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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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



For the quarterly period ended September 30, 2004



OR



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



Commission File Number: 1-10982



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Cross Timbers Royalty Trust

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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 change since last report)



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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 an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes  x    No ̈



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



Outstanding as of October 1,
2004

6,000,000



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CROSS TIMBERS ROYALTY TRUST

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004



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, 2004 and December 31, 2003        |  | 6   
|         |  |                       | 
|         |  |                       |  | Condensed Statements of Distributable Income for the Three and Nine Months Ended September 30, 2004 and 2003    |  | 7   
|         |  |                       | 
|         |  |                       |  | Condensed Statements of Changes in Trust Corpus for the Three and Nine Months Ended September 30, 2004 and 2003 |  | 8   
|         |  |                       | 
|         |  |                       |  | Notes to Condensed Financial Statements                                                                         |  | 9   
|         |  |                       | 
|         |  | Item 2.               |  | Trustees Discussion and Analysis                                                                               |  | 11  
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 16  
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                         |  | 16  
|         |  |                      
|PART II. |  | OTHER INFORMATION     |  |                                                                                                                
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                                |  | 17  
|         |  |                       | 
|         |  |                       |  | Signatures                                                                                                      |  | 18  



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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% and 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 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 and development costs                                                                                                                                                                               



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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, 2004, and the distributable income and changes in trust corpus for the three- and nine-month periods ended September 30, 2004 and 2003, have been included.
Distributable income for such interim periods is not necessarily indicative of distributable income for the full year.



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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, 2004 and the related condensed statements of distributable income and changes in trust corpus for the three- and nine-month periods ended September 30, 2004 and 2003. 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, 2003, 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 2003 Annual Report
on Form 10-K, and in our report dated March 5, 2004, 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, 2003 is fairly stated, in all material respects, in relation to the statement of assets, liabilities and trust corpus included in the trusts 2003 Annual Report on Form 10-K from which it has been derived.



KPMG LLP



Dallas, Texas

October 15, 2004



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CROSS TIMBERS ROYALTY TRUST



Condensed
Statements of Assets, Liabilities and Trust Corpus



|                                                                                 |  |                   |            |                  |   |           
|-------------------------------------------------------------------------------- |  | ----------------- | ---------- | ---------------- | - | ----------
|                                                                                 |  | September 30,2004 |            | December 31,2003
|                                                                                 |  | (Unaudited)       |            |                 
|ASSETS                                                                           |  |                   |            |                  |   |           
|                                                                                 |  |                  
|Cash and short-term investments                                                  |  | $                 | 1,507,837  |                  | $ | 994,389   
|Interest to be received                                                          |  |                   | 605        |                  |   | 357       
|Net profits interests in oil and gas properties - net (Note 1)                   |  |                   | 23,341,683 |                  |   | 24,665,401
|                                                                                 |  |                   |            |                  |   |           
|                                                                                 |  | $                 | 24,850,125 |                  | $ | 25,660,147
|                                                                                 |  |                   |            |                  |   |           
|LIABILITIES AND TRUST CORPUS                                                     |  |                   |            |                  |   |           
|                                                                                 |  |                  
|Distribution payable to unitholders                                              |  | $                 | 1,508,442  |                  | $ | 994,746   
|Trust corpus (6,000,000 units of beneficial interest authorized and outstanding) |  |                   | 23,341,683 |                  |   | 24,665,401
|                                                                                 |  |                   |            |                  |   |           
|                                                                                 |  | $                 | 24,850,125 |                  | $ | 25,660,147
|                                                                                 |  |                   |            |                  |   |           



