The following review of the Trust's financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. The discussion of net production attributable to the Hugoton and San Juan properties represents production volumes that are to a large extent hypothetical as the Trust does not own and is not entitled to any specific production volumes.

Critical Accounting Policies

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

(a) Royalty income recorded for a month is the amount computed and paid by the working interest owners to the Trustee for such month rather than either the value of a portion of the oil and gas produced by the working interest owners for such month or the amount subsequently determined to be the Trust's proportionate share of the net proceeds for such month;

(b) Interest income, interest receivable and distributions payable to unitholders include interest to be earned on short-term investments from the financial statement date through the next date of distribution; and

(c) Trust general and administrative expenses, net of reimbursements, are recorded in the month they accrue.

This basis for reporting distributable income is considered to be the most meaningful because distributions to the unitholders for a month are based on net cash receipts for such month. However, these statements differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America because, under such principles, royalty income for a month would be based on net proceeds from production for such month without regard to when

calculated or received and interest income for a month would be calculated only through the end of such month.

Liquidity and Capital Resources

As discussed under "Business-Description of the Trust" in Item 1 of this Form 10-K, the Trust's source of cash is the Royalty income received from its share of the net proceeds from the Royalty Properties. Reference is made to the Notes to Financial Statements under Item 8 of this Form 10-K for estimates of future Royalty income attributable to the Royalty.

In accordance with the provisions of the Conveyance, generally all revenues received by the Trust, net of Trust administrative expenses and the amount of established reserves, are distributed currently to the unitholders.

During 2008, the Trustee engaged an independent consulting firm to audit revenues, expenses and established reserves of certain working interest owners. This review and audit remains ongoing. While this audit has highlighted issues that remain open, the Trustee has not determined at this time whether any audit exceptions will result in any material gains or expenses net to the Trust.

Financial Review

     Years 2007 and 2006

                                                 Years Ended December 31,
                                                    2007           2006
         Royalty income                        $   12,216,271   $ 9,809,030
         Interest income                               97,278        30,275
         General and administrative expenses          (91,504 )     (68,271 )

         Distributable income                  $   12,222,045   $ 9,771,034

         Distributable income per unit         $       6.5583   $    5.2431

The Trust's Royalty income was $12,216,271 in 2007, an increase of approximately 25% as compared to $9,809,030 in 2006, primarily as a result of decreased capital spending in 2007.

Hugoton Field

Royalty income attributable to the Hugoton Royalty Properties was $5,705,773 in 2007, an increase of approximately 19%, as compared to $4,810,684 million in 2006, primarily as a result of payments and interest recieved during 2007 of approximately $1,100,000 to partially settle claims made in the John Steven Alford and Robert Larrabee v. Pioneer lawsuit discussed in Item 3. "Legal Proceedings" of this Form 10-K.

The average price received for natural gas and natural gas liquids from the Hugoton Royalty Properties was $6.07 per Mcf and $42.85 per barrel, respectively, in 2007 as compared to $7.48 per Mcf and $42.83 per barrel, respectively, in 2006. Net production attributable to the Hugoton Royalty was 543,241 Mcf of natural gas and 30,625 barrels of natural gas liquids in 2007 as compared with 406,409 Mcf of natural gas and 41,344 barrels of natural gas liquids in 2006. Actual production volumes attributable to the Hugoton properties were 759,786 Mcf of natural gas and 36,660 barrels of natural gas liquids in 2007 as compared with 739,168 Mcf of natural gas and 41,363 barrels of natural gas liquids in 2006. The increase in gas production and the decrease in the natural gas liquids production for the year ended December 31, 2007 compared to the same period in 2006 was primarily due to the nitrogen injection unit being shut-down for a portion of January and February in 2007. The shut-down

of the nitrogen injection unit increased gas production while it decreased natural gas liquids production.

The Hugoton capital expenditures were $144,559 for 2007, a decrease of approximately 33% as compared to $217,304 for 2006. The decrease in the capital expenditures was primarily due to less wells drilled in 2007 as compared to 2006. Operating costs were $1,422,455 during 2007, an increase of approximately 11% as compared to $1,285,962 during 2006 due to increases in production taxes, well workers, and higher rates charged by service providers.

