##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number: 1-10982

Cross Timbers Royalty Trust

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 75-6415930                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                      |  |           
|----------------------------------------------------- |  | ----------
|Bank of America, N.A., P.O. Box 830650, Dallas, Texas |  | 75283-0650
|(Address of principal executive offices)              |  | (Zip Code)

(877) 228-5084

(Registrants telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.  Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x                Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes ̈No  x

Indicate the number of units of beneficial interest outstanding, as of the latest practicable date:

Outstanding as of October 1, 2006

6,000,000



---



---

##### Table of Contents

CROSS TIMBERS ROYALTY TRUST

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

TABLE OF CONTENTS



|         |  |                                                                                                                 |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                 |  | Page
|         |  | Glossary of Terms                                                                                               |  | 3   
|         |  |                                                                                                                
|PART I.  |  | FINANCIAL INFORMATION                                                                                           |  |     
|         |  |                                                                                                                
|Item 1.  |  | Financial Statements                                                                                            |  | 4   
|         |  |                                                                                                                
|         |  | Report of Independent Registered Public Accounting Firm                                                         |  | 5   
|         |  |                                                                                                                
|         |  | Condensed Statements of Assets, Liabilities and Trust Corpus at September 30, 2006 and December 31, 2005        |  | 6   
|         |  |                                                                                                                
|         |  | Condensed Statements of Distributable Income for the Three and Nine Months Ended September 30, 2006 and 2005    |  | 7   
|         |  |                                                                                                                
|         |  | Condensed Statements of Changes in Trust Corpus for the Three and Nine Months Ended September 30, 2006 and 2005 |  | 8   
|         |  |                                                                                                                
|         |  | Notes to Condensed Financial Statements                                                                         |  | 9   
|         |  |                                                                                                                
|Item 2.  |  | Trustees Discussion and Analysis                                                                               |  | 12  
|         |  |                                                                                                                
|Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 18  
|         |  |                                                                                                                
|Item 4.  |  | Controls and Procedures                                                                                         |  | 18  
|         |  |                                                                                                                
|PART II. |  | OTHER INFORMATION                                                                                               |  |     
|         |  |                                                                                                                
|Item 1A. |  | Risk Factors                                                                                                    |  | 19  
|         |  |                                                                                                                
|Item 6.  |  | Exhibits                                                                                                        |  | 19  
|         |  |                                                                                                                
|         |  | Signatures                                                                                                      |  | 20  



2



---

##### Table of Contents

CROSS TIMBERS ROYALTY TRUST

GLOSSARY OF TERMS

The following are definitions of significant terms used in this Form 10-Q:



|                                                   |  |                                                                                                                                                                                                                                                                                                                                                
|-------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Bbl                                                |  | Barrel (of oil)                                                                                                                                                                                                                                                                                                                                
|                                                   | 
|Mcf                                                |  | Thousand cubic feet (of natural gas)                                                                                                                                                                                                                                                                                                           
|                                                   | 
|MMBtu                                              |  | One million British Thermal Units, a common energy measurement                                                                                                                                                                                                                                                                                 
|                                                   | 
|net proceeds                                       |  | Gross proceeds received by XTO Energy from sale of production from the underlying properties, less applicable costs, as defined in the net profits interest conveyances                                                                                                                                                                        
|                                                   | 
|net profits income                                 |  | Net proceeds multiplied by the applicable net profits percentage of 75% or 90%, which is paid to the trust by XTO Energy. Net profits income is referred to as royalty
income for income tax purposes.                                                                                                                                     
|                                                   | 
|net profits interest                               |  | An interest in an oil and gas property measured by net profits from the sale of production, rather than a specific portion of production. The following defined net profits interests were
conveyed to the trust from the underlying properties:                                                                                               
|                                                   | 
|                                                   |  | 90% net profits interests  interests that entitle the trust to receive 90% of the net proceeds from the underlying properties that are royalty or overriding royalty interests in
Texas, Oklahoma and New Mexico                                                                                                                              
|                                                   | 
|                                                   |  | 75% net profits interests  interests that entitle the trust to receive 75% of the net proceeds from the underlying properties that are working interests in Texas and
Oklahoma                                                                                                                                                                
|                                                   | 
|royalty interest (and overriding royalty
interest) |  | A nonoperating interest in an oil and gas property that provides the owner a specified share of production without any production expense or development costs                                                                                                                                                                                 
|                                                   | 
|underlying properties                              |  | XTO Energys interest in certain oil and gas properties from which the net profits interests were conveyed. The underlying properties include royalty and overriding royalty interests in
producing and nonproducing properties in Texas, Oklahoma and New Mexico, and working interests in producing properties located in Texas and Oklahoma.
|                                                   | 
|working interest                                   |  | An operating interest in an oil and gas property that provides the owner a specified share of production that is subject to all production expense and development costs                                                                                                                                                                       