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



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CROSS TIMBERS ROYALTY TRUST



Condensed
Statements of Distributable Income (Unaudited)



|                                                |  |                                |           |                               |   |           |  |      |            |  |   |          
|----------------------------------------------- |  | ------------------------------ | --------- | ----------------------------- | - | --------- |  | ---- | ---------- |  | - | ---------
|                                                |  | Three Months EndedSeptember 30 |           | Nine Months EndedSeptember 30
|                                                |  | 2004                           |           | 2003                          |   | 2004      |  | 2003
|Net profits income                              |  | $                              | 4,017,397 |                               | $ | 3,122,116 |  | $    | 10,792,393 |  | $ | 9,539,904
|Interest income                                 |  |                                | 1,548     |                               |   | 953       |  |      | 3,089      |  |   | 3,347    
|                                                |  |                                |           |                               |   |           |  |      |            |  |   |          
|Total income                                    |  |                                | 4,018,945 |                               |   | 3,123,069 |  |      | 10,795,482 |  |   | 9,543,251
|Administration expense                          |  |                                | 90,205    |                               |   | 53,457    |  |      | 264,966    |  |   | 210,275  
|                                                |  |                                |           |                               |   |           |  |      |            |  |   |          
|Distributable income                            |  | $                              | 3,928,740 |                               | $ | 3,069,612 |  | $    | 10,530,516 |  | $ | 9,332,976
|                                                |  |                                |           |                               |   |           |  |      |            |  |   |          
|Distributable income per unit (6,000,000 units) |  | $                              | 0.654790  |                               | $ | 0.511602  |  | $    | 1.755086   |  | $ | 1.555496 
|                                                |  |                                |           |                               |   |           |  |      |            |  |   |          



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



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CROSS TIMBERS ROYALTY TRUST



Condensed
Statements of Changes in Trust Corpus (Unaudited)



|                                      |  |                                |            |   |                                |   |            |      |  |   |             |   |  |   |            |  
|------------------------------------- |  | ------------------------------ | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ----------- | - |  | - | ---------- | -
|                                      |  | Three Months EndedSeptember 30 |            |   | Nine Months Ended September 30 |  
|                                      |  | 2004                           |            |   | 2003                           |   |            | 2004 |  |   | 2003        |  
|Trust corpus, beginning of period     |  | $                              | 23,815,899 |   |                                | $ | 25,612,459 |      |  | $ | 24,665,401  |   |  | $ | 26,556,533 |  
|Amortization of net profits interests |  |                                | (474,216   | ) |                                |   | (415,857   | )    |  |   | (1,323,718  | ) |  |   | (1,359,931 | )
|Distributable income                  |  |                                | 3,928,740  |   |                                |   | 3,069,612  |      |  |   | 10,530,516  |   |  |   | 9,332,976  |  
|Distributions declared                |  |                                | (3,928,740 | ) |                                |   | (3,069,612 | )    |  |   | (10,530,516 | ) |  |   | (9,332,976 | )
|                                      |  |                                |            |   |                                |   |            |      |  |   |             |   |  |   |            |  
|Trust corpus, end of period           |  | $                              | 23,341,683 |   |                                | $ | 25,196,602 |      |  | $ | 23,341,683  |   |  | $ | 25,196,602 |  
|                                      |  |                                |            |   |                                |   |            |      |  |   |             |   |  |   |            |  



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



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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 other production and development costs. For the 75% net profits interests, costs deducted in the calculation
of net proceeds include production expenses, development costs, applicable taxes, 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



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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 $37,758,766 as of September 30, 2004 and $36,435,048 as of December 31, 2003.



|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 being developed or are subject to change by the various states, which could change
this conclusion. In the event it is determined that the trust is 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.



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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 2003 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, 2004, net profits income was $4,017,397 compared to $3,122,116 for third quarter 2003. This 29% increase
in net profits income is primarily the result of higher oil and gas prices. See Net Profits Income on the following page.