San Juan Basin

Royalty income from the San Juan Basin Royalty properties is calculated and paid to the Trust on a state-by-state basis. Royalty income from the San Juan Basin Royalty Properties located in the state of New Mexico was $5,316,376 in 2007 as compared to $4,019,997 in 2006, an increase of 33%. The increase in Royalty income was due primarily to increased natural gas liquid production and decreased operating expenditures in the first nine months of 2006 from the San Juan Basin-New Mexico properties. Net production attributable to the San Juan Basin Royalty located in the state of New Mexico was 578,316 Mcf of natural gas and 56,188 barrels of natural gas liquids, oil and condensate in 2007 as compared to 374,180 Mcf of natural gas and 40,567 barrels of natural gas liquids, oil and condensate in 2006. Actual production volumes attributable to the San Juan Basin properties located in the state of New Mexico was 941,366 Mcf of natural gas and 73,888 barrels of natural gas liquids, oil and condensate in 2007 as compared with 928,364 Mcf of natural gas and 48,046 barrels of natural gas liquids, oil and condensate in 2006. The increase in production volume for the year ended December 31, 2007 compared to the same period 2006 was due to the better run times on conventional gathering. The average price received for natural gas and natural gas liquids, oil and condensate from the San Juan Basin Royalty properties located in the state of New Mexico was $5.36 per Mcf and $39.45 per barrel, respectively, in 2007 compared with $6.37 per Mcf and $40.34 per barrel, respectively, in 2006.

San Juan-New Mexico capital expenditures were $1,007,366 during 2007, an increase of approximately 49% as compared to $678,351 during 2006. Operating costs were $1,638,835 during 2007, a decrease of approximately 17% as compared to $1,966,468 during 2006. The decrease in operating costs during 2007 compared to 2006 was due to inclement weather that impacted the operations coupled with a reduction in lease inspections, facilities expenses and well workover expenses.

The costs related to the San Juan Basin, Colorado portion were recovered in December 2004. However, subsequent earnings were not remitted to the Trust until December 2006 and July 2007. The cumulative earnings, including interest on undistributed earnings, reported to the Trust by the working interest owner through November 2006, totaled $1,280,412. In December 2006, BP remitted $978,349 for payment of undistributed earnings from January 2005 through October 2006 and November 2006 earnings related to the properties it operates. In July 2007, Red Willow remitted $159,497 for payment of undistributed earnings from January 2005 through December 2006 for the San Juan Basin-Colorado Royalty properties it operates. BP communicated to the Trust these distributions represent all of the previously unpaid revenues. The Trustee is currently investigating the $142,566 difference in the original estimate of unpaid proceeds of $1,280,412 and the payment of $1,137,846. Since Royalty income for the Trust is recorded on a cash basis, the earnings for the year ended December 31, 2006 were not recognized as income until the quarter ended December 31, 2006 and September 30, 2007.

Royalty income from the San Juan Basin-Colorado Royalty Properties was $1,194,122 in 2007 as compared to $978,349 in 2006. Net production attributable to the San Juan Basin Royalty properties primarily located in Colorado were 194,775 Mcf of natural gas in 2007 as compared to 223,367 Mcf of natural gas in 2006. The average price received for natural gas from these San Juan Basin properties was $5.99 per Mcf in 2007 as compared with $4.38 per Mcf in 2006. Actual natural gas production

volumes attributable to the San Juan Basin Colorado Properties were 177,619 Mcf in 2007. Net production of natural gas liquids, oil and condensate from the San Juan Basin-Colorado Properties in 2007 was 734 barrels and actual production was 1,348 barrel in 2007. The average price received for natural gas liquids, oil and condensate from the San Juan Basin-Colorado properties was $37.34 per barrel in 2007. Operating costs for the San Juan Basin properties was $136,772 in 2007 as compared to $270,017 in 2006.

     Years 2006 and 2005

                                                 Years Ended December 31,
                                                   2006            2005
         Royalty income                         $  9,809,030   $ 10,568,610
         Interest income                              30,275         17,780
         General and administrative expenses         (68,271 )      (63,613 )

         Distributable income                   $  9,771,034   $ 10,522,777

         Distributable income per unit          $     5.2431   $     5.6465

The Trust's Royalty income was $9,809,030 in 2006, a decrease of approximately 7% as compared to $10,568,610 in 2005, primarily as a result of increased capital spending in 2006.

Royalty income from the Hugoton Royalty Properties was $4,810,684 in 2006, a decrease of approximately 12%, as compared to $5,441,802 million in 2005, primarily as a result of payments made of approximately $1,000,000 to partially settle claims made in the John Steven Alford and Robert Larrabee v. Pioneer lawsuit discussed in Item 3. "Legal Proceedings" of this Form 10-K.