3



---

##### Table of Contents

CROSS TIMBERS ROYALTY TRUST

PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

The condensed financial statements
included herein are presented, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or
omitted pursuant to such rules and regulations, although the trustee believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial
statements and the notes thereto included in the trusts latest Annual Report on Form 10-K. In the opinion of the trustee, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the assets, liabilities and
trust corpus of the Cross Timbers Royalty Trust at September 30, 2006, and the distributable income and changes in trust corpus for the three- and nine-month periods ended September 30, 2006 and 2005, have been included. Distributable
income for such interim periods is not necessarily indicative of distributable income for the full year.



4



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Bank of America, N.A., as Trustee

for the Cross Timbers Royalty Trust:

We have
reviewed the accompanying condensed statement of assets, liabilities and trust corpus of the Cross Timbers Royalty Trust as of September 30, 2006 and the related condensed statements of distributable income and changes in trust corpus for the
three- and nine-month periods ended September 30, 2006 and 2005. These condensed financial statements are the responsibility of the trustee.

We
conducted our review in accordance with standards established by the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and
making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

The
accompanying condensed financial statements are prepared on a modified cash basis as described in Note 1 which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.

Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them
to be in conformity with the basis of accounting described in Note 1.

We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the statement of assets, liabilities and trust corpus of the Cross Timbers Royalty Trust as of December 31, 2005, and the related statements of distributable income and changes in trust corpus
for the year then ended (not presented herein), included in the trusts 2005 Annual Report on Form 10-K, and in our report dated March 16, 2006, we expressed an unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2005 is fairly stated, in all material respects, in relation to the statement of assets, liabilities and trust corpus
included in the trusts 2005 Annual Report on Form 10-K from which it has been derived.

KPMG LLP

Dallas, Texas

November 2, 2006



5



---

##### Table of Contents

CROSS TIMBERS ROYALTY TRUST

Condensed Statements of Assets, Liabilities and Trust Corpus



|                                                                                 |  |                   |            |                  |   |           
|-------------------------------------------------------------------------------- |  | ----------------- | ---------- | ---------------- | - | ----------
|                                                                                 |  | September 30,2006 |            | December 31,2005
|                                                                                 |  | (Unaudited)       |            |                 
|ASSETS                                                                           |  |                   |            |                  |   |           
|Cash and short-term investments                                                  |  | $                 | 2,209,175  |                  | $ | 2,111,521 
|Interest to be received                                                          |  |                   | 12,553     |                  |   | 2,489     
|Net profits interests in oil and gas properties - net (Note 1)                   |  |                   | 20,035,944 |                  |   | 21,204,723
|                                                                                 |  |                   |            |                  |   |           
|                                                                                 |  | $                 | 22,257,672 |                  | $ | 23,318,733
|                                                                                 |  |                   |            |                  |   |           
|LIABILITIES AND TRUST CORPUS                                                     |  |                   |            |                  |   |           
|Distribution payable to unitholders                                              |  | $                 | 2,221,728  |                  | $ | 2,114,010 
|Trust corpus (6,000,000 units of beneficial interest authorized and outstanding) |  |                   | 20,035,944 |                  |   | 21,204,723
|                                                                                 |  |                   |            |                  |   |           
|                                                                                 |  | $                 | 22,257,672 |                  | $ | 23,318,733
|                                                                                 |  |                   |            |                  |   |           

The accompanying notes to condensed financial statements are an integral part of these statements.