After considering interest income of $1,548 and administration expense of $90,205, distributable income for the quarter ended September 30, 2004 was $3,928,740, or
$0.654790 per unit of beneficial interest. Administration expense for the quarter increased 69% from the prior year quarter primarily because of higher reporting costs related to an increased number of unitholders and the timing of expenditures. For
third quarter 2003, distributable income was $3,069,612, or $0.511602 per unit. Distributions to unitholders for the quarter ended September 30, 2004 were:



|                   |  |                    |  |                      |         
|------------------ |  | ------------------ |  | -------------------- | --------
|Record Date        |  | Payment Date       |  | Distributionper Unit
|July 30, 2004      |  | August 13, 2004    |  | $                    | 0.205248
|August 31, 2004    |  | September 15, 2004 |  |                      | 0.198135
|September 30, 2004 |  | October 15, 2004   |  |                      | 0.251407
|                   |  |                    |  |                      |         
|                   |  |                    |  | $                    | 0.654790
|                   |  |                    |  |                      |         



Nine Months



For the nine months ended September 30, 2004, net profits income was $10,792,393 compared to
$9,539,904 for the same 2003 period. This 13% increase in net profits income is the result of higher oil and gas prices. See Net Profits Income on the following page.



After considering interest income of $3,089 and administration expense of $264,966, distributable income for the nine months ended September
30, 2004 was $10,530,516, or $1.755086 per unit of beneficial interest. Administration expense for the first nine months of 2004 increased 26% from the comparable 2003 period primarily because of higher reporting costs related to an increased number
of unitholders and the timing of expenditures. For the nine months ended September 30, 2003, distributable income was $9,332,976, or $1.555496 per unit.



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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 and development costs, since the properties underlying the 75% net profits interests are
working interests.



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



|                                |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|------------------------------- |  | ---------------------------------- | --------- | ------------------- | - | --------- | --------------------------------- | --- | ------------------- |  | - | ---------- |  | - | ---------- |  | --- | --
|                                |  | Three Months Ended September 30(a) |           | Increase (Decrease) |   |           | Nine Months Ended September 30(a) |     | Increase (Decrease) | 
|                                |  | 2004                               |           | 2003                |   |           | 2004                              |     | 2003                | 
|Sales Volumes                   |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Oil (Bbls) (b)                  |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Underlying properties           |  |                                    | 68,573    |                     |   | 68,727    |                                   |    |                     |  |   | 207,651    |  |   | 217,365    |  | (4  | )%
|Average per day                 |  |                                    | 745       |                     |   | 747       |                                   |    |                     |  |   | 758        |  |   | 796        |  | (5  | )%
|Net profits interests           |  |                                    | 35,415    |                     |   | 27,906    |                                   | 27  | %                   |  |   | 98,086     |  |   | 92,390     |  | 6   | % 
|                                |  |                                    |           |                     |   |          
|Gas (Mcf) (b)                   |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Underlying properties           |  |                                    | 647,814   |                     |   | 639,200   |                                   | 1   | %                   |  |   | 1,933,538  |  |   | 2,015,547  |  | (4  | )%
|Average per day                 |  |                                    | 7,119     |                     |   | 7,024     |                                   | 1   | %                   |  |   | 7,057      |  |   | 7,383      |  | (4  | )%
|Net profits interests           |  |                                    | 569,213   |                     |   | 559,565   |                                   | 2   | %                   |  |   | 1,701,999  |  |   | 1,756,625  |  | (3  | )%
|                                |  |                                    |           |                     |   |          
|Average Sales Prices            |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Oil (per Bbl)                   |  |                                    | $36.44    |                     |   | $27.96    |                                   | 30  | %                   |  |   | $33.05     |  |   | $28.16     |  | 17  | % 
|Gas (per Mcf)                   |  |                                    | $  6.05   |                     |   | $  5.05   |                                   | 20  | %                   |  |   | $  5.59    |  |   | $  4.79    |  | 17  | % 
|                                |  |                                    |           |                     |   |          
|Revenues                        |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Oil sales                       |  | $                                  | 2,498,487 |                     | $ | 1,921,563 |                                   | 30  | %                   |  | $ | 6,863,501  |  | $ | 6,121,182  |  | 12  | % 
|Gas sales                       |  |                                    | 3,917,682 |                     |   | 3,225,251 |                                   | 21  | %                   |  |   | 10,818,144 |  |   | 9,650,909  |  | 12  | % 
|                                |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Total Revenues                  |  |                                    | 6,416,169 |                     |   | 5,146,814 |                                   | 25  | %                   |  |   | 17,681,645 |  |   | 15,772,091 |  | 12  | % 
|                                |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Costs                           |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Taxes, transportation and other |  |                                    | 966,335   |                     |   | 682,538   |                                   | 42  | %                   |  |   | 2,652,934  |  |   | 2,222,186  |  | 19  | % 
|Production expense (c)          |  |                                    | 800,030   |                     |   | 884,010   |                                   | (9  | )%                  |  |   | 2,373,009  |  |   | 2,531,977  |  | (6  | )%
|Development costs               |  |                                    | 24,926    |                     |   | 27,830    |                                   | (10 | )%                  |  |   | 282,951    |  |   | 124,246    |  | 128 | % 
|                                |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Total Costs                     |  |                                    | 1,791,291 |                     |   | 1,594,378 |                                   | 12  | %                   |  |   | 5,308,894  |  |   | 4,878,409  |  | 9   | % 
|                                |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Net Proceeds                    |  | $                                  | 4,624,878 |                     | $ | 3,552,436 |                                   | 30  | %                   |  | $ | 12,372,751 |  | $ | 10,893,682 |  | 14  | % 
|                                |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   
|Net Profits Income              |  | $                                  | 4,017,397 |                     | $ | 3,122,116 |                                   | 29  | %                   |  | $ | 10,792,393 |  | $ | 9,539,904  |  | 13  | % 
|                                |  |                                    |           |                     |   |           |                                   |     |                     |  |   |            |  |   |            |  |     |   