The average price received for natural gas and natural gas liquids from the Hugoton Royalty Properties was $7.48 per Mcf and $42.83 per barrel, respectively, in 2006 as compared to $6.62 per Mcf and $34.44 per barrel, respectively, in 2005. Net production attributable to the Hugoton Royalty was 406,409 Mcf of natural gas and 41,344 barrels of natural gas liquids in 2006 as compared with 591,015 Mcf of natural gas and 44,404 barrels of natural gas liquids in 2005. Actual production volumes attributable to the Hugoton properties were 739,168 Mcf of natural gas and 41,363 barrels of natural gas liquids in 2006 as compared with 786,935 Mcf of natural gas and 44,425 barrels of natural gas liquids in 2005.

Royalty income from the San Juan Basin Royalty properties is calculated and paid to the Trust on a state-by-state basis. Royalty income from the San Juan Basin Royalty Properties located in the state of New Mexico was $4,019,997 in 2006 as compared to $5,126,808 in 2005, a decrease of 22%. The decrease in Royalty income was due to decreased natural gas and natural gas liquids volumes in 2006 as well as, increased capital expenditures. Royalty income from the San Juan Basin Properties located in the state of Colorado was $978,349 in 2006 as compared to $0 in 2005. The San Juan Basin Royalty Properties located in the state of Colorado recouped all costs related to the Fruitland Coal drilling program as of December 2004. However, subsequent earnings were not remitted to the Trust until December 2006. The cumulative earnings, including interest on undistributed earnings, reported to the Trust by BP through November 2006, totaled approximately $1,280,000. In December, BP remitted approximately $978,000 for payment of undistributed earnings from January 2005 through October 2006 and November 2006 earnings. The working interest owner communicated to the Trust this distribution represents all of the previously unpaid revenues. The Trustee is currently investigating the $251,000 difference in the original estimate of unpaid proceeds of approximately $1,229,000 and the payment of approximately $978,000.

The average price received for natural gas and natural gas liquids, oil and condensate from the San Juan Basin Royalty properties located in the state of New Mexico was $6.37 per Mcf and

$40.34 per barrel, respectively, in 2006 compared with $6.24 per Mcf and $34.37 per barrel, respectively, in 2005. Net production attributable to the San Juan Basin Royalty located in the state of New Mexico was 374,180 Mcf of natural gas and 40,567 barrels of natural gas liquids, oil and condensate in 2006 as compared to 589,652 Mcf of natural gas and 42,112 barrels of natural gas liquids, oil and condensate in 2005. Actual production volumes attributable to the San Juan Basin properties located in the state of New Mexico was 928,364 Mcf of natural gas and 48,046 barrels of natural gas liquids, oil and condensate in 2006 as compared with 1,038,065 Mcf of natural gas and 51,331 barrels of natural gas liquids, oil and condensate in 2005.

The average price received for natural gas and natural gas liquids, oil and condensate from the San Juan Basin Royalty properties located in the state of Colorado was $4.38 per Mcf in 2006. Net production attributable to the San Juan Basin Royalty properties located in the state of Colorado was 223,367 Mcf of natural gas in 2006. As described above, there were no earnings remitted to the Trust in 2005 related to the San Juan Royalty properties located in the State of Colorado.

      SUMMARY OF ROYALTY INCOME, PRODUCTION AND AVERAGE PRICES (Unaudited)

                                                                         San Juan
                              Hugoton                     New Mexico                    Colorado                      Total
                                                                    Oil,                         Oil,                         Oil,
                                                                 Condensate                   Condensate                   Condensate
                                                                     and                         and                           and
                                      Natural                      Natural                     Natural                       Natural
                       Natural          Gas         Natural          Gas         Natural         Gas          Natural          Gas
                         Gas          Liquids         Gas          Liquids         Gas         Liquids          Gas          Liquids
Year ended
December 31, 2007:
The Trust's
proportionate
share of-
Gross Proceeds(1)    $  5,702,879   $ 1,569,899   $  5,047,932   $ 2,914,645   $ 1,309,166   $     28,771   $ 12,059,977   $ 4,513,315
Less the Trust's
proportionate
share of-
Capital costs            (107,490 )     (37,065 )     (714,876 )    (292,490 )      (6,939 )         (104 )     (829,305 )    (329,659 )
Operating costs        (1,201,906 )    (220,544 )   (1,233,284 )    (405,551 )    (135,524 )       (1,248 )   (2,570,714 )    (627,343 )

Royalty Income       $  4,393,483   $ 1,312,290   $  3,099,772   $ 2,216,604   $ 1,166,703   $     27,419   $  8,659,958   $ 3,556,313