6



---

##### Table of Contents

CROSS TIMBERS ROYALTY TRUST

Condensed Statements of Distributable Income(Unaudited)



|                                                |  |                                |           |                               |   |           |  |      |            |  |   |           
|----------------------------------------------- |  | ------------------------------ | --------- | ----------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                                |  | Three Months EndedSeptember 30 |           | Nine Months EndedSeptember 30
|                                                |  | 2006                           |           | 2005                          |   | 2006      |  | 2005
|Net profits income                              |  | $                              | 6,178,866 |                               | $ | 5,069,110 |  | $    | 18,544,566 |  | $ | 14,120,370
|Interest income                                 |  |                                | 16,548    |                               |   | 5,578     |  |      | 42,689     |  |   | 13,399    
|                                                |  |                                |           |                               |   |           |  |      |            |  |   |           
|Total income                                    |  |                                | 6,195,414 |                               |   | 5,074,688 |  |      | 18,587,255 |  |   | 14,133,769
|Administration expense                          |  |                                | 48,498    |                               |   | 35,600    |  |      | 324,413    |  |   | 300,289   
|                                                |  |                                |           |                               |   |           |  |      |            |  |   |           
|Distributable income                            |  | $                              | 6,146,916 |                               | $ | 5,039,088 |  | $    | 18,262,842 |  | $ | 13,833,480
|                                                |  |                                |           |                               |   |           |  |      |            |  |   |           
|Distributable income per unit (6,000,000 units) |  | $                              | 1.024486  |                               | $ | 0.839848  |  | $    | 3.043807   |  | $ | 2.305580  
|                                                |  |                                |           |                               |   |           |  |      |            |  |   |           

The accompanying notes to condensed financial statements are an integral part of these statements.



7



---

##### Table of Contents

CROSS TIMBERS ROYALTY TRUST

Condensed Statements of Changes in Trust Corpus(Unaudited)



|                                      |  |                                |            |   |                               |   |            |      |  |   |             |   |  |   |             |  
|------------------------------------- |  | ------------------------------ | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                      |  | Three Months EndedSeptember 30 |            |   | Nine Months EndedSeptember 30 |  
|                                      |  | 2006                           |            |   | 2005                          |   |            | 2006 |  |   | 2005        |  
|Trust corpus, beginning of period     |  | $                              | 20,452,368 |   |                               | $ | 21,967,298 |      |  | $ | 21,204,723  |   |  | $ | 22,847,694  |  
|Amortization of net profits interests |  |                                | (416,424   | ) |                               |   | (379,578   | )    |  |   | (1,168,779  | ) |  |   | (1,259,974  | )
|Distributable income                  |  |                                | 6,146,916  |   |                               |   | 5,039,088  |      |  |   | 18,262,842  |   |  |   | 13,833,480  |  
|Distributions declared                |  |                                | (6,146,916 | ) |                               |   | (5,039,088 | )    |  |   | (18,262,842 | ) |  |   | (13,833,480 | )
|                                      |  |                                |            |   |                               |   |            |      |  |   |             |   |  |   |             |  
|Trust corpus, end of period           |  | $                              | 20,035,944 |   |                               | $ | 21,587,720 |      |  | $ | 20,035,944  |   |  | $ | 21,587,720  |  
|                                      |  |                                |            |   |                               |   |            |      |  |   |             |   |  |   |             |  

The accompanying notes to condensed financial statements are an integral part of these statements.



8



---

##### Table of Contents

CROSS TIMBERS ROYALTY TRUST

Notes to Condensed Financial Statements(Unaudited)



|1. | Basis of Accounting
|-- | -------------------

The financial statements of
Cross Timbers Royalty Trust are prepared on the following basis and are not intended to present financial position and results of operations in conformity with generally accepted accounting principles (GAAP):



| |  |  | Net profits income recorded for a month is the amount computed and paid by XTO Energy Inc., the owner of the underlying properties, to Bank of America, N.A., as trustee for the
trust. Net profits income consists of net proceeds received by XTO Energy from the underlying properties in the prior month, multiplied by net profit percentages of 90% for the 90% net profits interests, and 75% for the 75% net profits interests.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Costs deducted in the calculation of net proceeds for the 90% net profits interests generally include applicable taxes,
transportation, marketing and legal costs, and do not include production expense or development costs. For the 75% net profits interests, costs deducted in the calculation of net proceeds include production expense, development costs, applicable
taxes, transportation, marketing and legal costs, operating charges and other costs.