---

|(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 expenses 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 fee which is deducted and retained by XTO Energy. This fee is currently $23,265 per month and is subject to adjustment each May.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



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The following are explanations of significant variances from third quarter 2003 to third quarter 2004 and from the first
nine months of 2003 to the comparable period in 2004:



Sales Volumes



Oil



Oil sales volumes remained relatively unchanged from third quarter 2003 to third quarter 2004 as decreased volumes related to natural
production decline were offset by the effects of timing of cash receipts and prior period volume adjustments in 2003. Oil sales volumes for the 2004 nine-month period declined 4% from the comparable 2003 period primarily because of natural
production decline and the timing of cash receipts, partially offset by the effect of prior period volume adjustments in 2003.



Gas



Gas sales volumes increased 1% for third quarter 2004 and decreased 4% for the nine-month period as compared with the same 2003 periods. Increased gas sales volumes for the quarter are primarily because of the timing
of cash receipts and prior period volume adjustments in 2003, partially offset by natural production decline. Decreased gas sales volumes for the nine-month period are primarily because of the timing of cash receipts and natural production decline,
partially offset by prior period volume adjustments in 2003.



Sales Prices



Oil



The average oil price increased 30% to $36.44 per Bbl for the third quarter and 17% to $33.05 per Bbl for the nine-month period. Crude oil
prices are generally determined by global supply and demand. During 2003, increased demand, continued uncertainties in the Middle East and production discipline by OPEC maintained oil prices at relatively high levels. Oil prices continued to
increase in early 2004 because of increasing demand and low crude stocks. In June and July 2004, supply disruption concerns caused oil prices to exceed $40 per Bbl. OPEC members agreed to increase daily oil production by 2 million barrels beginning
July 2004 and an additional 500,000 barrels beginning August 2004 to maintain market stability and prices. Although OPEC recently decided to increase daily oil production by 1 million barrels beginning November 2004, oil prices have continued to
increase. Continued instability in the Middle East, political unrest in Nigeria and hurricanes in the Gulf of Mexico led to record oil prices exceeding $50 per Bbl in October. The average NYMEX price for August and September 2004 was $45.34 per Bbl.
At October 15, 2004, the average NYMEX futures price for the following twelve months was $51.00 per Bbl. Recent trust oil prices have averaged approximately $3.00 per Bbl lower than the NYMEX price.



