.

Volumes and dollar amounts discussed below represent amounts recorded by the Working Interest Owners unless otherwise specified.

Natural Gas and Gas Products

Natural gas revenues and gas products increased 21% from $11,820,973 in 2007 to $14,248,644 in 2008, partially offset by a slight decrease in natural gas and gas products volumes from 1,654,836 Mcf equivalents in 2007 to 1,625,408 Mcf equivalents in 2008. The average price received for natural gas increased 19% from $7.11 per Mcf in 2007 to $8.45 Mcf in 2008.

Crude Oil and Condensate

Crude oil and condensate revenues increased 12% from $37,732,678 in 2007 to $42,424,601 in 2008, due primarily to a 54% increase in the average price received for crude oil and condensate from $65.26 in 2007 to $100.54 in 2008. This increase was partially offset by a decrease of 27% in crude oil and condensate volumes from 578,159 barrels in 2007 to 421,958 barrels in 2008.

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The decrease in crude oil and condensate volumes during 2008 was related in part to a three day field shut-in for repairs at Eugene Island 339 and to an entire production shut-in at Ship Shoal 182/183, platforms C and E, due to pipeline obstruction. Oil production ceased at Eugene Island 339 and Ship Shoal 182/183 in September 2008 after damages inflicted by Hurricane Ike.

Operating and Capital Expenditures

Operating expenses paid by the Working Interest Owners increased 6% from $6,598,909 in 2007 to $7,012,792 in 2008. The increase in operating expenses is primarily due to the increased production during 2008.

Capital expenditures paid by the Working Interest Owners decreased 87% from $1,716,676 in 2007 to $228,959 in 2008. The higher amount of capital expenditures during 2007 related primarily to damages caused by Hurricanes Rita and Katrina.

Special Cost Escrow Account

The special cost escrow account is an account of the Working Interest Owners, and it is described herein for information purposes only. The Conveyance provides for the reserve of funds for estimated future "Special Costs" of plugging and abandoning wells, dismantling platforms and other costs of abandoning the Royalty Properties, as well as for the estimated amount of future drilling projects and other capital expenditures on the Royalty Properties. As provided in the Conveyance, the amount of funds to be reserved is determined based on factors, including estimates of aggregate future production costs, aggregate future Special Costs, aggregate future net revenues and actual current net proceeds. Deposits into this account reduce current distributions and are placed in an escrow account and invested in short-term certificates of deposit. Such account is herein referred to as the "Special Cost Escrow" account. The Trust's share of interest generated from the Special Cost Escrow Account, $155,152 and $255,443 in 2008 and 2007, respectively, serves to reduce the Trust's share of allocated production costs. Special Cost Escrow funds will generally be utilized to pay Special Costs to the extent there are not adequate current net proceeds to pay such costs. Special Costs that have been paid are no longer included in the Special Cost Escrow calculation. Deposits to the Special Cost Escrow Account will generally be made when the balance in the Special Cost Escrow Account is less than 125% of future Special Costs and there is a Net Revenues Shortfall (a calculation of the excess of estimated future costs over estimated future net revenues pursuant to a formula contained in the Conveyance). When there is not a Net Revenues Shortfall, amounts in the Special Cost Escrow account will generally be released, to the extent that Special Costs have been incurred. Amounts in the Special Cost Escrow account will also be released when the balance in such account exceeds 125% of estimated future Special Costs. The discussion of the terms of the Conveyance and Special Cost Escrow account contained herein is qualified in its entirety by reference to the Conveyance itself, which is an exhibit to this Form 10-K and is available upon request from the Corporate Trustee.

Chevron, in its capacity as Managing General Partner of the Partnership, has advised the Trust that additional deposits to the Special Cost Escrow account may be required in future periods in connection with other production costs, other abandonment costs, other capital expenditures and changes on the estimates and factors described above. Such deposits could result in a significant reduction on Royalty income on the periods in which such deposits are made, including the possibility that no Royalty income would be received in such periods.

In 2008, the Working Interest Owners refunded a net amount to the Trust of $2,388,061 from the Special Cost Escrow Account. As of December 31, 2008, approximately $4,325,503 remained in the Special Cost Escrow Account. In 2007, the Working Interest Owners refunded a net amount to the Trust of $125,391 from the Special Cost Escrow Account. As of December 31, 2007, approximately $6,713,564 remained in the Special Cost Escrow Account. The net refund for 2008 compared to the net

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refund for 2007 was primarily due to a revision to the Special Cost Escrow Account related to the outside audit commenced by the Trust as discussed above. See"-Operations".

