<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2000

Commission File Number: 0-9116

                            PANHANDLE ROYALTY COMPANY
            (Exact name of small business registrant in its charter)

           OKLAHOMA                                        73-1055775
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization )                         Identification No.)

Grand Centre Suite 210, 5400 N. Grand Blvd., Okla. City, OK      73112
(Address of principal executive offices)                       (Zip code)

Registrant's telephone number   (405) 948-1560

Securities registered under Section 12(b) of the Exchange Act:  NONE

Securities registered under Section 12(g) of the Exchange Act:

              (Title of Class)
     CLASS A COMMON STOCK (VOTING)                .0333 par value
              (Title of Class)
     CLASS B COMMON STOCK (NON-VOTING)            $1.00 par value

Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes  [ ] No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

Registrant's revenues for fiscal year-end September 30, 2000, were $9,277,974.

The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by using the closing price of registrant's common stock, at
November 30,2000, was $24,786,102. As of November 30, 2000, 2,060,202 class A
common shares were outstanding.

Documents Incorporated By Reference ..... NONE



<PAGE>   2



                                TABLE OF CONTENTS
                                -----------------

<TABLE>
<CAPTION>
PART I                                                                 PAGE
------                                                                 ----
<S>   <C>                                                             <C>
Item  1. Description of Business ...........................            1-4

Item  2. Description of Properties .........................           4-10

Item  3. Legal Proceedings .................................             10

Item  4. Submission of Matters to a Vote of
           Security Holders ................................             10

PART II
-------

Item  5. Market for Common Equity and
           Related Stockholder Matters .....................          10-11

Item  6. Management's Discussion and Analysis
           or Plan of Operations ...........................          11-13

Item  7. Financial Statements ..............................          14-33

Item  8. Changes in and Disagreements with
           Accountants on Accounting and
           Financial Disclosure ............................             34

PART III
--------

Item  9. Directors, Executive Officers, Promoters
           and Control Persons; Compliance with
           Section 16(a) of the Exchange Act ...............          34-36

Item 10. Executive Compensation ............................          36-37

Item 11. Security Ownership of Certain Beneficial
           Owners and Management ...........................          37-38

Item 12. Certain Relationships and Related
           Transactions ....................................             38

Item 13. Exhibits and Reports on Form 8-K ..................             39

Exhibit 21 .................................................             39

Signature Page .............................................             40
</TABLE>



                                       (I)


<PAGE>   3





                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

         FORWARD-LOOKING STATEMENTS

         Forward-looking statements for 2001 and later periods are made
throughout this document. Such statements represent estimates of management
based on the Company's historical operating trends, its proved oil and gas
reserves and other information currently available to management. The Company
cautions that the forward-looking statements provided herein are subject to all
the risks and uncertainties incident to the acquisition, development and
marketing of, and exploration for oil and gas reserves. These risks include, but
are not limited to oil and natural gas price risk, environmental risk, drilling
risk, reserve quantity risk and operations and production risks. For all the
above reasons, actual results may vary materially from the forward-looking
statements and there is no assurance that the assumptions used are necessarily
the most likely to occur.

         BUSINESS DEVELOPMENT

         Panhandle Royalty Company ("Panhandle" or the "Company") is an Oklahoma
Corporation, organized in 1926 as Panhandle Cooperative Royalty Company. In
1979, Panhandle Cooperative Royalty Company was merged into Panhandle Royalty
Company. Panhandle's authorized and registered stock consisted of 100,000 shares
of $1.00 par value class A common stock. In 1982, the Company split the stock on
a 10-for-1 basis and reduced the par value to $.10, resulting in 1,000,000
shares of authorized class A common stock. In May 1999, the Company's
shareholders voted to increase the authorized Class A Common shares of the
Company to 6,000,000 and to split the shares on a three-for-one basis. In
addition, voting rights for the shares were changed from one vote per
shareholder to one vote per share. Since its formation, the Company has been
involved in the acquisition and management of mineral interests and the
exploration for, and development of, oil and gas properties, principally
involving wells located on the Company's mineral interests. Panhandle's mineral
properties and other oil and gas interests are located primarily in Oklahoma,
New Mexico and Texas. Properties are also located in twelve other states. The
majority of the Company's oil and gas production is from wells located in
Oklahoma and the Dagger Draw Field in Eddy County, New Mexico. In 1988, the
Company merged with New Mexico Osage Royalty Company, thus acquiring most of its
New Mexico mineral interests. The Company's offices are located at Grand Centre
Suite 210, 5400 N. Grand Blvd., Oklahoma City, OK 73112 (405)948-1560, FAX
(405)948-2038.

         BUSINESS OF ISSUER

         The majority of Panhandle's revenues are derived from the production
and sale of oil and natural gas. See "Item 7 - Financial Statements". The
Company's oil and gas holdings, including its mineral interests and its
interests in producing wells, both working interests and royalty interests, are
centered in Oklahoma with activity, in recent years, in New Mexico and Texas.
See "Item 2 - Description of Properties". Exploration and development of the
Company's oil and gas properties is conducted in association with operating oil
and gas companies, including major and independent companies. The


                                      (1)


<PAGE>   4

Company does not operate any of its oil and gas properties. The Company has been
an active participant for several years in wells drilled on the Company's
mineral properties and in third party drilling prospects. A large percentage of
the Company's recent drilling participations have been on properties in which
the Company has mineral interests and in many cases already owns an interest in
a producing well in the unit. This "increased density" drilling has accounted
for a majority of the successful oil and gas wells completed during these years
and has added significant reserves for the Company. The Company continues to
acquire additional mineral interest properties, both producing and
non-producing. Several of the mineral properties purchased have been in areas
where the Company had no mineral holdings, thus expanding the Company's area of
interest.

         PRINCIPAL PRODUCTS AND MARKETS

         The Company's principal products are crude oil and natural gas. These
products are sold to various purchasers, including pipeline companies, which are
generally located in and service the areas where the Company's producing wells
are located. The Company does not act as operator for any of the properties in
which it owns an interest, thus it relies on the operating expertise of numerous
companies that operate in the area where the Company owns mineral interests.
This expertise includes drilling operations and completions, producing well
operations and, in some cases, the marketing or purchasing of the well's
production. Natural gas sales are principally handled by the well operator and
are normally contracted on a monthly basis with third party gas marketers and
pipeline companies. Payment for gas sold is received either from the contracted
purchasers or the well operator. Crude oil sales are generally handled by the
well operator and payment for oil sold is received from the well operator or
from the crude oil purchaser.


         COMPETITIVE BUSINESS CONDITIONS

         The oil and gas industry is highly competitive, particularly in the
search for new oil and gas reserves. There are many factors affecting
Panhandle's competitive position and the market for its products which are
beyond its control. Some of these factors are quantity and price of foreign oil
imports, changes in prices received for its oil and gas production, business and
consumer demand for refined oil products and natural gas, and the effects of
federal and state regulation of the exploration, production and sales of oil and
natural gas. Changes in existing economic conditions, weather patterns and
actions taken by OPEC and other oil-producing countries have dramatic influence
on the price Panhandle receives for its oil and gas production. The Company
relies heavily on companies with greater resources, staff, equipment, research,
and experience for operation of wells and the development and drilling of
subsurface prospects. The Company uses its strong financial base and its mineral
property ownership, coupled with it's own geologic and economic evaluaton to
participate in drilling operations with these larger companies. This method
allows the Company to effectively compete in drilling operations it could not
undertake on its own due to financial and personnel limits and allows it to
maintain low overhead costs.



                                      (2)


<PAGE>   5



         SOURCES AND AVAILABILITY OF RAW MATERIALS

         The existence of commercial oil and gas reserves is essential to the
ultimate realization of value from the Company's mineral properties and these
mineral properties may be considered a raw material to its business. The
production and sale of oil and natural gas from the Company's oil and gas
properties is essential to provide the cash flow necessary to sustain the
ongoing viability of the Company. The Company continues to reinvest a portion of
its cash flow in the purchase of additional mineral properties to assure the
continued availability of acreage with which to participate in exploration,
drilling, and development operations and subsequently the production and sale of
oil and gas. This participation in exploration and production and the purchasing
of additional mineral interests will continue to supply the Company with the raw
materials with which to generate additional cash flow. Mineral purchases are
made from varied owners, and the Company does not rely on any particular
companies or individuals for these acquisitions.

         MAJOR CUSTOMERS

         The Company's oil and gas production is sold by the well operators, in
most cases, to many different purchasers on a well-by-well basis. Currently, one
purchaser, through the well operator, purchases approximately 26% of the
Company's monthly gas production. Generally, if one purchaser declines to
continue purchasing the Company's oil and/or natural gas, several other
purchasers can be located, especially in the current market environment for
natural gas. Pricing is usually reasonably consistent from purchaser to
purchaser.

         PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND ROYALTY AGREEMENTS

         The Company does not own any patents, trademarks, licenses or
franchises. Royalty agreements on producing oil and gas wells stemming from the
Company's ownership of mineral interests generate a substantial portion of the
Company's revenues. These royalties are tied to the ownership of the mineral
interests and this ownership is perpetual, unless sold by the Company. Royalties
are due and payable to the Company whenever oil and/or gas is produced from
wells located on the Company's mineral properties.

         GOVERNMENTAL REGULATION

         Oil and gas production is subject to various taxes, such as gross
production taxes and, in some cases, ad valorem taxes.

         The State of Oklahoma and other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and gas properties, the
establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. These statutes
and regulations currently limit the rate at which oil and gas can be produced
from certain of the



                                      (3)
<PAGE>   6




Company's properties. As previously discussed, the well operators are relied
upon by Panhandle to comply with governmental regulations.