| |  |  | Net profits income is computed separately for each of five conveyances under which the net profits interests were conveyed to the trust. If monthly costs exceed revenues for any
conveyance, such excess costs must be recovered, with accrued interest, from future net proceeds of that conveyance and cannot reduce net proceeds from the other conveyances.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest income, interest to be received and distribution payable to unitholders include interest to be earned from the monthly record date (last business day of the month) through
the date of the next distribution to unitholders.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trust expenses are recorded based on liabilities paid and cash reserves established by the trustee for liabilities and contingencies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Distributions to unitholders are recorded when declared by the trustee.
| | - |  | -----------------------------------------------------------------------

The financial statements of the trust differ from those prepared in conformity with GAAP because revenues are recognized when received rather than accrued in the month of production, expenses are recognized when paid
rather than when incurred, and certain cash reserves may be established for contingencies which would not be accrued under GAAP. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the
U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

Most
accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were
paid. Because the trusts financial statements are prepared



9



---

##### Table of Contents

on the modified cash basis, as described above, most accounting pronouncements are not applicable to the trusts financial statements.

The initial carrying value of the net profits interests of $61,100,449 represents XTO Energys historical net book value on February 12, 1991,
the creation date of the trust. Amortization of the net profits interests is calculated on a unit-of-production basis and is charged directly to trust corpus. Accumulated amortization was $41,064,505 as of September 30, 2006 and $39,895,726 as
of December 31, 2005.



|2. | Contingencies
|-- | -------------

Several states have enacted
legislation to require state income tax withholding from nonresident recipients of oil and gas proceeds. After consultation with its state tax counsel, XTO Energy has advised the trustee that it believes the trust is not subject to these withholding
requirements. However, regulations are subject to change by the various states, which could change this conclusion. Should the trust be required to withhold state taxes, distributions to the unitholders would be reduced by the required amount,
subject to the unitholders right to file a state tax return to claim any refund due.

In May 2006, the State of Texas passed
legislation to implement a new margin tax of 1% to be imposed on revenues less certain costs, as specified in the legislation, generated from Texas activities beginning in 2007. Entities subject to the tax generally include trusts, unless otherwise
exempt, and various other types of entities. Trusts that meet statutory requirements are generally exempt from the margin tax as passive entities; however, there is currently no clear authority that the trust meets requirements for the
margin tax exemption as a passive entity. Additional legislative action or issuance of applicable administrative rules by the state comptroller may be necessary to determine if the trust is exempt. Approximately 30% of the trusts net profits
income is generated from underlying properties in Texas.



|3. | XTO Energy Inc.
|-- | ---------------

In January 2006, XTO Energy
announced that it would consider selling the underlying properties. However, XTO Energy advised the trustee in August 2006, that after a full review, it has decided to retain ownership of these underlying property interests at this time.



|4. | Reversion Agreement
|-- | -------------------

Certain of the properties
underlying the 90% net profits interests are subject to a reversion agreement between XTO Energy and an unrelated third party. The agreement calls for XTO Energy to transfer 25% of its interest in those properties to the third party when net amounts
received by XTO Energy from the properties subject to the agreement equal the purchase price of the properties plus a 1% per month return on the unrecouped purchase price, known as payout. At the time payout occurs and the 25% interest is
transferred to the third party, net proceeds payable to the trust and trust distributions to unitholders will be reduced. Based on recent prices and sales volumes, XTO Energy has informed the trustee that payout could occur by the end of 2007,
thereafter reducing monthly distributions by approximately 5%. Payout is affected by product prices and the level of development of properties subject to the reversion agreement.



10



---

##### Table of Contents

|5. | Potential Litigation Settlement Proceeds
|-- | ----------------------------------------

XTO
Energy advised the trustee that it received lawsuit settlement proceeds in September 2006 related to underpayment of royalties on certain San Juan Basin properties. XTO Energy is in the process of determining the portion of this remittance that
relates to the underlying properties, and currently estimates the amount attributable to the trusts 90% net profits interests may range from approximately $1,200,000 to $1,900,000, or $0.20 to $0.32 per unit. This settlement may increase the
trusts November distribution payable to unitholders on December 14, 2006, and/or subsequent distributions, depending on when XTO Energy is able to determine the allocation of these proceeds by property.



11



---

##### Table of Contents

|Item 2. | Trustees Discussion and Analysis.
|------- | ----------------------------------

The following
discussion should be read in conjunction with the trustees discussion and analysis contained in the trusts 2005 annual report, as well as the condensed financial statements and notes thereto included in this quarterly report on Form
10-Q. The trusts Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available on the trusts web site at www.crosstimberstrust.com.