Average Sales        $       6.07   $     42.85   $       5.36   $     39.45   $      5.99   $      37.36   $       6.62   $     40.62
Price

Net production
volumes
attributable to
the Royalty                  (Mcf         (Bbls           (Mcf         (Bbls          (Mcf          (Bbls           (Mcf         (Bbls
paid(3)                   543,241 )      30,625 )      578,316 )      56,188 )     194,775 )          734 )    1,316,332 )      87,547 )

Year ended
December 31, 2006:
The Trust's
proportionate
share of-
Gross Proceeds(1)    $  5,527,968   $ 1,770,745   $  5,915,794   $ 1,937,941   $ 1,550,429   $          -   $ 12,994,191   $ 3,708,686
Less the Trust's
proportionate
share of-
Capital costs            (217,180 )           -     (1,205,870 )                         -              -     (1,423,050 )           -
Operating costs        (2,270,849 )           -     (2,326,396 )    (301,472 )    (270,017 )            -     (4,867,262 )    (301,472 )
Withheld                        -             -              -             -      (302,063 )            -       (302,063 )           -
revenues(2)

Royalty Income       $  3,039,939   $ 1,770,745   $  2,383,528   $ 1,636,469   $   978,349   $          -   $  6,401,816   $ 3,407,214

Average Sales        $       7.48   $     42.83   $       6.37   $     40.34   $      4.38   $          -   $       6.38   $     41.58
Price

Net production
volumes
attributable to
the Royalty                  (Mcf         (Bbls           (Mcf         (Bbls          (Mcf          (Bbls           (Mcf         (Bbls
paid(3)                   406,409 )      41,344 )      374,180 )      40,567 )     223,367 )            - )    1,003,956 )      81,911 )

Year ended
December 31, 2005:
The Trust's
proportionate
share of-
Gross Proceeds(1)    $  5,203,899   $ 1,529,284   $  7,388,469   $ 1,764,397   $         -   $          -   $ 12,592,368   $ 3,293,681
Less the Trust's
proportionate
share of-
Capital costs            (160,042 )           -       (693,556 )           -             -              -       (853,598 )           -
Operating costs        (1,131,339 )           -     (2,471,497 )    (317,016 )           -              -     (3,602,836 )    (317,016 )
Withheld                        -             -       (543,989 )           -             -              -       (543,989 )           -
revenues(2)

Royalty Income       $  3,912,518   $ 1,529,284   $  3,679,427   $ 1,447,381   $         -   $          -   $  7,591,945   $ 2,976,665

Average Sales        $       6.62   $     34.44   $       6.24   $     34.37   $         -   $          -   $       6.43   $     34.41
Price

Net production
volumes
attributable to
the Royalty                  (Mcf         (Bbls           (Mcf         (Bbls          (Mcf          (Bbls           (Mcf         (Bbls
paid(3)                   591,015 )      44,404 )      589,652 )      42,112 )           - )            - )    1,180,707 )      86,506 )

º (2)
º The Colorado portion of the San Juan Basin Royalty properties recouped all costs related to the Fruitland Coal drilling program as of December 2004. However, subsequent cumulative earnings were not remitted to the Trust until December 2006 and July 2007. The cumulative earnings reported to the Trust by the Working Interest Owner from January 2005 through October 2006 totaled approximately $1,280,000. In December 2006, BP as operator of a portion of the San Juan Basin-Colorado Royalty properties remitted approximately $978,000 for payment of undistributed earnings from January 2005 through October 2006 and November 2006 earnings. In the quarter ended September 30, 2007, Red Willow remitted $226,000 to the Trust relating to San Juan Basin-Colorado Royalty properties that it operates. Of the $226,000 remitted by Red Willow, $66,000 relates to production during the three and nine months ended September 30, 2007. The remaining $159,000 relate to undistributed earnings from January 2005 through December 2006. Since Royalty income for the Trust is recorded on a cash basis, Royalty income for year ended December 31, 2005 and 2004 of $543,989 and $38,860, respectively, was not recognized until the year ended December 31, 2006.

Royalty income reported from BP is net of pre-main line production costs. These costs were charged to the Trust in error and as a result royalty income for previous periods were reduced. Because royalty income recorded for a month is the amount computed and paid by BP, the additional royalties, if any, will not be recorded until received.

º (3)
º Net production volumes attributable to the Royalty are determined by dividing Royalty income by the average sales price received. Net production volumes attributable for Hugoton Royalty for 2007 were not calculated for the 2007 reimbursement from PNR related to the Alford settlement.

Off-Balance Sheet Arrangements

None.

Contractual Obilgations

None.