         Federal tax law allows producers of "tight gas" to utilize an
approximate $.52/MMBTU tax credit for gas produced from approved wells. The
credit is a direct reduction of regular federal income tax. Panhandle began
receiving revenues from "tight gas" wells during fiscal 1992. This credit will
be available for all tight gas sold prior to January 1, 2003, and is expected to
reduce the Company's cash outlay for income taxes.


         ENVIRONMENTAL MATTERS

         As the Company is directly involved in the extraction and use of
natural resources, it is subject to various federal, state and local provisions
regarding environmental and ecological matters. Compliance with these laws may
necessitate significant capital outlays, however, to date the Company's cost of
compliance has been insignificant. The Company does not feel the existence of
these environmental laws will materially hinder or adversely affect the
Company's business operations; however, there can be no assurances of future
events. Since the Company does not operate any wells where it owns an interest,
actual compliance with environmental laws is controlled by others, with
Panhandle being responsible for its proportionate share of the costs involved.
Panhandle carries liability insurance and to the extent available at reasonable
cost, pollution control coverage. However, all risks are not insured due to
insurance availability and/or cost thereof.

         EMPLOYEES

         At September 30, 2000, Panhandle employed ten persons on a full-time
basis and has no part-time employees. Three of the employees are executive
officers and one is also a director of the Company.


ITEM 2.  DESCRIPTION OF PROPERTIES

         As of September 30, 2000, Panhandle's principal properties consisted of
perpetual ownership of 189,463 net mineral acres, held in tracts in Alabama,
Arkansas, Colorado, Idaho, Kansas, Illinois, Indiana, Montana, Nebraska, New
Mexico, North Dakota, Oklahoma, Tennessee and Texas. The Company also held
leases on 5,332 net acres of minerals in Louisiana, Oklahoma and Texas. At
September 30, 2000, Panhandle held royalty and/or working interests in 2,213
producing oil or gas wells, 40 successfully completed but not yet producing
wells, and 19 wells in the process of being drilled or completed.



                                      (4)
<PAGE>   7





         Panhandle does not have current abstracts or title opinions on all
mineral properties owned and, therefore, cannot warrant that it has unencumbered
title to all of its properties. In the period from 1927 through 1937, the
Company lost title to a number of its then owned mineral acres through
foreclosures and tax sales of the surface acreage overlying its minerals. In
recent years, few challenges have been made against the Company's fee title to
its properties.

         Panhandle pays ad valorem taxes on its minerals owned in Arkansas,
Colorado, Idaho, Indiana, Illinois, Kansas, Tennessee and Texas.

         ACREAGE

         The following table of mineral interests owned reflects, as of
September 30, 2000, in each respective state, the number of net and gross acres,
net and gross producing acres, net and gross acres leased, and net and gross
acres open (unleased).

                                MINERAL INTERESTS

<TABLE>
<CAPTION>
                                           Net           Gross            Net          Gross            Net           Gross
                                          Acres          Acres           Acres         Acres           Acres          Acres
              Net           Gross         Prod'g         Prod'g         Leased         Leased          Open           Open
St.          Acres          Acres          (1)             (1)            (2)            (2)            (3)            (3)
----      ----------     ----------     ----------     ----------     ----------     ----------     ----------     ----------
<S>       <C>            <C>            <C>            <C>            <C>            <C>            <C>            <C>
AL                 5            479                                                                          5            479
AR             7,546         38,579             64            220            119            400          7,363         37,959
CO             8,217         39,080                                                                      8,217         39,080
ID                30            880                                                                         30            880
IL             1,018          4,393                                                                      1,018          4,393
IN                27            262                                                                         27            262
KS               637          6,024             62            720                                          575          5,304
MT               422          7,960                                                                        422          7,960
NE               442          6,120                                            7            160            435          5,960
ND               292          5,036                                           37            320            255          4,716
NM            53,324        153,073          1,150          4,949          2,041          5,542         50,133        142,582
OK            92,731        839,107         18,336        155,638          2,495         26,387         71,900        657,082
TN             1,543          3,087                                                                      1,543          3,087
TX            23,228        220,335          1,123         35,032            256          3,081         21,849        182,222
          ----------     ----------     ----------     ----------     ----------     ----------     ----------     ----------
TOT:         189,463      1,324,416         20,734        196,559          4,954         35,891        163,775      1,091,966
</TABLE>

(1)      "Producing" represents the mineral acres in which Panhandle owns a
         royalty or working interest in a producing well.

(2)      "Leased" represents the mineral acres, owned by Panhandle, that are
         leased to third parties but not producing.

(3)      "Open" represents mineral acres owned by Panhandle that are not leased
         or in production.

         This table reflects net mineral acres leased from others, lease
expiration dates, and net leased acres held by production.


                                     LEASES
<TABLE>
<CAPTION>
                                                                                              Net Acres
                Net                               Net Acres Leases                             Held By
State           Acres                                 Expiring                                Production
-----      ---------------     -------------------------------------------------------     ---------------
                                     2001               2002                2003
                               ---------------     ---------------     ---------------
<S>        <C>                 <C>                 <C>                 <C>                 <C>
LA                     271                                                                             271
OK                   5,008                 600               1,044                 356               3,008
TX                      53                                                                              53
           ---------------     ---------------     ---------------     ---------------     ---------------
TOT:                 5,332                 600               1,044                 356               3,332
</TABLE>


                                      (5)
<PAGE>   8


         PROVED RESERVES

         The following table summarizes estimates of the proved reserves of oil
and gas held by Panhandle. All reserves are located within the United States.
Because the Company's non-producing mineral and leasehold interests consist of
various small interests in numerous tracts located primarily in Oklahoma, New
Mexico and Texas and because the Company is a non-operator and must rely on
third parties to propose and drill wells, it is not feasible to provide
estimates of all proved undeveloped reserves and associated future net revenues.
Prior to fiscal 1995, the Company did not provide estimates of any proved
undeveloped reserves. The Company directs its independent petroleum engineering
firm to include proved undeveloped reserves in certain areas of western and
eastern Oklahoma and New Mexico in the scope of properties evaluated for the
Company. Due to field production allowable rules in Dagger Draw, only those
proved undeveloped reserves which the Company felt could be drilled, under
existing allowable rules, have been included. Should the allowable rules be
amended and/or production volumes change significantly, additional proved
undeveloped reserves may be added in the future. The Company, in both cases,
expects drilling to continue for the next several years, and thus made the
decision to provide proved undeveloped reserve estimates for these areas. All
reserve quantity estimates were prepared by Campbell & Associates, Inc., an
independent petroleum engineering firm. The Company's reserve estimates were not
filed with any other federal agency.

<TABLE>
<CAPTION>
    Proved Developed Reserves          Barrels of Oil        MCF of Gas
    ---------------------------        --------------        -----------
<S>                                    <C>                   <C>
    September 30, 1998                    497,263             10,103,355
    September 30, 1999                    433,263             11,519,071
    September 30, 2000                    408,732             11,585,331

    Proved Undeveloped Reserves
    September 30, 1998                    279,824              1,557,965
    September 30, 1999                    287,940              1,596,149
    September 30, 2000                    251,508              2,803,789

    Total Proved Reserves
    September 30, 1998                    777,087             11,661,320
    September 30, 1999                    721,203             13,115,220
    September 30, 2000                    660,240             14,389,120
</TABLE>

         Because the determination of reserves is a function of testing,
evaluating, developing oil and gas reservoirs and establishing a production
decline history, along with product price fluctuations, it would be expected
that estimates will change as future information concerning those reservoirs is
developed and as market conditions change. Estimated reserve quantities and
future net revenues are affected by changes in product prices, and these prices
have varied substantially in recent years. Proved developed reserves are those
expected to be recovered through existing well bores under existing economic and
operating conditions. Proved undeveloped reserves are reserves that may be
recovered from undrilled acreage, but are usually limited to those sites
directly offsetting established production units and have sufficient geological
data to indicate a reasonable expectation of commercial success.


                                      (6)
<PAGE>   9




         ESTIMATED FUTURE NET CASH FLOWS

         Set forth below are estimated future net cash flows with respect to
Panhandle's proved reserves (based on the estimated units set forth in the
immediately preceding table) as of year ends, and the present value of such
estimated future net cash flows, computed by applying a ten (10) percent
discount factor as required by the rules and regulations of the Securities and
Exchange Commission. Estimated future net cash flows have been computed by
applying current year-end prices to future production of proved reserves less
estimated future expenditures (based on costs as of year end) to be incurred
with respect to the development and production of such reserves. Such pricing is
based on SEC guidelines. No federal income taxes are included in estimated
costs. However, the amounts are net of production taxes levied by respective
states. Prices used for determining future cash flows from oil and natural gas
for the periods ended September 30, 2000, 1999, and 1998 were as follows: 2000 -
$32.84, $3.96; 1999 - $23.29, $2.70; 1998 - $14.45, $1.63. These future net cash
flows should not be construed as the fair market value of the Company's
reserves. A market value determination would need to include many additional
factors, including anticipated oil and gas price increases or decreases.

Estimated Future Net Cash Flows
<TABLE>
<CAPTION>
                          9-30-00             9-30-99       9-30-98
                        -----------        -----------    ------------
<S>                     <C>                <C>             <C>
Proved Developed        $48,481,740        $33,049,035     $18,256,510
Proved Undeveloped      $16,604,661        $ 8,942,345     $ 4,868,946
                        -----------        -----------    ------------
Total Proved (1)        $65,086,401        $41,991,380     $23,125,456
</TABLE>

10% Discounted Present Value of Estimated Future Net Cash Flows

<TABLE>
<CAPTION>
                          9-30-00            9-30-99        9-30-98
                        -----------        -----------    -----------
<S>                     <C>                <C>             <C>
Proved Developed        $32,122,191        $22,066,753    $12,469,019
Proved Undeveloped      $11,417,769        $ 5,566,777    $ 2,929,190
                        -----------        -----------    -----------
Total Proved (1)        $43,539,960        $27,633,530    $15,398,209
</TABLE>


         (1)      The major portion of the increase from September 30, 1998, to
                  September 30, 1999, and from September 30, 1999 to September
                  30, 2000, is attributable to the increased oil and gas prices
                  used in the 1999 and 2000 reserve report versus the prices
                  used in the 1998 and 1999 reserve reports, respectively.