Distributable Income

Quarter

For the quarter ended September 30, 2006, net profits income was $6,178,866 compared to $5,069,110 for third quarter 2005. This 22% increase in net profits income is
primarily the result of higher oil prices and increased gas and oil sales volumes. See Net Profits Income on the following page.

After
considering interest income of $16,548 and administration expense of $48,498, distributable income for the quarter ended September 30, 2006 was $6,146,916, or $1.024486 per unit of beneficial interest. Administration expense for the quarter
increased 36% from the prior year quarter primarily because of the timing of expenditures. Interest income increased 197% because of increased net profits income and higher interest rates. For third quarter 2005, distributable income was $5,039,088,
or $0.839848 per unit. Distributions to unitholders for the quarter ended September 30, 2006 were:



|                   |  |                    |  |                      |         
|------------------ |  | ------------------ |  | -------------------- | --------
|Record Date        |  | Payment Date       |  | Distributionper Unit
|July 31, 2006      |  | August 14, 2006    |  | $                    | 0.310365
|August 31, 2006    |  | September 15, 2006 |  |                      | 0.343833
|September 29, 2006 |  | October 16, 2006   |  |                      | 0.370288
|                   |  |                    |  |                      |         
|                   |  |                    |  | $                    | 1.024486
|                   |  |                    |  |                      |         

Nine Months

For the nine months ended September 30, 2006, net profits income was $18,544,566 compared to $14,120,370 for the same 2005 period. This 31% increase in net profits income is primarily the result of higher oil and gas prices and
increased gas sales volumes. See Net Profits Income on the following page.

After considering interest income of $42,689 and administration
expense of $324,413, distributable income for the nine months ended September 30, 2006 was $18,262,842, or $3.043807 per unit of beneficial interest. Administration expense for the nine months ended September 30, 2006 increased 8% from the
prior year period primarily because of the timing of expenditures. Interest income increased 219% because of increased net profits income and higher interest rates. For the nine months ended September 30, 2005, distributable income was
$13,833,480, or $2.305580 per unit.



12



---

##### Table of Contents

Net Profits Income

Net profits income is recorded when received by the trust, which is the month following receipt by XTO Energy, and generally two months after oil production and three months after gas production. Net profits income is generally affected by
three major factors:



| |  |  | oil and gas sales volumes,
| | - |  | --------------------------



| |  |  | oil and gas sales prices, and
| | - |  | -----------------------------



| |  |  | costs deducted in the calculation of net profits income.
| | - |  | --------------------------------------------------------

Because
properties underlying the 90% net profits interests are royalty and overriding royalty interests, they generally bear no costs other than production and property taxes, related legal costs, and marketing and transportation charges. In addition to
these costs, the 75% net profits interests are subject to production expense and development costs, since the properties underlying the 75% net profits interests are working interests.



13



---

##### Table of Contents

The following is a summary of the calculation of net profits income received by the trust:



