MESA ROYALTY TRUST/TX

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which in turn will depend upon the supply and demand for oil and natural gas, prevailing economic conditions, inflation, interest rates, and financial, business and other factors, many of which are beyond the control of such operators. Any sustained decrease in demand for crude oil and natural gas in the global market or any other business downturn could have a material negative impact on the financial condition and economic performance of Working Interest Owners or other operators of the underlying properties.

In the event of the bankruptcy of any operator of the underlying properties, the Working Interest Owners in the affected properties, creditors or the debtor-in-possession may seek a new party to perform the operations of the affected wells. The creditors or debtor-in-possession may not be able to contract with a replacement operator on favorable terms or within a reasonable period of time. Any financial distress of a Working Interest Owner could adversely affect operations of the underlying properties and could reduce Net Proceeds available to the Trust.

Financial information of the Trust is not prepared in accordance with U.S. GAAP.

The financial statements of the Trust are prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than U.S. generally accepted accounting principles (“U.S. GAAP”). Although this basis of accounting is permitted for royalty trusts by the SEC, the financial statements of the Trust differ from U.S. GAAP financial statements, because net profits income is not accrued in the month of production, expenses are not recognized when incurred, and cash reserves may be established for certain contingencies that would not be recorded in U.S. GAAP financial statements.

Working Interest Owners may estimate the revenue or expense components of Net Proceeds, which may result in future adjustments and may adversely affect future distributions to unitholders.

Each Working Interest Owner has its own system of tracking revenues and expenses related to production from its respective Royalty Properties. From time to time, the Working Interest Owners may not be in a position to ascertain actual revenue or expense amounts for a given period due to technological factors or because of a transition period in which a new Working Interest Owner begins operating a Royalty Property. During periods in which actual revenue or expense amounts cannot be ascertained, the Working Interest Owners may instead calculate amounts due to the Trust based on estimated revenue or expense amounts using historical data. Such estimates may be materially inaccurate and result in overpayments or underpayments to the Trust during a given period. The amounts of Net Proceeds reported by a Working Interest Owner for any period may not be representative of Net Proceeds that will be received by the Trust in future periods. Net Proceeds received by the Trust are subject to significant variability from period to period.

For example, following Hilcorp’s acquisition of ConocoPhillips’ and XTO’s interests in the San Juan Basin — New Mexico Properties, there was a transition period to transfer historical information, knowledge and processes from one Working Interest Owner to another. During this transition period, Hilcorp recorded estimates of revenues and expenses and made payments to the Trust based on historical amounts previously paid by ConocoPhillips, and Hilcorp made estimated monthly payments to the Trust for approximately two years. Payments received by the Trust were then adjusted as actual amounts of production and costs were determined by Hilcorp, and in some periods these adjustments resulted in a decrease in Net Proceeds.

Pursuant to the Trust Indenture, the Trust is not required to pay to Working Interest Owners any amounts that could be owed if estimated revenues exceed actual revenue amounts or estimated expenses were less than actual expense amounts in past periods. However, a Working Interest Owner may recover such amounts by withholding a portion or all of the Net Proceeds that would otherwise be payable to the Trust in subsequent periods. This could result in a decrease in Net Proceeds paid to the Trust and could result in future material reductions in distributions to the Trust’s unitholders.

With the assistance of a third party consultant, the Trust may periodically review reconciliation calculations by Working Interest Owners and any amounts of Net Proceeds calculated and paid based upon estimated revenue or expenses.

Item 1B.

Unresolved Staff Comments.

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None.