                                      (7)
<PAGE>   10




OIL AND GAS PRODUCTION

         The following table sets forth the Company's net production of oil and
gas for the fiscal periods indicated.

<TABLE>
<CAPTION>
                           Year                 Year            Year
                           Ended               Ended            Ended
                          9-30-00             9-30-99          9-30-98
                         ---------           ---------        ---------
<S>                      <C>                 <C>              <C>
Bbls - Oil                  66,609              75,891          103,989
MCF - Gas                2,454,844           1,888,890        1,710,264
</TABLE>

Average Sales Prices and Production Costs

         The following table sets forth unit price and cost data for the fiscal
periods indicated.

<TABLE>
<CAPTION>
                           Year            Year           Year
                          Ended           Ended          Ended
Average Sales Price      9-30-00         9-30-99        9-30-98
-------------------    -----------     -----------     ---------
<S>                    <C>             <C>             <C>
Per Bbl. Oil           $     27.13     $     15.53     $   15.16
Per MCF Gas            $      3.03     $      2.06     $    2.20

Average Production (Lifting Cost)

Per Equivalent
Bbl. Oil (1)(2)        $      1.04     $      1.22     $    1.20
            (3)        $      2.03     $      1.25     $    1.27
</TABLE>

(1)      Gas production is converted to barrel equivalents at the rate of 6 MCF
         per barrel, representing the estimated relative energy content of
         natural gas and oil.

(2)      Includes actual well operating costs only.

(3)      Includes production taxes, compression, handling and marketing fees
         paid on natural gas sales, and other minor expenses associated with
         well operations.

         Average well operating costs are influenced by the fact that the
Company bears no cost of production on many of its well interests, as a large
part of the Company's producing well interests are royalty interests, which bear
no share of the operating costs.

         GROSS AND NET PRODUCTIVE WELLS AND DEVELOPED ACRES

         The following table sets forth Panhandle's gross and net productive oil
and gas wells as of September 30, 2000. Panhandle owns fractional royalty
interests or fractional working interests in these wells. The Company does not
operate any wells.

<TABLE>
<CAPTION>
                           Gross Wells            Net Wells
                           -----------           ----------
<S>                        <C>                   <C>
            Oil                  454              15.436797
            Gas                1,759              22.404828
                           ---------             ----------
            TOTAL              2,213              37.841625
</TABLE>

         Information on multiple completions is not available from Panhandle's
records, but the number of such is insignificant.


                                      (8)
<PAGE>   11



         As of September 30, 2000, Panhandle owned 196,559 gross developed
mineral acres and 20,734 net developed mineral acres. Panhandle has also leased
from others 55,159 gross developed acres which contain 3,332 net developed
acres.

         UNDEVELOPED ACREAGE

         As of September 30, 2000, Panhandle owned 1,127,857 gross and 168,729
net undeveloped mineral acres, and leases on 11,906 gross and 2,000 net acres.

         DRILLING ACTIVITY

         The following net productive development and exploratory wells and net
dry development and exploratory wells, in which the Company had a fractional
royalty or working interest, were drilled and completed during the fiscal years
indicated. Also shown are the net wells purchased during these periods.

<TABLE>
<CAPTION>
                                Net Productive          Net Dry
Development Wells                    Wells               Wells
------------------------        --------------        ---------
<S>                             <C>                   <C>
     Fiscal year ending
      September 30, 1998            1.548498           .608732

     Fiscal year ending
      September 30, 1999            1.813871           .582417

     Fiscal year ending
      September 30, 2000            2.356519           .277873

Exploratory Wells
------------------------
     Fiscal year ending
      September 30, 1998             .953696           .566764

     Fiscal year ending
      September 30, 1999             .497868           .270698

     Fiscal year ending
      September 30, 2000             .810099           .400511

Purchased Wells
------------------------
     Fiscal year ending
      September 30, 1998             .174667                 0

     Fiscal year ending
      September 30, 1999             .178395                 0

     Fiscal year ending
      September 30, 2000             .007321                 0
</TABLE>

                                      (9)
<PAGE>   12



         PRESENT ACTIVITIES

         The following table sets forth the gross and net oil and gas wells
drilling or testing as of September 30, 2000, in which Panhandle owns a royalty
or working interest.

<TABLE>
<CAPTION>
                           Gross Wells          Net Wells
                           -----------         ----------
<S>                        <C>                 <C>
            Oil                 16               .263407
            Gas                 43              1.597584
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

         There were no material legal proceedings involving Panhandle or its
subsidiary, PHC, Inc., as of the date of this report.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of Panhandle's security holders
during the fourth quarter of the fiscal year ended September 30, 2000.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock is listed on the NASDAQ Small-Cap Market
(symbol PANRA). The following table sets forth the high and low trade prices of
the Company's common stock during the periods indicated: (all share or per share
amounts, are adjusted for the effect of the 3-for-1 stock split effective May 7,
1999).

<TABLE>
<CAPTION>
         Quarter Ended                HIGH                LOW
     ----------------------         ---------          ---------
<S>                                 <C>                <C>
     December 31, 1998              $   8.750          $  5.3125
     March 31, 1999                 $   8.625          $   6.625
     June 30, 1999                  $ 10.6875          $  7.3125
     September 30, 1999             $   9.500          $   7.625
     December 31, 1999              $   9.000          $   6.500
     March 31, 2000                 $   8.250          $   7.000
     June 30, 2000                  $   9.500          $   7.375
     September 30, 2000             $  17.000          $   8.750
</TABLE>

         As of November 30, 2000, the approximate number of holders of shares of
Panhandle stock were:

         Title of Class                                   Number of Holders
         -----------------------                          -----------------
         Class A Common (Voting) . . . . . . .. . . . . . . . . . . . 2,600




                                      (10)
<PAGE>   13



         During the past two years, cash dividends have been paid as follows on
the class A common stock:

               DATE                 RATE PER SHARE
         -----------------          --------------
         December 1998                 $ .06
         March 1999                    $ .07
         June 1999                     $ .07
         September 1999                $ .07
         December 1999                 $ .07
         March 2000                    $ .07
         June 2000                     $ .07
         September 2000                $ .07

         The Company's line of credit loan agreement contains a provision
limiting the paying or declaring of a cash dividend to fifty percent of cash
flow, as defined, of the preceding twelve-month period. See Note 3 to the
consolidated financial statements contained herein at "Item 7 - Financial
Statements", for a further discussion of the loan agreement.


ITEM 6.  MANAGEMENT'S DISCUSSION AND
         ANALYSIS OR PLAN OF OPERATIONS


         LIQUIDITY AND CAPITAL RESOURCES

         At September 30, 2000, the Company had positive working capital of
$1,712,806, an increase of $1,100,587, compared to year-end September 30, 1999.
Cash flow from operating activities increased 89% to $5,366,066 for fiscal 2000,
as compared to fiscal 1999. This increase was a result of increased oil and gas
sales revenues during fiscal 2000, which are discussed in detail in "Results of
Operations."

         Capital expenditures on oil and gas activities in fiscal 2000 amounted
to $4,089,851, a 72% increase from the $2,382,296 expended in fiscal 1999. This
increased spending was principally the result of increased market prices for
natural gas and crude oil stimulating new wells to be drilled. As the market
prices increased during the year, and have continued to increase into fiscal
2001, well proposals submitted to the Company for drilling participations
increased allowing the Company to participate in a record number of wells in
fiscal 2000. The Company currently expects fiscal 2001 to be the busiest
drilling year in Company history.

         Historically, the Company has funded drilling costs and other capital
expenditures, as well as overhead costs and dividend payments, from operating
cash flow. However, in fiscal 2000, the Company borrowed $500,000 under it's
bank line-of-credit to help fund the above costs and to finance a small
acquisition of mineral properties. As of September 30, 2000, the Company had
repaid the $500,000 and had no-debt outstanding.

         The Company expects to continue its business strategy of aggressive
drilling participation in fiscal 2001, and well into the future. At September
30, 2000, the Company had projected costs of $2,499,116, for its share of
drilling and equipment costs on working interest wells which have been proposed
or were in the process of being drilled or



                                      (11)
<PAGE>   14


completed. Management currently anticipates spending approximately $5,500,000,
for exploration and development costs on its oil and gas properties in fiscal
2001. In addition , the Company will continue to seek acquisitions of producing,
and to a lessor extent non-producing mineral properties and working interests in
producing wells. These capital costs along with overhead expenses and dividend
payments are expected to be funded by cash flow and from borrowings, if needed,
under the Company's bank line-of-credit. In addition, the Company has available,
approximately 4,000,000 shares of authorized but unissued common stock, which
could be used for an asset purchase. Anticipated cash flows are more than
sufficient to meet all currently expected capital obligations. As capital
expenditure amounts can vary due to many factors, including drilling results,
oil and gas prices, industry conditions and acquisition opportunities, the exact
amount of future capital expenditures is not known. Thus, the Company has
provided the sources of capital, discussed above, to supplement cash flow from
operations, if needed.

RESULTS OF OPERATIONS

         Revenues increased $4,160,499 or 81% in fiscal 2000, as compared to
fiscal 1999. The increased revenues were attributable to a $4,014,680 increase
in oil and gas sales revenues. Oil and gas sales revenues increased due to large
increases in the average sales price for natural gas and crude oil in fiscal
2000, as compared to fiscal 1999 sales prices. In addition, natural gas sales
volumes increased 30%. The chart below summarizes the Company's sales volumes
and average sales prices for oil and natural gas in fiscal 2000 and 1999.