|                                |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|------------------------------- |  | --------------------------------- | --------- | ------------------ | - | --------------------------------- | ---- | ------------------ | ---- | - | ---------- |  | - | ---------- |  | ----
|                                |  | Three Months EndedSeptember 30(a) |           | Increase(Decrease) |   | Nine Months EndedSeptember 30 (a) |      | Increase(Decrease)
|                                |  | 2006                              |           | 2005               |   |                                   | 2006 |                    | 2005 |  
|Sales Volumes                   |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Oil (Bbls) (b)                  |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Underlying properties           |  |                                   | 68,694    |                    |   | 65,643                            |      | 5%                 |      |   | 205,723    |  |   | 203,329    |  | 1%  
|Average per day                 |  |                                   | 747       |                    |   | 714                               |      | 5%                 |      |   | 754        |  |   | 745        |  | 1%  
|Net profits interests           |  |                                   | 40,323    |                    |   | 35,866                            |      | 12%                |      |   | 109,068    |  |   | 110,257    |  | (1%)
|Gas (Mcf) (b)                   |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Underlying properties           |  |                                   | 708,589   |                    |   | 492,130                           |      | 44%                |      |   | 2,053,599  |  |   | 1,684,821  |  | 22% 
|Average per day                 |  |                                   | 7,787     |                    |   | 5,408                             |      | 44%                |      |   | 7,522      |  |   | 6,172      |  | 22% 
|Net profits interests           |  |                                   | 624,471   |                    |   | 428,430                           |      | 46%                |      |   | 1,795,407  |  |   | 1,470,111  |  | 22% 
|Average Sales Prices            |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Oil (per Bbl)                   |  | $                                 | 65.39     |                    | $ | 50.57                             |      | 29%                |      | $ | 58.71      |  | $ | 46.61      |  | 26% 
|Gas (per Mcf)                   |  | $                                 | 7.25      |                    | $ | 9.05                              |      | (20%)              |      | $ | 8.36       |  | $ | 7.51       |  | 11% 
|Revenues                        |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Oil sales                       |  | $                                 | 4,492,028 |                    | $ | 3,319,375                         |      | 35%                |      | $ | 12,078,312 |  | $ | 9,476,428  |  | 27% 
|Gas sales                       |  |                                   | 5,136,225 |                    |   | 4,454,082                         |      | 15%                |      |   | 17,173,116 |  |   | 12,648,425 |  | 36% 
|                                |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Total Revenues                  |  |                                   | 9,628,253 |                    |   | 7,773,457                         |      | 24%                |      |   | 29,251,428 |  |   | 22,124,853 |  | 32% 
|                                |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Costs                           |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Taxes, transportation and other |  |                                   | 1,366,431 |                    |   | 909,166                           |      | 50%                |      |   | 4,241,824  |  |   | 2,873,378  |  | 48% 
|Production expense (c)          |  |                                   | 954,605   |                    |   | 867,386                           |      | 10%                |      |   | 3,160,478  |  |   | 2,559,442  |  | 23% 
|Development costs               |  |                                   | 151,369   |                    |   | 128,768                           |      | 18%                |      |   | 534,080    |  |   | 311,893    |  | 71% 
|                                |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Total Costs                     |  |                                   | 2,472,405 |                    |   | 1,905,320                         |      | 30%                |      |   | 7,936,382  |  |   | 5,744,713  |  | 38% 
|                                |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Net Proceeds                    |  | $                                 | 7,155,848 |                    | $ | 5,868,137                         |      | 22%                |      | $ | 21,315,046 |  | $ | 16,380,140 |  | 30% 
|                                |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     
|Net Profits Income              |  | $                                 | 6,178,866 |                    | $ | 5,069,110                         |      | 22%                |      | $ | 18,544,566 |  | $ | 14,120,370 |  | 31% 
|                                |  |                                   |           |                    |   |                                   |      |                    |      |   |            |  |   |            |  |     

---

|(a) | Because of the interval between time of production and receipt of royalty income by the trust, (1) oil and gas sales for the quarter ended September 30 generally represent
oil production for the period May through July and gas production for the period April through June and (2) oil and gas sales for the nine months ended September 30 generally represent oil production for the period November through July
and gas production for the period October through June.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Oil and gas sales volumes are allocated to the net profits interests based upon a formula that considers oil and gas prices and the total amount of production expense and
development costs. Changes in any of these factors may result in disproportionate fluctuations in volumes allocated to the net profits interests. Therefore, comparative discussion of oil and gas sales volumes is based on the underlying properties.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Includes an overhead charge which is deducted and retained by XTO Energy. As of September 30, 2006, this charge was $27,879 per month (including a monthly overhead charge of
$2,572 which XTO Energy deducts as operator of the Penwell Unit) and is subject to adjustment each May based on an oil and gas industry index.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



---

##### Table of Contents

The following are explanations of significant variances on the underlying properties from third quarter 2005 to third
quarter 2006 and from the first nine months of 2005 to the comparable period in 2006:

Sales Volumes

Oil

Oil sales volumes increased 5% for third quarter 2006 and 1% for
the nine-month period as compared with the same 2005 periods primarily due to timing of cash receipts and increased production, partially offset by natural production decline.

Gas

Gas sales volumes increased 44% for third quarter 2006 and 22% for the nine-month period as compared with the
same 2005 periods. Increased gas sales volumes are primarily due to timing of cash receipts, prior period volume adjustments and production from new wells, partially offset by natural production decline.