Gas



Gas prices for the third quarter increased 20% to $6.05 per Mcf and for the nine-month period increased 17% to $5.59 per Mcf. Colder than
normal weather, record low gas storage levels and continued increasing demand caused gas prices to remain relatively high during the first five months of 2003. With diminished demand related to higher prices, natural gas prices were lower during the
summer months, then rose with cooler weather in the fall and early winter. Forecasts for continued production declines, increasing natural gas demand and larger than projected storage withdrawals supported higher prices in the first six months of
2004. Mild summer weather and increased gas storage inventories led to declining gas prices in August and



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early September. Natural gas prices rose again in mid-September because of reduced gas production as a result of
hurricanes in the Gulf of Mexico. Prices will continue to be affected by weather, the recovery of the domestic economy, increases in the level of North American production and import levels of liquified natural gas. In any case, natural gas prices
are expected to remain volatile. The third quarter 2004 gas price is primarily related to production from April through June 2004, when the average NYMEX price was $6.16 per MMBtu. The average NYMEX price for July through September 2004 was $5.59
per MMBtu. At October 15, 2004, the average NYMEX futures price for the following twelve months was $7.20 per MMBtu. Recent trust gas prices have been approximately $0.60 per MMBtu higher than the NYMEX price.



Costs



Taxes



Taxes, transportation and other increased 42% for the third quarter and 19% for the nine-month period. The third quarter increase is because of higher production taxes
and purchaser deductions related to higher revenues and higher property taxes related to the timing of disbursements. The nine-month increase is because of higher production taxes and purchaser deductions related to higher revenues, partially offset
by decreased property taxes related to the timing of disbursements.



Production Expenses



Production expenses were 9% lower for the
third quarter and 6% lower for the nine-month period primarily because of decreased maintenance costs related to the timing of maintenance projects.



Development



Development costs decreased 10% for the third quarter and increased 128% for the nine-month period. Development costs for the quarter decreased primarily because of reduced drilling activity on properties underlying
the Texas 75% net profits interests. The nine-month increase is primarily because of increased drilling activity on one of the properties underlying the Oklahoma 75% net profits interests.



Other



In August 2004, XTO Energy became operator of the Penwell Unit, one of the properties underlying the Texas 75% net profits interests, as a
result of XTO Energys acquisition of the previous operators interest in this property.



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, oil and gas prices, and industry and
market conditions, are forward-looking statements that are subject to risks and uncertainties which are detailed in Part II, Item 7 of the trusts Annual Report on Form 10-K for the year ended December 31, 2003, 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.



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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, 2003.



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 effective in timely alerting the trustee to material information relating to the trust required to be included in the trusts periodic filings with
the Securities and Exchange Commission. 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.



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##### Table of Contents

PART II - OTHER INFORMATION



Items 1 through 5.
Not Applicable.



Item 6. Exhibits and Reports on Form 8-K.



| | (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 7 and 7a to the Annual Report on Form 10-K for Cross Timbers Royalty Trust filed with the Securities and Exchange Commission on March 11, 2004 (incorporated herein by
reference)



| | (b) | Reports on Form 8-K.
| | --- | --------------------



No reports on Form 8-K were filed during the quarter. The trust furnished three reports on Form 8-K under Item 2.02 (or Item 12 prior to August 23, 2004)
for this period.



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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: October 19, 2004 |  | By                                |  | /s/ LOUIS G. BALDWIN       
|                       |  |                                   |  | Louis G. Baldwin           
|                       |  |                                   |  | Executive Vice President   
|                       |  |                                   |  | and Chief Financial Officer



18