Summary By Property

Listed below is a summary of 2008 operations as compared to 2007 of the five principal Royalty Properties based on gross revenues generated during these periods combined.

Eugene Island 339

Eugene Island 339 crude oil revenues increased $1,519,790, from $18,179,707 in 2007 to $19,699,497 in 2008, primarily due to an increase in average price of crude oil received. The average price of crude oil increased from $63.22 per barrel in 2007 to $104.60 per barrel in 2008. This increase was partially offset by a decrease in crude oil production from 287,539 barrels in 2007 to 188,337 barrels in 2008. Gas revenues increased $2,960,096, from $1,222,807 in 2007 to $4,182,903 in 2008, primarily due to an increase in gas production from 194,633 Mcf in 2007 to 435,583 Mcf in 2008 as a result of completion in July 2007 of the pipeline connection to the sales point on the Eugene Island 361 platform. The average price received for natural gas increased from $6.28 per Mcf in 2007 to $9.60 per Mcf in 2008. Capital expenditures increased from $190,093 in 2007 to $518,385 in 2008 due to the conversion to a water injector. Operating expenses increased from $2,214,130 in 2007 to $2,868,686 in 2008 primarily due to increased production.

Production from Eugene Island 339 ceased following damage inflicted by Hurricane Ike in September 2008, as the platforms and wells on Eugene Island 339 were completely destroyed. At this point in time, there can be no assurance that production will restored at Eugene Island 339. See "-Operations."

Ship Shoal 182/183

Ship Shoal 182/183 crude oil revenues increased from $18,924,236 in 2007 to $21,775,671 in 2008, due to an increase in crude oil prices from $67.35 per barrel in 2007 to $107.70 per barrel in 2008. This increase was partially offset by a decrease in crude oil production from 280,996 barrels in 2007 to 202,185 barrels in 2008. This production decline is related in part to a three day field shut-in for repairs at Ship Shoal 182/183. Gas revenues decreased from $8,013,970 in 2007 to $4,726,292 in 2008 due to a decrease in gas volumes from 1,089,709 Mcf in 2007 to 508,781 Mcf in 2008. The decrease in gas volumes was due to a shut-in as a result of an obstructed pipeline and the natural decline of production. The average natural gas sales price increased from $7.35 per Mcf in 2007 to $9.29 per Mcf in 2008. Capital expenditures decreased from $701,753 in 2007 to ($419,971) in 2008 primarily due to an audit credit adjustment for prior periods. Operating expenses decreased from $3,204,308 in 2007 to $2,471,185 in 2008 due to decreased production during 2008.

Production from Ship Shoal 182 and 183 ceased following damage inflicted by Hurricane Ike in September 2008. While Hurricane Ike caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. A limited volume of oil production was restored in November 2008, with an average rate of daily oil production from November 20, 2008 through January 31, 2009 of approximately 831 barrels per day. The volume of oil production that can be produced is limited by the amount of gas that is also produced by the oil wells. Production is expected to remain limited until the natural gas pipeline is fully repaired and tested, which is anticipated to occur in the second quarter of 2009, but which is also in the control of the pipeline owner. At this point in time, there can be no assurance as to when, or if at all, production may be restored at Ship Shoal 182/183. See "-Operations."

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West Cameron 643

West Cameron 643 gas revenues increased from $802,575 in 2007 to $2,024,841 in 2008 due primarily to an increase in gas volumes from 126,971 Mcf in 2007 to 214,130 Mcf in 2008. The increase in gas volumes resulted from increased production for the last three quarters of 2008, compared to the last three quarters of 2007. The average natural gas sales price increased from $6.32 per Mcf in 2007 to $9.46 per Mcf in 2008. Operating expenses decreased from $942,457 in 2007 to $1,233,887 in 2008. Capital expenditures increased from $0 in 2007 to $27,953 in 2008.

Production from West Cameron 643 ceased following damage inflicted by Hurricane Ike in September 2008 to a third-party transporter's pipeline. The Managing General Partner of the Partnership understands that the pipeline is in the process of being restored; however, the pipeline is not expected to be able to take production until at least the end of 2009. At this point in time, there can be no assurance as to when, or if at all, production may be restored at West Cameron 643.

East Cameron 371

East Cameron 371 gas revenues increased from $150,500 in 2007 to $252,992 in 2008. Oil revenues increased from $30,164 in 2007 to $47,962 in 2008. Capital . . .