Sales Prices

Oil

The average oil price increased 29% to $65.39 per Bbl for the third quarter and 26% to $58.71 per Bbl for the nine-month period. Oil prices were higher for the third
quarter and for the nine-month period primarily because of increasing global demand and supply shortage concerns, political instability, reduced production as a result of tropical storms in the Gulf of Mexico in 2005 and inadequate sour crude
refining capacity. Rising tension in the Middle East caused oil prices to increase to record levels in July 2006, exceeding $78.00 per Bbl. Rising crude oil supplies, reduced geopolitical tensions and the potential for lower demand in a slowing U.S.
economy have caused recent oil prices to drop below $57.00 per Bbl. The average NYMEX price for August and September 2006 was $68.70 per Bbl. At October 30, 2006, the average NYMEX futures price for the following twelve months was $63.53 per
Bbl. Recent trust oil prices have averaged approximately 8% lower than the NYMEX price.

Gas

Gas prices for the third quarter decreased 20% to $7.25 per Mcf and for the nine-month period increased 11% to $8.36 per Mcf. Gas prices were lower for third quarter 2006
primarily because of an adequate natural gas supply inventory due to the warmer than normal weather during the winter of 2005-2006 and the absence of hurricane activity in the Gulf of Mexico in 2006. Gas prices were higher for the nine-month period
primarily because of increased demand and declining North American production. Prices will continue to be affected by weather, the U.S. economy, the level of North American production, crude oil prices and import levels of liquified natural gas, and
are expected to remain volatile. The third quarter 2006 gas price is primarily related to production from April through June 2006, when the average NYMEX price was $6.66 per MMBtu. Increased gas inventories, speculative activity in NYMEX gas markets
and mild weather have caused recent prices to decline. The average NYMEX price for July through September 2006 was $6.17 per MMBtu. At October 30, 2006, the average NYMEX futures price for the following twelve months was $7.61 per MMBtu. Recent
trust gas prices have been approximately 22% higher than the NYMEX price.



15



---

##### Table of Contents

Costs

Taxes

Taxes, transportation and other increased 50% for the third quarter and 48% for the nine-month period primarily because of increased production taxes
related to higher revenues and increased property taxes related to the timing of cash disbursements.

Production Expense

Production expense was 10% higher for the third quarter and 23% higher for the nine-month period primarily because of increased power and fuel, maintenance, overhead and
other costs as well as the timing of projects and cash disbursements.

Development

Development costs increased 18% for the third quarter and 71% for the nine-month period primarily because of increased activity and costs related to properties underlying the 75% net profits interests.

State of Texas Margin Tax

In May 2006, the State of Texas passed
legislation to implement a new margin tax of 1% to be imposed on revenues less certain costs, as specified in the legislation, generated from Texas activities beginning in 2007. Entities subject to the tax generally include trusts, unless otherwise
exempt, and various other types of entities. Trusts that meet statutory requirements are generally exempt from the margin tax as passive entities; however, there is currently no clear authority that the trust meets requirements for the
margin tax exemption as a passive entity. Additional legislative action or issuance of applicable administrative rules by the state comptroller may be necessary to determine if the trust is exempt. Approximately 30% of the trusts net profits
income is generated from underlying properties in Texas.

If the trust is exempt from the margin tax at the trust level as a passive entity, each
unitholder that is a taxable entity would generally include its share of the trusts revenues in its margin tax computation. If, however, the margin tax is imposed on the trust at the trust level, each unitholder would generally exclude its
share of the trusts net income from the margin tax calculation. Unitholders should consult their tax advisors regarding their individual tax situation.

Reversion Agreement

Certain of the properties underlying the 90% net profits interests are subject to a reversion agreement between XTO
Energy and an unrelated third party. The agreement calls for XTO Energy to transfer 25% of its interest in those properties to the third party when net amounts received by XTO Energy from the properties subject to the agreement equal the purchase
price of the properties plus a 1% per month return on the unrecouped purchase price, known as payout. At the time payout occurs and the 25% interest is transferred to the third party, net proceeds payable to the trust and trust distributions to
unitholders will be reduced. Based on recent prices and sales volumes, XTO Energy has informed the trustee that payout could occur by the end of 2007, thereafter reducing monthly distributions by approximately 5%. Payout is affected by product
prices and the level of development of properties subject to the reversion agreement.