                                OIL AND GAS SALES

<TABLE>
<CAPTION>
                                      OIL                             GAS
                              -------------------           ------------------------
                              Total      Average            Total           Average
                              -----     ---------           -----          ---------
                               BBLS     Price/BBL            MCF           Price/MCF
<S>                              <C>       <C>            <C>               <C>
   Year-Ended 9/30/00          66,609    $ 27.13          2,454,844         $ 3.03
   Year-Ended 9/30/99          75,891    $ 15.53          1,888,890         $ 2.06
</TABLE>

         The increase in gas sales volume was principally due to increased sales
volume of natural gas from the Potato Hills field in southeast Oklahoma and from
new wells coming on line in western Oklahoma. The Potato Hills field continues
to be developed and several wells are expected to be drilled in fiscal 2001. As
the price of natural gas increased throughout 2000, the pace of drilling for
natural gas increased and the Company continues to have increased opportunities
for drilling. Gas production and gas prices are currently expected to increase
well into fiscal 2001. A normal winter weather pattern could lead to some
natural gas shortages in the upcoming winter months, causing natural gas
production and market prices to reach record levels in 2001. The 12% decline in
oil production volume from fiscal 1999 to fiscal 2000, is the continuing result
of decreased production volume in the Dagger Draw field in New Mexico. This
decreased production volume is a continuing result of the wells being shut-in
due to low oil prices in late 1998 and early 1999. The well drainage patterns
were apparently altered by the shutting-in process. Additional drilling is
planned by the two operators in the area. Panhandle will have an interest in
several wells expected to be drilled in the Dagger Draw field in fiscal 2001.



                                      (12)
<PAGE>   15



         Costs and Expenses increased $1,073,671 or 24% in fiscal 2000, as
compared to fiscal 1999. The increase was principally due to increased
production taxes on the increased oil and gas sales revenues of fiscal 2000,
increased non-cash depreciation, depletion, amortization and impairment costs
(DD&A) and increased general and administrative costs.

         Increased DD&A costs in fiscal 2000, were principally the result of
increased production volume during the year, several new wells having initial
high production volumes compared to total expected reserve volumes and, in some
cases, reserves which were substantially lower than the previous year's
estimates. This increase was offset by a reduction in impairment of proved oil
and gas properties of approximately $95,000. Impairment results primarily from
single well fields which are not expected to produce sufficient future net cash
flow to recover the Company's carrying cost based on currently forecast market
prices.

         Gross production taxes are paid as a percentage of oil and gas sales
revenues. Thus, increased revenues in fiscal 2000 increased gross production
taxes paid in fiscal 2000 approximately $314,000, as compared to fiscal 1999.
Lease operating expenses continue to increase each year, $181,000 higher in 2000
as compared to 1999, as the Company adds additional working interest wells each
year. A component of lease operating expenses, the costs associated with selling
natural gas, compression, handling and marketing fees, increases each year as
the Company produces more natural gas.

         General and administrative costs increased $285,496, or 25% in fiscal
2000,as compared to fiscal 1999. Approximately $175,000 of this increase, was
related to the Non-Employee Director's Deferred Compensation Plan (The
Director's Plan). During fiscal 2000, Panhandle's share price increased from a
September 30, 1999, price of $7.625 per share to end fiscal 2000 at $14.00 per
share. This increase in share price caused recognition of a current year expense
based on shares that could currently be issued under the terms of The Director's
Plan. The Non-Employee Directors have taken these potential shares, rather than
a cash payment, for their Director's fees. In addition, personnel related
expenses, including salaries, insurance costs, payroll taxes and ESOP expenses
increased during fiscal 2000.

         The provision for income taxes increased in fiscal 2000, due to a much
larger income before taxes (as discussed above). The Company continues to be
able to utilize tax credits from production of "tight gas sands" natural gas and
excess percentage depletion on it's oil and gas properties to reduce its tax
liability, resulting in an effective tax rate of 24% in 2000.

         As discussed above, the increase in net income is attributable to
increased oil and gas sales revenues, partially offset by increased expenses.
Management currently expects natural gas sales price to increase over fiscal
2000 average levels during fiscal 2001. In addition, recent well completions
should keep natural gas and crude oil production at equal to or slightly higher
than fiscal 2000 levels. The above factors, should allow the Company in fiscal
2001, to continue reporting strong earnings. However, as management has no
control over market prices of natural gas or crude oil, substantial price
reductions, could affect year 2001 results. Also, unexpected production declines
from large volume wells or investments in exploratory well drilling resulting in
dry hole costs, could adversely affect 2001 earnings.




                                      (13)
<PAGE>   16




ITEM 7.  FINANCIAL STATEMENTS

<TABLE>
<S>                                                                    <C>
         Report of Independent Auditors .............................         15

         Consolidated Balance Sheets
           As of September 30, 2000 and 1999 ........................         16

         Consolidated Statements of Income For The
           Years Ended September 30, 2000 and 1999 ..................         17

         Consolidated Statements of Stockholders' Equity For
           The Years Ended September 30, 2000 and 1999 ..............         18

         Consolidated Statements of Cash Flows For
           The Years Ended September 30, 2000 and 1999 ..............         19

         Notes To Consolidated Financial Statements .................      20-33
</TABLE>


                                      (14)
<PAGE>   17


                         Report of Independent Auditors


Board of Directors and Stockholders
Panhandle Royalty Company

We have audited the accompanying consolidated balance sheets of Panhandle
Royalty Company as of September 30, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Panhandle Royalty
Company at September 30, 2000 and 1999, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.


                                               ERNST & YOUNG LLP
November 27, 2000



                                      (15)
<PAGE>   18



                            Panhandle Royalty Company

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,
                                                                        2000              1999
                                                                   -------------     -------------
<S>                                                                <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                                       $     815,912     $     213,207
   Oil and gas sales receivable                                        1,955,590         1,134,153
   Prepaid expenses                                                        3,817             4,132
                                                                   -------------     -------------
Total current assets                                                   2,775,319         1,351,492

Property and equipment, at cost, based on successful
   efforts accounting:
     Producing oil and gas properties                                 27,282,697        24,074,383
     Nonproducing oil and gas properties                               6,154,159         5,804,543
     Furniture and fixtures                                              280,877           263,695
                                                                   -------------     -------------
                                                                      33,717,733        30,142,621
     Less accumulated depreciation, depletion and amortization
                                                                      20,390,441        18,337,952
                                                                   -------------     -------------
Net properties and equipment                                          13,327,292        11,804,669

Other assets                                                             107,716           107,716
                                                                   -------------     -------------
                                                                   $  16,210,327     $  13,263,877
                                                                   =============     =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued liabilities (Note 8)               $     703,917     $     522,269
   Gas imbalance liability                                                55,527            44,380
   Dividends payable                                                       7,742            33,296
   Income taxes payable                                                  249,327            46,328
   Deferred income taxes                                                  46,000            93,000
                                                                   -------------     -------------
Total current liabilities                                              1,062,513           739,273

Deferred income taxes                                                  1,794,000         1,476,000

Stockholders' equity:
   Class A voting common stock, $.0333 par value;
     6,000,000 shares authorized, 2,060,206 issued and
     outstanding (2,056,990 in 1999)
                                                                          68,673            68,566
   Capital in excess of par value                                        608,280           587,058
   Retained earnings                                                  12,676,861        10,392,980
                                                                   -------------     -------------
Total stockholders' equity                                            13,353,814        11,048,604
                                                                   -------------     -------------
                                                                   $  16,210,327     $  13,263,877
                                                                   =============     =============
</TABLE>


See accompanying notes

                                      (16)

<PAGE>   19



                            Panhandle Royalty Company

                        Consolidated Statements of Income


<TABLE>
<CAPTION>
                                                                  YEAR ENDED SEPTEMBER 30,
                                                                  2000                1999
                                                            ---------------     ---------------
<S>                                                         <C>                 <C>
Revenues:
   Oil and gas sales                                        $     9,091,920     $     5,077,240
   Lease bonuses and rentals                                         82,030              10,773
   Interest                                                          17,689              10,253
   Other                                                             86,335              19,209
                                                            ---------------     ---------------
                                                                  9,277,974           5,117,475

Costs and expenses:
   Lease operating expenses and production taxes                  1,458,935             963,804
   Exploration costs                                                514,739             535,431
   Depreciation, depletion, amortization and impairment           2,052,489           1,737,453
   General and administrative                                     1,450,241           1,164,745
   Interest expense                                                  15,643              16,943
                                                            ---------------     ---------------
                                                                  5,492,047           4,418,376
                                                            ---------------     ---------------
Income before provision (benefit) for income taxes                3,785,927             699,099

Provision (benefit) for income taxes                                925,000             (35,000)
                                                            ---------------     ---------------
Net income                                                  $     2,860,927     $       734,099
                                                            ===============     ===============

Basic earnings per share                                    $          1.39     $           .36
                                                            ===============     ===============
Diluted earnings per share                                  $          1.38     $           .36
                                                            ===============     ===============
</TABLE>


See accompanying notes.


