Liquidity and Capital Resources

The Trust makes monthly distributions to the holders of Units of the excess of the preceding month's revenues received over expenses incurred. Upon receipt, royalty income is invested in short-term investments until its subsequent distribution. In accordance with the Trust Agreement, the Trust's only long-term assets consist of royalty interests in producing and proved undeveloped oil and gas properties. Although the Trust is permitted to borrow funds if necessary to continue its operations, borrowings are not anticipated in the foreseeable future.

Results of Operations

Distributable income consists of royalty income plus interest income plus any decrease in cash reserves established by the Trustee less general and administrative expenses of the Trust less any increase in cash reserves established by the Trustee. Distributable income for the three months ended September 30, 2009 was $9,784,447, or $0.67 per unit. Royalty income for the three months ended September 30, 2009 amounted to $10,239,252 while interest income was $650. General and administrative expenses totaled $455,455 for the three months ended September 30, 2009.
Distributions during the period were $.29014, $.19117, and $.23673 per Unit payable to Unit holders of record on July 15, August 17, and September 15, 2009, respectively.

Royalty income for the quarter ended September 30, 2009 decreased approximately $18,182,000 or 64% compared with the third quarter of 2008. This decrease was caused by decreases in the production of both oil and natural gas as well as decreases in the price of both oil and natural gas. Compared to the preceding quarter ended June 30, 2009, royalty income decreased approximately $399,000, or 4%, due to a decrease in the production of both oil and natural gas along with a decrease in the pricing of natural gas, offset somewhat by an increase in the price of oil. Royalty income for the nine months ended September 30, 2009 decreased approximately $38,578,000, or 55%, due mainly to decreases in the prices of both oil and natural gas as well as decreases in the production of both oil and natural gas.

The following tables illustrate average prices received for the periods discussed above and the related oil and gas production volumes:

                                               Quarter Ended
                       September 30,         September 30,             June 30,
                            2009                 2008                    2009
      Production
      Oil (Bbls)             103,963                 108,580                118,258
      Gas (Mcfs)           1,350,137               1,577,361              1,385,889

      Average Price
      Oil (per Bbl)    $       59.30       $          119.57      $           41.36
      Gas (per Mcf)    $        3.45       $           10.78      $            3.87

                                                      Nine-Months Ended
                                          September 30, 2009      September 30, 2008
      Production
      Oil (Bbls)                                     326,392                341,812
      Gas (Mcfs)                                   4,308,391              4,758,778

      Average Price
      Oil (per Bbl)                        $           46.36      $          101.07
      Gas (per Mcf)                        $            4.15      $            8.52

Gas revenues received for the three months ended September 30, 2009, related primarily to production for April 2009 through June 2009. The average price of gas as reported by the Henry Hub for the same time period was $3.44 per Mcf. The average price of gas for the Henry Hub was $3.52 per Mcf for January 2009 through September 2009. Oil revenues for the three months ended September 30, 2009 related primarily to production for May 2009 through July 2009. The average price of oil as reported by Nymex for that time period was $64.28 per barrel. The average price of oil was $57.34 per barrel for January 2009 through September 2009. As of October 16, 2009, the average price of gas for the Henry Hub was $4.03 per Mcf and the average price of oil reported by Nymex was $77.58 per barrel. It is difficult to accurately estimate future prices of oil and gas, and any assumptions concerning future prices may prove to be incorrect.
Interest income for the quarter ended September 30, 2009 decreased approximately $75,300 compared with the third quarter of 2008. Compared to the preceding quarter ended June 30, 2009, interest income decreased approximately $800. Interest income for the nine months ended September 30, 2009 decreased approximately $203,300 compared to the same time period in 2008. Changes in interest income are the result of changes in interest rates and funds available for investment.
General and administrative expenses for the quarter ended September 30, 2009 decreased by approximately $16,200 compared to the same quarter of 2008 primarily due to decreases in escrow agent/trustee fees and legal fees of approximately $12,100 and $28,100, respectively. These decreases were offset somewhat by increases in transfer agent fees, professional services, electronic processing services and the timing of tax reporting services of $11,100, $4,000, $4,500 and $4,400, respectively. Compared to the previous quarter ended June 30, 2009, general and administrative expenses decreased approximately $235,200. This decrease was primarily due to the timing of annual payments in the second quarter such as the engineering reserve report and expenses related to the printing and mailing of the annual report on Form 10-K of approximately $84,100 and $46,000, respectively; along with decreases in the escrow agent/trustee fee, legal expenses, the timing of unitholder information services, and tax reporting services of $12,900, $34,100, $47,100, and $11,200, respectively.
General and administrative expenses for the nine months ended September 30, 2009 increased approximately $61,600 compared to the same time period in 2008, due mainly to increases in the transfer agent fees, professional fees, unitholder information services and electronic processing fees of $17,800, $15,000, $59,600 and $11,600, respectively. These increases were offset somewhat by a decrease in escrow agent/trustee fees and the timing of tax reporting services of approximately $34,100 and $4,500, respectively.

Critical Accounting Policies and Estimates

The Trust's financial statements reflect the selection and application of accounting policies that require the Trust to make significant estimates and assumptions. The following are some of the more critical judgement areas in the application of accounting policies that currently affect the Trust's financial condition and results of operations.