16



---

##### Table of Contents

Potential Litigation Settlement Proceeds

XTO Energy advised the trustee that it received lawsuit settlement proceeds in September 2006 related to underpayment of royalties on certain San Juan Basin properties. XTO Energy is in the process of determining the
portion of this remittance that relates to the underlying properties, and currently estimates the amount attributable to the trusts 90% net profits interests may range from approximately $1,200,000 to $1,900,000, or $0.20 to $0.32 per unit.
This settlement may increase the trusts November distribution payable to unitholders on December 14, 2006, and/or subsequent distributions, depending on when XTO Energy is able to determine the allocation of these proceeds by property.



17



---

##### Table of Contents

Forward-Looking Statements

This report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements regarding the net profits interests, underlying properties, development activities, development, production and other costs and
expenses, oil and gas prices and differentials to NYMEX prices, supply shortages, distributions to unitholders, timing of payout under the reversion agreement and reductions in distributions following payout and industry and market conditions, are
forward-looking statements that are subject to risks and uncertainties which are detailed in Part I, Item 1A of the trusts Annual Report on Form 10-K for the year ended December 31, 2005, which is incorporated by this reference as
though fully set forth herein. Although XTO Energy and the trustee believe that the expectations reflected in such forward-looking statements are reasonable, neither XTO Energy nor the trustee can give any assurance that such expectations will prove
to be correct.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk.
|------- | -----------------------------------------------------------

There have been no material changes in the trusts market risks, as disclosed in Part II, Item 7A of the trusts Annual Report on Form 10-K for the year ended December 31, 2005.



|Item 4. | Controls and Procedures.
|------- | ------------------------

As of the end of the period
covered by this report, the trustee carried out an evaluation of the effectiveness of the design and operation of the trusts disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the
trustee concluded that the trusts disclosure controls and procedures are functioning effectively to ensure that information required to be disclosed in reports filed with the Securities and Exchange Commission is recorded, processed,
summarized and reported within the periods required and that this information is accumulated and communicated to allow timely decisions regarding required disclosures. In its evaluation of disclosure controls and procedures, the trustee has relied,
to the extent considered reasonable, on information provided by XTO Energy. There has not been any change in the trusts internal control over financial reporting during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the trusts internal control over financial reporting.



18



---

##### Table of Contents

PART II - OTHER INFORMATION



|Item 1. | 
|------- | 

Not Applicable.



|Item 1A. | Risk Factors.
|-------- | -------------

There have been no material
changes in the risk factors disclosed under Part I, Item 1A of the trusts Annual Report on Form 10-K for the year ended December 31, 2005.



|Items 2 | through 5.
|------- | ----------

Not Applicable.



|Item 6. | Exhibits.
|------- | ---------

(a) Exhibits.



|                               |  |                                                                                                                                                                                         
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number and Description |  |                                                                                                                                                                                         
|(15)                           |  | Awareness letter of KPMG LLP                                                                                                                                                            
|                               | 
|(31)                           |  | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                  
|                               | 
|(32)                           |  | Section 1350 Certification                                                                                                                                                              
|                               | 
|(99)                           |  | Items 1A and 7A to the Annual Report on Form 10-K for Cross Timbers Royalty Trust filed with the Securities and Exchange Commission on March 16, 2006 (incorporated herein by
reference)



19



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.



|                       |  |  |  |                                                                |  |                      |  |                                                     
|---------------------- |  |  |  | -------------------------------------------------------------- |  | -------------------- |  | ----------------------------------------------------
|                       |  |  |  | CROSS TIMBERS ROYALTY TRUST  By BANK OF AMERICA, N.A., TRUSTEE
|                       |  |  | 
|                       |  |  |  | By                                                             |  | /S/ NANCY G. WILLIS 
|                       |  |  |  |                                                                |  |                      |  | Nancy G. Willis                                     
|                       |  |  |  |                                                                |  |                      |  | Vice President                                      
|                       |  | 
|                       |  |  |  | XTO ENERGY INC.                                               
|                       |  |  | 
|Date: November 3, 2006 |  |  |  | By                                                             |  | /S/ LOUIS G. BALDWIN
|                       |  |  |  |                                                                |  |                      |  | Louis G. Baldwin                                    
|                       |  |  |  |                                                                |  |                      |  | Executive Vice President and Chief Financial Officer



20