                                      (17)
<PAGE>   20



                            Panhandle Royalty Company

                 Consolidated Statements of Stockholders' Equity


<TABLE>
<CAPTION>
                                                  COMMON STOCK              CAPITAL IN
                                        ------------------------------       EXCESS OF          RETAINED
                                           SHARES            AMOUNT          PAR VALUE          EARNINGS            TOTAL
                                        ------------      ------------      ------------      ------------      ------------
<S>                                     <C>               <C>               <C>               <C>               <C>
Balances at September 30, 1998             2,047,602      $     68,254      $    515,823      $ 10,220,166      $ 10,804,243

Purchase and cancellation of common
   shares                                       (237)               (9)           (1,835)               --            (1,844)
Issuance of common shares to ESOP              9,625               321            73,070                --            73,391
Dividends declared ($.27 per share)               --                --                --          (561,285)         (561,285)
Net income                                        --                --                --           734,099           734,099
                                        ------------      ------------      ------------      ------------      ------------
Balances at September 30, 1999             2,056,990            68,566           587,058        10,392,980        11,048,604

Purchase and cancellation of common
   shares                                     (3,368)             (112)          (70,798)               --           (70,910)
Issuance of common shares to ESOP              6,584               219            92,020                --            92,239
Dividends declared ($.28 per share)               --                --                --          (577,046)         (577,046)
Net income                                        --                --                --         2,860,927         2,860,927
                                        ------------      ------------      ------------      ------------      ------------

Balances at September 30, 2000             2,060,206      $     68,673      $    608,280      $ 12,676,861      $ 13,353,814
                                        ============      ============      ============      ============      ============
</TABLE>


See accompanying notes.


                                      (18)
<PAGE>   21




                            Panhandle Royalty Company

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                      YEAR ENDED SEPTEMBER 30,
                                                                                      2000                 1999
                                                                                ---------------      ---------------
<S>                                                                             <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income                                                                      $     2,860,927      $       734,099
Adjustments to reconcile net income to net cash provided by operating
   activities:
     Depreciation, depletion, amortization, and impairment                            2,052,489            1,737,454
     Deferred income taxes, net of transfer in 1999 of
       $105,000 (none in 2000)                                                          271,000                6,000
     Exploration costs                                                                  514,739              535,431
     Common stock issued to Employee Stock Ownership Plan
                                                                                         92,239               73,391
     Cash provided (used) by changes in assets and liabilities:
       Oil and gas sales and other receivables                                         (821,437)            (417,505)
       Income taxes receivable                                                               --              152,090
       Prepaid expenses                                                                     315               23,259
       Accounts payable and accrued liabilities                                         192,795              (53,764)
       Income taxes payable                                                             202,999               46,328
                                                                                ---------------      ---------------
Total adjustments                                                                     2,505,139            2,102,684
                                                                                ---------------      ---------------
Net cash provided by operating activities                                             5,366,066            2,836,783

CASH FLOWS FROM INVESTING ACTIVITIES OF PROPERTY AND EQUIPMENT
Capital expenditures, including dry hole costs                                       (4,089,851)          (2,382,296)
                                                                                ---------------      ---------------
Net cash used in investing activities                                                (4,089,851)          (2,382,296)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit                                                         500,000              300,000
Payments of loan principal                                                             (500,000)            (300,000)
Purchase and cancellation of common shares                                              (70,910)              (1,844)
Payments of dividends                                                                  (602,600)            (559,646)
                                                                                ---------------      ---------------
Net cash used in financing activities                                                  (673,510)            (561,490)
                                                                                ---------------      ---------------
Increase (decrease) in cash and cash equivalents                                        602,705             (107,003)

Cash and cash equivalents at beginning of year                                          213,207              320,210
                                                                                ---------------      ---------------
Cash and cash equivalents at end of year                                        $       815,912      $       213,207
                                                                                ===============      ===============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid                                                                   $        15,643      $        16,943
Income taxes paid (received), net of refunds                                            451,167             (239,418)
</TABLE>



See accompanying notes


                                      (19)
<PAGE>   22

                            Panhandle Royalty Company

                  Notes to Consolidated Financial Statements

                         September 30, 2000 and 1999



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Panhandle Royalty
Company and its wholly-owned subsidiary, P.H.C., Inc. All material intercompany
transactions have been eliminated in the accompanying consolidated financial
statements.

CASH EQUIVALENTS

All highly liquid short-term investments with original maturities of three
months or less at the date of purchase by the Company are considered to be cash
equivalents.

OIL AND GAS SALES

The Company sells oil and natural gas to various customers, recognizing revenues
as oil and gas is produced and sold. Substantially all of the Company's accounts
receivable are due from purchasers of oil and natural gas or operators of the
oil and gas properties. Oil and natural gas sales are generally unsecured. The
Company has not experienced significant credit losses in prior years and is not
aware of any significant uncollectible accounts at September 30, 2000.

OIL AND GAS PRODUCING ACTIVITIES

The Company follows the successful efforts method of accounting for oil and gas
producing activities. Intangible drilling and other costs of successful wells
and development dry holes are capitalized and amortized. The costs of
exploratory wells are initially capitalized, but charged against income if and
when the well is determined to be nonproductive. Oil and gas mineral and
leasehold costs are capitalized when incurred.

DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT

Depreciation, depletion and amortization of the costs of producing oil and gas
properties are generally computed using the units of production method primarily
on a separate-property basis using proved reserves as estimated annually by an
independent petroleum engineer. Depreciation of furniture and fixtures is
computed using the straight-line method over estimated productive lives of five
to eight years.

The Company has significant royalty interests in wells for which the Company
does not share in the costs associated with the wells. Estimated costs of future
dismantlement, restoration and abandonment of wells in which the Company owns a
working interest are



                                      (20)
<PAGE>   23

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

not expected to differ significantly from the estimated salvage value of
equipment from such wells and, accordingly, no accrual of such costs is included
in the accompanying consolidated financial statements.

Nonproducing oil and gas properties include nonproducing minerals, which have a
net book value of $4,110,879 at September 30, 2000, consisting of perpetual
ownership of mineral interests in several states, including Oklahoma, Texas and
New Mexico. These costs are being amortized over a thirty-three year period
using the straight-line method. An ultimate determination of whether these
properties contain recoverable reserves in economical quantities is expected to
be made within this time frame. Impairment of nonproducing oil and gas
properties is recognized based on experience and management judgment.

In accordance with the provisions of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company recognizes impairment losses for
long-lived assets when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. Fair values are based on discounted future cash flows. The
Company's oil and gas properties were reviewed for indicators of impairment on a
field-by-field basis, resulting in the recognition of impairment provisions of
$262,998 and $357,891, respectively, for 2000 and 1999, which are included in
depreciation, depletion, amortization and impairment expense. The majority of
the impairment recognized in 2000 and 1999 relates to single well fields on
which the Company does not expect sufficient future net cash flow to recover
its carrying cost.

ENVIRONMENTAL COSTS

Environmental liabilities, which historically have not been material, are
recognized when it is probable that a loss has been incurred and the amount of
that loss is reasonably estimable. Environmental liabilities, when accrued, are
based upon estimates of expected future costs. At September 30, 2000, there were
no such costs accrued.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.


                                      (21)
<PAGE>   24

                            Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PRODUCTION IMBALANCES

During the course of normal production operations, joint interest owners will,
from time to time, take more or less than their ownership share of natural gas
volumes from jointly-owned wells. These volumetric imbalances are monitored over
the life of the well to achieve balancing, or to minimize imbalances, by the
time reserves are depleted, with final cash settlements made under a variety of
arrangements at that time. The Company follows the sales method of accounting
for imbalances. A liability is recorded only if takes of natural gas volumes
from jointly-owned wells exceed the Company's interest in the well's remaining
estimated natural gas reserves. At September 30, 2000 and 1999, the Company's
net liability for natural gas production imbalances of approximately 31,671 mcf
and 28,500 mcf amounted to $55,527 and $44,380, respectively.

EARNINGS PER SHARE OF COMMON STOCK

Basic earnings per share ("EPS") is calculated using net income divided by the
weighted average of common shares outstanding during the year. Diluted EPS is
similar to Basic EPS except that the weighted average of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. The treasury stock method is used to calculate dilutive shares, which
reduces the gross number of dilutive shares (Note 6).

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following information is provided regarding the estimated fair value of the
Company's financial instruments at September 30, 2000 and 1999:

         Cash and cash equivalents, receivables, prepaid expenses, accounts
         payable and accrued liabilities are each estimated to have a fair value
         approximating the carrying amount due to the short maturity of those
         instruments.




                                      (22)
<PAGE>   25
                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


2. INCOME TAXES

The Company's provision (benefit) for income taxes is detailed as follows:

<TABLE>
<CAPTION>
                                    2000          1999
                                 ----------    ----------
<S>                              <C>           <C>
          Current:
             Federal             $  647,000    $   59,000
             State                    7,000         5,000
                                 ----------    ----------
                                    654,000        64,000

          Deferred:
             Federal                244,000       (87,000)
             State                   27,000       (12,000)
                                 ----------    ----------
                                    271,000       (99,000)
                                 ----------    ----------
                                 $  925,000    $  (35,000)
                                 ==========    ==========
</TABLE>

The difference between the provision (benefit) for income taxes and the amount
which would result from the application of the federal statutory rate to income
before provision (benefit) for income taxes is analyzed below:

<TABLE>
<CAPTION>
                                                     2000          1999
                                                  ----------    ----------
<S>                                               <C>           <C>
Provision for income taxes at statutory rate      $1,325,074    $  244,685
Percentage depletion                                (368,687)     (196,401)
Tight-sands gas credits                              (59,359)      (69,959)
State income taxes, net of federal benefit            22,125        (4,550)
Other                                                  5,847        (8,775)
                                                  ----------    ----------
                                                  $  925,000    $  (35,000)
                                                  ==========    ==========
</TABLE>


                                      (23)
<PAGE>   26


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


2. INCOME TAXES (CONTINUED)

Deferred tax assets and liabilities, resulting from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, consist of the following:

<TABLE>
<CAPTION>
                                                                2000         1999
                                                             ----------   ----------
<S>                                                          <C>          <C>
Deferred tax liabilities:
   Capitalized costs and related depreciation, depletion,
     amortization and impairment                             $1,794,000   $1,505,000
   Cash basis of accounting for income tax purposes              46,000       93,000
                                                             ----------   ----------
                                                              1,840,000    1,598,000

Deferred tax assets:
   Percentage depletion carryforward                                 --       17,000
   Alternative minimum tax credit carryforwards                      --       12,000
                                                             ----------   ----------
                                                                     --       29,000
                                                             ----------   ----------
Net deferred tax liabilities                                 $1,840,000   $1,569,000
                                                             ==========   ==========
</TABLE>

3. LONG-TERM DEBT

The Company has a revolving line of credit agreement with a bank, which extends
through December 31, 2002, for borrowings up to $5,000,000, which bear interest
at the bank's base rate minus .25% (9.25% at September 30, 2000). Any
outstanding borrowings are unsecured but subject to a negative pledge on all of
the Company's oil and gas properties and are payable in full, with accrued and
unpaid interest, December 31, 2002. The Company is required to pay an annual fee
of .06% for the unused portion of the line of credit. There was no balance
outstanding at September 30, 2000 and 1999.