The financial statements of the Trust are prepared on the following basis and are not intended to present financial position and results of operations in conformity with accounting principles generally accepted in the United States of America:

• Royalty income, net of severance and ad valorem taxes, and interest income are recognized in the month in which amounts are received by the Trust.

• Trust expenses, consisting principally of routine general and administrative costs, include payments made during the accounting period. Expenses are accrued to the extent of amounts that become payable on the next monthly record date following the end of the accounting period. Reserves for liabilities that are contingent or uncertain in amount may also be established if considered necessary.

• Royalties that are producing properties are amortized using the unit-of-production method. This amortization is shown as a reduction of Trust corpus.

• Distributions to Unit holders are recognized when declared by the Trustee.

The financial statements of the Trust differ from financial statements prepared in conformity with accounting principles generally accepted in the United States of America because of the following:

• Royalty income is recognized in the month received rather than in the month of production.

• Expenses other than those expected to be paid on the following monthly record date are not accrued.

• Amortization of the Royalties is shown as a reduction to Trust corpus and not as a charge to operating results.

• Reserves may be established for contingencies that would not be recorded under accounting principles generally accepted in the United States of America.

This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

Revenues from royalty interests are recognized in the period in which amounts are received by the Trust. Royalty income received by the Trust in a given calendar year will generally reflect the proceeds, on an entitlements basis, from natural gas produced for the twelve-month period ended September 30th in that calendar year.

Independent petroleum engineers estimate the net proved reserves attributable to the royalty interests. In accordance with Statement of Financial Standards No. 69, "Disclosures About Oil and Gas Producing Activities," estimates of future net revenues from proved reserves have been prepared using year-end contractual gas prices and related costs. Numerous uncertainties are inherent in estimating volumes and the value of proved reserves and in projecting future production rates and the timing of development of non-producing reserves. Such reserve estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production may be substantially different from the reserve estimates. Other than those filed with the SEC, our estimated reserves have not been filed with or included in any reports to any Federal agency.

Contingencies related to the royalty properties that are unfavorably resolved would generally be reflected by the Trust as reductions to future royalty income payments to the Trust with corresponding reductions to cash distributions to Unit holders. The Trustee is not aware of any such items as of September 30, 2009.

The preparation of financial statements in conformity with the basis of accounting described above requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting periods. Actual results may differ from such estimates.

The Trustee routinely reviews the Trust's royalty interests in oil and gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust's royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows.

Pending Securities and Exchange Commission Rule In December 2008, the Securities and Exchange Commission (SEC) released Final Rule, Modernization of Oil and Gas Reporting. The new disclosure requirements include provisions that permit the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes. The new requirements also will allow companies to disclose their probable and possible reserves to investors. In addition, the new disclosure requirements require companies to: (a) report the independence and qualifications of its reserves preparer or auditor;
(b) file reports when a third party is relied upon to prepare reserves estimates or conducts a reserves audit; and (c) report oil and gas reserves using an average price based upon the prior 12-month period rather than year-end prices. The new disclosure requirements are effective for financial statements for fiscal years ending on or after December 31, 2009. The effect of adopting the SEC rule has not been determined, but it is not expected to have a significant effect on the Trust's reported financial position or distributable income.

New Accounting Standards
In May 2009, the Financial Accounting Standards Board ("FASB") issued guidance which establishes accounting and reporting standards for events that occur after the balance sheet date but before the financial statements are issued or are available to be issued and requires the disclosure of the date through which a company has evaluated subsequent events. This guidance was effective for the Trust for the period ended June 30, 2009 and the adoption did not have an impact on the Trust's financial statements. Refer to footnote 5 for required disclosures.
In June 2009, the FASB issued guidance which changes the way entities account for securitizations. The new standard is effective for the Trust on January 1, 2010 and the adoption is not expected to have a significant impact on the Trust's financial statements.
In June 2009, the FASB issued guidance which changes the way entities account for special-purpose entities. The new standard is effective for the Trust on January 1, 2010 and the adoption is not expected to have a significant impact on the Trust's financial statements.
In June 2009, the FASB issued guidance effective July 1, 2009 that requires all then-existing non-SEC accounting and reporting standards to be superseded by the FASB Accounting Standards Codification (the "Codification"), the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Previous references to then-existing non-SEC accounting and reporting standards were removed and are reflected in the Trust's footnotes herein.

Other

This Report includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor created thereby. All statements other than statements of historical fact included in this Report are forward-looking statements. Although the Trustee believes that the expectations reflected in such forward-looking statements are reasonable, such expectations are subject to numerous risks and uncertainties and the Trustee can give no assurance that they will prove correct. There are many factors, none of which is within the Trustee's control, that may cause such expectations not to be realized, including, among other things, factors identified in the Trust's most recent Annual Report on Form 10-K affecting oil and gas prices and the recoverability of reserves, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets.

The Trust has an Internet website and has made available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act at http://www.sbr-sabineroyalty.com as soon as reasonably practicable after such information is electronically filed with or furnished to the SEC.