The agreement contains various restrictions which, among other things, require
the Company to maintain, at the end of each quarter, positive net income for the
preceding twelve-month period. Additionally, the Company is restricted from
incurring certain indebtedness, selling oil and gas properties for which the
proceeds received exceed $250,000, acquiring treasury stock in any one year in
excess of $250,000 and paying or declaring cash dividends exceeding fifty
percent of the cash flow from operations, as defined, of the preceding
twelve-month period.


                                      (24)
<PAGE>   27


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


4. DIVIDENDS PAYABLE

Dividends payable represent accrued dividends which are due and payable, but
have not been paid for various reasons, including questions concerning estates
of deceased stockholders, unlocatable shareholders or questions of ownership of
the underlying shares.

5. STOCKHOLDERS' EQUITY

On February 26, 1999, the Company's Board of Directors approved a proposal to
(1) amend the Company's duration from fifty years to perpetuity; (2) amend the
Company's Articles of Incorporation to increase the number of authorized shares
of Class A Common Stock from 1,000,000 shares to 6,000,000 shares; (3) effect a
3-for-1 stock split of the outstanding Class A Common Stock and a corresponding
reduction of the par value per share from $.10 to $.0333; (4) adopt amendments
to the Articles of Incorporation to change voting rights from one vote per
stockholder to one vote per share; and (5) amend the Articles of Incorporation
to provide that generally any merger, consolidation, liquidation or dissolution
of the Company or sale of substantially all of the assets of the Company
requires the affirmative vote of the holders of 66-2/3% or more of the Company's
outstanding Class A Common Stock. On May 7, 1999, these proposals were put forth
to a vote of the stockholders, for which a majority of the stockholders voted in
favor of each proposal, causing these proposals to become effective on such
date. The Class A Common Stock split was effected in the form of a stock
dividend, distributed on June 1, 1999, to stockholders of record on May 7, 1999.

All agreements concerning Common Stock of the Company, including the Company's
Employee Stock Ownership Plan and the Company's commitment under the Deferred
Compensation Plan for Non-Employee Directors, provide for the issuance or
commitment, respectively, of additional shares of the Company's stock due to the
declaration of the stock split. All references to number of shares, per share,
and authorized share information in the accompanying consolidated financial
statements have been adjusted to reflect the stock split and increase in
authorized shares approved on May 7, 1999, at the special meeting of the
stockholders of the Company.

6. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share. The Company's diluted earnings per share calculation takes into account
certain shares that may be issued under the Non-Employee Directors' Deferred
Compensation Plan (Note 8).


                                      (25)
<PAGE>   28


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


6. EARNINGS PER SHARE (CONTINUED)

<TABLE>
<CAPTION>
                                                                     YEAR ENDED SEPTEMBER 30,
                                                                        2000          1999
                                                                     ----------    ----------
<S>                                                                  <C>           <C>
Numerator for primary and diluted earnings per share:
   Net income                                                        $2,860,927    $  734,099
                                                                     ==========    ==========

Denominator:
   For basic earnings per share--weighted average shares
                                                                      2,055,470     2,047,507
   Effect of potential diluted shares:
     Directors' deferred compensation shares                             21,960        16,399
                                                                     ----------    ----------
Denominator for diluted earnings per share--adjusted weighted
   average shares and potential shares                                2,077,430     2,063,906
                                                                     ==========    ==========

Basic earnings per share                                             $     1.39    $      .36
                                                                     ==========    ==========

Diluted earnings per share                                           $     1.38    $      .36
                                                                     ==========    ==========
</TABLE>

7. EMPLOYEE STOCK OWNERSHIP PLAN

The Company has an employee stock ownership plan that covers substantially all
employees and is established to provide such employees with a retirement
benefit. These benefits become fully vested after three years of employment.
Contributions to the plan are at the discretion of the Board of Directors and
can be made in cash (none in 2000 or 1999) or the Company's common stock. For
contributions of common stock, the Company records as expense, the fair market
value of the stock at the time of contribution. The 108,209 shares of the
Company's common stock held by the plan as of September 30, 2000, are allocated
to individual participant accounts, are included in the weighted average shares
outstanding for purposes of earnings per share computations and receive
dividends. Contributions to the plan consisted of:

<TABLE>
<CAPTION>
               YEAR                      SHARES         AMOUNT
               ----                      ------         -------
<S>                                      <C>            <C>
               2000                       6,584         $92,239
               1999                       9,625         $73,391
</TABLE>


                                      (26)
<PAGE>   29

                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


8. DEFERRED COMPENSATION PLAN FOR DIRECTORS

Effective November 1, 1994, the Company formed the Panhandle Royalty Company
Deferred Compensation Plan for Non-Employee Directors (the "Plan"). The Plan
provides that each eligible director can individually elect to receive shares of
Company stock rather than cash for board meeting fees and board committee
meeting fees. These shares are unissued and vest at the date of grant. The
shares are credited to each director's deferred fee account at the fair market
value of the stock at the date of grant and are adjusted for changes in market
value subsequent thereto. Upon retirement, termination or death of the director,
or upon change in control of the Company, the shares accrued under the Plan will
be either issued to the director or may be converted to cash, at the director's
discretion, for the fair market value of the shares on the conversion date as
defined by the Plan. As of September 30, 2000, 21,960 shares (16,399 shares at
September 30, 1999) are included in the Plan. The Company has accrued $307,444
at September 30, 2000 ($132,727 at September 30, 1999) in connection with the
Plan which is included in accrued liabilities in the accompanying consolidated
balance sheet ($174,717 and $9,072 was charged to the results of operations for
the years ended September 30, 2000 and 1999, respectively, and is included in
general and administrative expense in the accompanying income statement).

9. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

All oil and gas producing activities of the Company are conducted within the
United States (principally Oklahoma and New Mexico) and represent substantially
all of the business activities of the Company.

The Company has interests in a field of properties, the production on which was
sold to one purchaser, which accounted for approximately 26% of the Company's
gas revenues in fiscal 2000. The operator of the wells in this field has entered
into contracts to sell and deliver a substantial quantity of the gas volumes
produced from this field at a weighted average minimum price of $4.47 and a
weighted average maximum price of $5.41 per MMbtu. The contracts relate to
volumes produced from November 1, 2000 through March 31, 2001.


                                      (27)
<PAGE>   30


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


9. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED)

AGGREGATE CAPITALIZED COSTS

The aggregate amount of capitalized costs of oil and gas properties and related
accumulated depreciation, depletion and amortization is as follows:

<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,
                                                                2000            1999
                                                            ------------    ------------
<S>                                                         <C>             <C>
Producing properties                                        $ 27,282,697    $ 24,074,385
Nonproducing properties                                        6,154,159       5,804,543
                                                            ------------    ------------
                                                              33,436,856      29,878,928
Accumulated depreciation, depletion and amortization         (20,164,045)    (18,133,674)
                                                            ------------    ------------
Net capitalized costs                                       $ 13,272,811    $ 11,745,254
                                                            ============    ============
</TABLE>

COSTS INCURRED

During the reporting period, the Company incurred the following costs in oil and
gas producing activities:

<TABLE>
<CAPTION>
                                    2000         1999
                                 ----------   ----------
<S>                              <C>          <C>
Property acquisition costs       $  528,691   $  445,827
Exploration costs                 1,776,773      514,546
Development costs                 1,765,401    1,399,795
                                 ----------   ----------
                                 $4,070,865   $2,360,168
                                 ==========   ==========
</TABLE>

10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED)

The following unaudited information regarding the Company's oil and natural gas
reserves is presented pursuant to the disclosure requirements promulgated by the
Securities and Exchange Commission ("SEC") and SFAS No. 69, "Disclosures About
Oil and Gas Producing Activities."

Proved reserves are estimated quantities of crude oil and natural 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. Proved developed reserves are those proved reserves that
can be expected to be recovered through


                                      (28)
<PAGE>   31


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)



10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)

existing wells with existing equipment and operating methods. Because the
Company's nonproducing mineral and leasehold interests consist of various small
interests in numerous tracts located primarily in Oklahoma, New Mexico, and
Texas, it is not economically feasible for the Company to provide estimates of
all proved undeveloped reserves. The Company directs its independent petroleum
engineering firm to include proved undeveloped reserves in certain areas of
western and eastern Oklahoma and New Mexico in the scope of properties which are
evaluated for the Company. Due to field production allowable rules in the Dagger
Draw field of New Mexico only those proved undeveloped reserves which the
Company felt could be drilled, under existing allowable rules, have been
included. Should the allowable rules be amended and/or production volumes change
significantly, additional proved undeveloped reserves in the Dagger Draw field
of New Mexico may be added in the future.

The Company's net proved (including certain undeveloped reserves described
above) oil and gas reserves as of September 30, 2000 and 1999, have been
estimated by Campbell & Associates, Inc., an independent petroleum engineering
firm. All studies have been prepared in accordance with regulations prescribed
by the Securities and Exchange Commission. The reserve estimates were based on
economic and operating conditions existing at September 30, 2000 and 1999. Since
the determination and valuation of proved reserves is a function of testing and
estimation, the reserves presented should be expected to change as future
information becomes available.


                                      (29)
<PAGE>   32


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)

ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

The following table presents the Company's net proved (including certain
undeveloped reserves described above) oil and gas reserve quantities as
estimated by Campbell & Associates, Inc., an independent petroleum engineering
firm, as of September 30, 2000 and 1999, and the changes in reserves for the
years then ended:

<TABLE>
<CAPTION>
                                                  PROVED RESERVES
                                               ----------------------
                                                 OIL           GAS
                                               (Mbarrels)     (Mmcf)
                                               ----------    --------
<S>                                            <C>           <C>
September 30, 1998                                    777      11,661

Revisions of previous estimates (1)(2)                (32)        709
Purchases of reserves in place                         11         181
Extensions and discoveries                             41       2,453
Production                                            (76)     (1,889)
                                               ----------    --------
September 30, 1999                                    721      13,115

Revisions of previous estimates (2)                   (81)        396
Purchases of reserves in place                          6         147
Extensions and discoveries                             81       3,186
Production                                            (67)     (2,455)
                                               ----------    --------
September 30, 2000                                    660      14,389
                                               ==========    ========
</TABLE>

(1)      Oil and gas revisions are primarily related to those reserves which
         were economically recoverable at the higher prices which existed at
         September 30, 1998, which are not economically recoverable at prices
         existing at September 30, 1999.

(2)      Gas revisions are primarily related to those reserves which were
         economically recoverable at the higher prices which existed at
         September 30, 2000, which were not economically recoverable at prices
         existing at September 30, 1999. In 2000 and 1999, oil reserves were
         also revised downward from 1998 due to a decline in production of
         certain New Mexico properties after being shut-in for several months in
         1999 due to depressed oil prices.


                                      (30)
<PAGE>   33


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                               PROVED DEVELOPED RESERVES    PROVED UNDEVELOPED RESERVES
                               --------------------------   ----------------------------
                                  OIL             GAS          OIL               GAS
                               (Mbarrels)        (Mmcf)     (Mbarrels)          (Mmcf)
                               ----------      ----------   ----------        ----------
<S>                            <C>             <C>          <C>               <C>
September 30, 1998                    498          10,103          279             1,558
                               ==========      ==========   ==========        ==========
September 30, 1999                    433          11,519          288             1,596
                               ==========      ==========   ==========        ==========
September 30, 2000                    409          11,585          251             2,804
                               ==========      ==========   ==========        ==========
</TABLE>

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

Estimates of future cash flows from proved oil and gas reserves, based on
current prices and costs, are shown in the following table. Estimated income
taxes are calculated by (i) applying the appropriate year-end tax rates to the
estimated future pretax net cash flows less depreciation of the tax basis of
properties and statutory depletion allowances and (ii) reducing the amount in
(i) for estimated tax credits to be realized in the future for gas produced from
"tight-sands."

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,
                                                                      2000           1999
                                                                  ------------   ------------
<S>                                                               <C>            <C>
Future cash inflows                                               $ 78,668,350   $ 52,222,440
Future production costs                                             12,308,320      9,047,782
Future development costs                                             1,273,629      1,183,278
                                                                  ------------   ------------
Future net cash inflows before future income tax expenses           65,086,401     41,991,380

Future income tax expense                                           18,332,743     11,570,726
                                                                  ------------   ------------
Future net cash flows                                               46,753,658     30,420,654

10% annual discount                                                 15,892,344     10,348,756
                                                                  ------------   ------------
Standardized measure of discounted future net cash flows          $ 30,861,314   $ 20,071,898
                                                                  ============   ============
</TABLE>


                                      (31)
<PAGE>   34


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)

Changes in the standardized measure of discounted future net cash flows are as
follows:

<TABLE>
<CAPTION>
                                                              2000            1999
                                                          ------------    ------------
<S>                                                       <C>             <C>
Beginning of year                                         $ 20,071,898    $ 11,333,512
Changes resulting from:
   Sales of oil and gas, net of production costs            (7,632,985)     (4,113,436)
   Net change in sales prices and production costs          11,642,854       9,872,435
   Net change in future development costs                      (60,124)         (2,287)
   Extensions and discoveries                                8,886,844       4,447,477
   Revisions of quantity estimates                            (221,761)        797,470
   Purchases of minerals-in-place                              438,663         406,875
   Accretion of discount                                     2,007,190       1,133,351
   Net change in income taxes                               (4,807,558)     (3,806,471)
   Change in timing and other, net                             536,293           2,972
                                                          ------------    ------------
End of year                                               $ 30,861,314    $ 20,071,898
                                                          ============    ============
</TABLE>

11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the Company's unaudited quarterly results of
operations.

<TABLE>
                                                              FISCAL 2000
                                           ----------------------------------------------------
                                                             QUARTER ENDED
                                           ----------------------------------------------------
                                           DECEMBER 31    MARCH 31     JUNE 30     SEPTEMBER 30
                                           -----------   ----------   ----------   ------------
<S>                                        <C>           <C>          <C>          <C>
Revenues                                   $ 1,650,961   $2,240,986   $2,410,493   $  2,975,534
Income before provision for income
   taxes (A)                                   406,258    1,002,720    1,253,740      1,123,209
Net income (B)                                 364,258      722,720      943,740        830,209
Basic earnings per share                   $       .18   $      .35   $      .46   $        .40
Diluted earnings per share                 $       .18   $      .35   $      .46   $        .39
</TABLE>


                                      (32)
<PAGE>   35


                           Panhandle Royalty Company

             Notes to Consolidated Financial Statements (continued)


11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)

<TABLE>
                                                              FISCAL 1999
                                           ----------------------------------------------------
                                                             QUARTER ENDED
                                           ----------------------------------------------------
                                           DECEMBER 31    MARCH 31     JUNE 30     SEPTEMBER 30
                                           -----------   ----------   ----------   ------------
<S>                                        <C>           <C>          <C>          <C>
Revenues                                   $ 1,042,473   $  941,670   $1,542,780   $  1,590,552
Income (loss) before provision
   for income taxes (A)                          6,097     (119,745)     489,624        323,123
Net income (B)                                   6,097      (75,745)     408,624        395,123
Basic earnings per share                   $        --   $     (.04)  $      .20   $        .20
Diluted earnings per share                 $        --   $     (.04)  $      .20   $        .20
</TABLE>

(A)      Fourth quarter income before provision for income taxes includes an
         SFAS 121 charge of $112,998 and $267,891 for 2000 and 1999,
         respectively.

(B)      Year-end adjustments to the Company's provision for income taxes caused
         the effective rate for 2000 and 1999 to be less than that estimated
         during the previous three quarters. The effect of this difference is
         reflected in the fourth quarter net income above.

                                      (33)
<PAGE>   36


ITEM 8.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE

                                      NONE


                                    PART III

ITEM 9.         DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
                OF THE EXCHANGE ACT

                Listed below are the names, ages and positions, as of November
30, 2000, of the directors and executive officers of the Company. The Company's
bylaws provide for seven directors who are elected for staggered three-year
terms. Executive officers are appointed by the board of directors to serve in
their respective capacities until their successors are duly appointed by the
directors.

                                    DIRECTORS

<TABLE>
<CAPTION>
                                                              Served As
                                                   Term       Director
Name                    Age   Position & Offices  Expires      Since
----                    ---   ------------------  -------     --------
<S>                     <C>   <C>                 <C>         <C>
Michael A. Cawley (b)    53   Director              2001        1991

Sam J. Cerny (a)(d)      68   Director              2003        1993

E. Chris Kauffman (b)(c) 60   Director              2003        1991

H W Peace II (b)         65   Director, Chief       2002        1991
                              Executive Officer,
                              President

Ray H. Potts   ( c)      68   Director              2001        1997

Robert A. Reece (a)(c)   56   Director              2002        1986

Jerry L. Smith (a)       60   Director, Chairman    2002        1987
                              of the Board
</TABLE>

----------
         (a)  Member of Audit Committee
         (b)  Member of Compensation Committee
         (c)  Member of Retirement Committee
         (d)  The sale of 500 shares on June 27, 2000 and 4,300 shares on June
              29, 2000 of Panhandle Royalty Company class A common stock, were
              not reported by Mr. Cerny on FORM 4, until August 8, 2000.


                                      (34)
<PAGE>   37


                               EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                                                                         Held Office
Name                             Age          Position & Offices           Since
----                             ---          ------------------         -----------
<S>                              <C>          <C>                        <C>
Jerry L. Smith                    60          Chairman of the               1997
                                              Board, Director

H W Peace II                      65          Director, Chief               1991
                                              Executive Officer,
                                              President

Michael C. Coffman                47          Vice President,               1990
                                              Chief Financial Officer,
                                              Secretary/Treasurer

Wanda C. Tucker                   63          Vice President of             1990
                                              Land
</TABLE>

                BUSINESS EXPERIENCE

                Michael A. Cawley is an attorney and is the president and chief
executive officer of the Samuel Roberts Noble Foundation, Inc. He has been
employed by the Noble Foundation for the last seven years. Prior to joining the
Noble Foundation, he was engaged in the practice of law in Ardmore, Oklahoma
with the firm of Thompson & Cawley. He is also a director of Noble Drilling
Corporation and Noble Affiliates Inc.

                Sam J. Cerny is a geological engineer and has been employed by
Shell Oil Company, Cleary Petroleum Corporation and its successor company, Grace
Petroleum Corporation, where he served as President/CEO from 1976 to 1991. He is
a past president of the Oklahoma Independent Petroleum Association and for the
last five years has been active as a petroleum management consultant.

                E. Chris Kauffman is a vice-president of Campbell-Kauffman,
Inc., an independent insurance agency in Oklahoma City. He has been involved
with the agency since it was formed in 1981. He is also Chairman of the Central
Oklahoma Transportation & Parking Authority Trust.

                Robert A. Reece is an attorney, and for the last five years has
been of counsel with the firm of Crowe & Dunlevy. He is active in the management
of his family's investments. He is also a director of National Bank of Commerce.

                H W Peace II holds bachelors and masters degrees in geology. For
thirty-six years he has been employed as a geologist, in management or as an
officer and/or director in the petroleum industry. He has been employed by Union
Oil Company of California, Cotton Petroleum and Hadson Petroleum Corporation. He
has been president of the Company since 1991.

                Ray H. Potts holds a master's degree in geology from the
University of Missouri. He was employed for six years as an exploration
geologist for the Pure Oil Company and in


                                      (35)
<PAGE>   38


1967 formed Potts-Stephenson Exploration Company, later changed to PSEC, Inc. In
1997 PSEC, Inc. was sold to ONEOK Resources Company. Mr. Potts is currently
active in the oil and gas industry and has been involved in several national and
state trade associations, geological societies and numerous civic activities.

                Jerry L. Smith for the last ten years has been the owner of
Smith Capital Corporation in Dallas. This corporation is a private investment
firm focusing on commercial real estate and securities. Mr. Smith also is a past
Treasurer and Director of the Association of Graduates of the United States Air
Force Academy.

                Michael C. Coffman is a certified public accountant. Since 1975,
he has worked in public accounting and as a financial officer of three publicly
owned companies involved in the oil and gas industry. He has been employed by
the Company since 1990.

                Wanda C. Tucker has been a full-time employee of the Company
since 1978, has served in various positions with the Company and is currently
vice president of land.

                None of the organizations described in the business experiences
of company directors and officers are parents, subsidiaries or affiliates of
Panhandle Royalty Company.


ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table

<TABLE>
<CAPTION>
                                  Annual Compensation
Name and                    ---------------------------------------
Principal
Position         Year        Salary        Bonus         All Other
--------         ----       --------      -------       -----------
<S>              <C>        <C>           <C>           <C>
H W Peace II     2000       $128,000      $18,100       $21,915 (1)
President &      1999       $125,000      $13,100       $20,715 (1)
Chief Exec.      1998       $122,500      $25,600       $22,215 (1)
Officer
</TABLE>

----------
         (1)      Represents the value of 1,565 shares for 2000, and 2,538
                  shares for 1998, and 2,106 shares for 1997, of Company stock
                  contributed to the Panhandle Employee Stock Ownership Plan
                  (ESOP) on Mr. Peace's behalf. The ESOP is a defined
                  contribution plan, non-voluntary and non-contributory and
                  serves as the retirement plan for the Company's employees.
                  Contributions are at the discretion of the board of directors
                  and, to date, all contributions have been made in shares of
                  Company stock. Contributions are allocated to all participants
                  in proportion to their salaries for the plan year and 100%
                  vesting occurs after three year's of service.


                                      (36)
<PAGE>   39


                DIRECTORS FEES

                Outside directors of the Company are paid $1,000 plus travel
expenses for attending each meeting of the board of directors and $200 for
attending each committee meeting of the board. Any director who travels in
excess of 50 miles to attend a meeting receives an additional $100 for each
meeting. Outside directors can elect to be included in the Panhandle Royalty
Company Deferred Compensation Plan For Non-Employee Directors (the "Plan"). The
Plan provides that each eligible director can individually elect to receive
shares of Company stock rather than cash for board meeting fees and board
committee meeting fees. These unissued shares are credited to each director's
deferred fee account at the fair market value of the shares on the date of the
meeting. Upon retirement, termination or death of the director, or upon a change
in control of the Company, the shares accrued under the Plan will be either
issued to the director or may be converted to cash, at the directors'
discretion, at the fair market value of the shares on the conversion date, as
defined. All outside directors are participating in this Plan.

                In addition to the above, Jerry Smith, chairman of the board of
directors, who is not an employee of the Company, is entitled to receive a $100
per hour fee for time spent, other than board or committee meetings, on Company
business. During fiscal 2000 and 1999, no payments were made to Mr. Smith under
this arrangement.


ITEM 11.        SECURITY OWNERSHIP OF CERTAIN
                BENEFICIAL OWNERS AND MANAGEMENT


                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

                As of November 30, 2000, the following person or "group" as that
term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, was
known to Panhandle to be the only beneficial owner of more than five percent of
the outstanding shares of Panhandle's class A common stock.

<TABLE>
<CAPTION>
                          Amount And Nature Of              Percent Of
        Name               Beneficial Ownership               Class
------------------        ---------------------             ----------
<S>                       <C>                               <C>
Robert Robotti            103,104 shares, shared voting            5.0%
c/o  Robotti & Company     and investment powers
Incorporated,
52 Vanderbilt Avenue,
New York, NY 10017
</TABLE>


                SECURITY OWNERSHIP OF MANAGEMENT

                The following table sets forth, as of September 30, 2000, all
shares of class A common stock held beneficially, directly or indirectly by each
director and by all directors and officers as a group (excluding certain shares
that may be issued under the Non-Employee Directors' Deferred Compensation Plan
(see Item 10. EXECUTIVE COMPENSATION and Item 7. FINANCIAL STATEMENTS, Note B)).


                                      (37)
<PAGE>   40


<TABLE>
<CAPTION>
                          Amount And Nature Of              Percent Of
        Name               Beneficial Ownership               Class
------------------        ---------------------             ----------
<S>                       <C>                               <C>
Michael A. Cawley (A)     300 shares, sole voting               *
                          and investment powers

Sam J. Cerny (B)          300 shares, sole voting               *
                          and investment powers

E. Chris Kauffman (C)     9,300 shares, shared voting           *
                          and investment powers

H W Peace II (D)          29,267 shares, shared voting         1.3%
                          and investment powers

Ray H. Potts (E)          1,480 shares, sole voting             *
                          and investment powers

Robert A. Reece (F)       16,044 shares, sole voting            *
                          and investment powers

Jerry L. Smith (G)        21,072 shares, sole voting           1.0%
                          and investment powers

All directors and         38,567 shares, shared                1.9%
officers as a             voting and investment
group (9 persons)         powers

                          78,286 shares, sole voting           3.8%
                          and investment powers

                          116,853 shares total                 5.7%
</TABLE>


----------
* less than 1.0%

(A)  P.O. Box 2180, Ardmore, OK  73402
(B)  3330 Liberty Twr, 100 N. Broadway, Okla. City, OK  73102
(C)  9705 North Broadway Ext. - Suite #200, Okla. City, OK  73114
(D)  5400 N.W. Grand Blvd - Suite #210, Okla. City, OK  73112
(E)  100 N. Broadway - Suite #3200, Okla. City, OK  73102
(F)  6403 N. Grand Blvd.  - Suite #204, Okla. City, OK  73116
(G)  5944 Luther Lane - Suite #401, Dallas, TX  75225


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                     N O N E


                                      (38)
<PAGE>   41


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (3)      Articles of Incorporation (Incorporated by reference to
                  Exhibit attached to Form 10 filed January 27, 1980, and to
                  Forms 8-K dated June 1, 1982 and December 3, 1982)

                  By-Laws as amended (Incorporated by reference to Form 8-K
                  dated October 31, 1994)

         (4)      Instruments defining the rights of security holders
                  (Incorporated by reference to Articles of Incorporation and
                  By-Laws listed above)

         (10)     Agreement indemnifying directors and officers (Incorporated by
                  reference to Form 10-K dated September 30, 1989)

         (21)     Subsidiaries of the Registrant

         (27)     Financial Data Schedule


                REPORTS ON FORM 8-K

                No reports on Form 8-K were filed during the quarter ended
September 30, 2000.



                                      (39)
<PAGE>   42


                                   SIGNATURES

                Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                                PANHANDLE ROYALTY COMPANY



                                                By: /s/ H W PEACE II
                                                    ----------------------------
                                                    H W Peace II, Chief
                                                    Executive Officer,
                                                    President, Director

                                                Date:   December 19, 2000
                                                       ------------------

                In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.


 /s/ JERRY L. SMITH                            /s/ E. CHRIS KAUFFMAN
--------------------------                    -----------------------------
Jerry L. Smith, Chairman of Board             E. Chris Kauffman, Director

Date    December 19, 2000                     Date    December 19, 2000
     ---------------------                         --------------------

 /s/ ROBERT A. REECE                           /s/ RAY H. POTTS
--------------------------                    -----------------------------
Robert A. Reece, Director                     Ray H. Potts, Director

Date    December 19, 2000                     Date    December 19, 2000
     ---------------------                         --------------------

 /s/ SAM J. CERNY                              /s/ MICHAEL A. CAWLEY
--------------------------                    -----------------------------
Sam J. Cerny, Director                        Michael A. Cawley, Director

Date    December 19, 2000                     Date    December 19, 2000
     ---------------------                          --------------------


 /s/ MICHAEL C. COFFMAN
--------------------------
Michael C. Coffman, Vice President
Treasurer and Secretary
(Principal Financial and Accounting
 Officer)

Date    December 19, 2000
     ----------------------



                                      (40)
<PAGE>   43


INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER          DESCRIPTION
-------         -----------
<S>             <C>
  21            SUBSIDIARIES OF PANHANDLE ROYALTY COMPANY AT SEPTEMBER 30, 2000

  27            Financial Data Schedule
</TABLE>