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



                                   FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                                    of 1934


               For the Quarterly Period Ended September 30, 1996
                                              ------------------


                          Commission File No. 1-10982
                                              -------



                          CROSS TIMBERS ROYALTY TRUST



Texas                                                   I.R.S. No. 75-6415930



                      NationsBank of Texas, N.A., Trustee
                                 P.O. Box 1317
                         Fort Worth, Texas 76101-1317

                         Telephone Number 817/390-6592



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 and (2) has been subject to such filing requirements for
the past 90 days.  Yes  X   No
                      -----   -----    

Number of units of beneficial interest outstanding at November 13, 1996:
                                                                         
6,000,000
---------

                                    1 of 16
<PAGE>
 
CROSS TIMBERS ROYALTY TRUST

PART I - FINANCIAL STATEMENTS
-----------------------------



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, 1996, and the
distributable income and changes in trust corpus for the three and nine-month
periods ended September 30, 1996 and 1995, have been included.  Distributable
income for such interim periods is not necessarily indicative of the
distributable income for the full year.

Arthur Andersen LLP, independent certified public accountants, have made a
limited review of the condensed financial statements as of September 30, 1996,
and for the three and nine-month periods ended September 30, 1996 and 1995
included herein.

                                                                               2
<PAGE>
 
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



NationsBank of Texas, 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, 1996 and the
related condensed statements of distributable income and changes in trust corpus
for the three and nine-month periods ended September 30, 1996 and 1995.  These
financial statements are the responsibility of the Trustee.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants.  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 in accordance with
generally accepted auditing standards, 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 generally accepted accounting principles.

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

We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Cross
Timbers Royalty Trust as of December 31, 1995 included in the Trust's 1995
annual report on Form 10-K, and in our report dated March 12, 1996, we expressed
an unqualified opinion on that statement.  In our opinion, the information set
forth in the accompanying condensed statement of assets, liabilities and trust
corpus as of December 31, 1995 is fairly stated in all material respects in
relation to the statement of assets, liabilities and trust corpus included in
the Trust's 1995 annual report on Form 10-K from which it has been derived.



ARTHUR ANDERSEN LLP

Fort Worth, Texas
October 25, 1996

                                                                               3
<PAGE>
 
CROSS TIMBERS ROYALTY TRUST
--------------------------------------------------------------------------------

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

<TABLE>
<CAPTION>
 
 
                                                   SEPTEMBER 30,   DECEMBER 31,
                                                        1996           1995
                                                   --------------  ------------
                                                    (Unaudited)
<S>                                                <C>             <C>
 
ASSETS
 
Cash and short-term investments..................    $   601,631    $   428,610
 
Interest to be received..........................            738            640
 
Net overriding royalty interests in oil and gas
       properties - net (Note 1).................     42,596,970     45,118,209
                                                     -----------   ------------
 
                                                     $43,199,339    $45,547,459
                                                     ===========   ============
 
 
LIABILITIES AND TRUST CORPUS
 
Distribution payable to Unit holders.............    $   602,369    $   429,250
 
Contingencies (Note 3)
 
Trust corpus (6,000,000 Units of beneficial
       interest authorized and outstanding)......     42,596,970     45,118,209
                                                     -----------   ------------
 
                                                     $43,199,339    $45,547,459
                                                     ===========   ============
 
</TABLE>



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


                                                                               4
<PAGE>
 
CROSS TIMBERS ROYALTY TRUST
--------------------------------------------------------------------------------

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited)

<TABLE>
<CAPTION>
                                  THREE MONTHS ENDED       NINE MONTHS ENDED
                                    SEPTEMBER 30,            SEPTEMBER 30,
                                ----------------------   ----------------------
                                   1996        1995         1996        1995
                                ----------  ----------   ----------  ----------
<S>                             <C>         <C>          <C>         <C>
                                                        
Royalty income................  $1,873,196  $1,238,586   $5,341,840  $4,527,600
                                                         
Interest income...............       2,510       1,706        7,380       6,283
                                ----------  ----------   ----------  ----------
                                                         
Total income..................   1,875,706   1,240,292    5,349,220   4,533,883
                                                         
Administration expense........      80,507      51,067      169,603     147,575
                                ----------  ----------   ----------  ----------
                                                         
Distributable income..........  $1,795,199  $1,189,225   $5,179,617  $4,386,308
                                ==========  ==========   ==========  ==========
                                                        
Distributable income per Unit                           
     (6,000,000 Units)........  $  .299200  $  .198205   $  .863271  $  .731052
                                ==========  ==========   ==========  ==========
 
</TABLE>



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

                                                                               5
<PAGE>
 
CROSS TIMBERS ROYALTY TRUST
--------------------------------------------------------------------------------

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (Unaudited)


<TABLE>
<CAPTION>
 
 
                                               THREE MONTHS ENDED         NINE MONTHS ENDED
                                                  SEPTEMBER 30,              SEPTEMBER 30,
                                           --------------------------  --------------------------
                                               1996          1995          1996          1995
                                           ------------  ------------  ------------  ------------
<S>                                  <C>                  <C>           <C>           <C>
 
Trust Corpus, beginning of period..         $43,469,423   $46,785,325   $45,118,209   $48,731,991
 
Amortization of net overriding
       royalty interests...........            (872,453)     (839,829)   (2,521,239)   (2,786,495)
 
Distributable income...............           1,795,199     1,189,225     5,179,617     4,386,308
 
Distributions declared.............          (1,795,199)   (1,189,225)   (5,179,617)   (4,386,308)
                                            -----------   -----------   -----------   -----------
 
Trust Corpus, end of period........         $42,596,970   $45,945,496   $42,596,970   $45,945,496
                                            ===========   ===========   ===========   ===========
 
</TABLE>



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

                                                                               6
<PAGE>
 
CROSS TIMBERS ROYALTY TRUST
--------------------------------------------------------------------------------

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)



1.  BASIS OF ACCOUNTING

    The financial statements of Cross Timbers Royalty Trust ("the Trust") are
    prepared on the following basis:

    - Royalty income recorded for a month is the amount computed and paid by the
      interest owner, Cross Timbers Oil Company ("Cross Timbers Oil"), to
      NationsBank of Texas, N.A. ("Trustee"), as Trustee for the Trust. Royalty
      income consists of the amounts received by Cross Timbers Oil from the sale
      of production less applicable costs ("net proceeds") from the properties
      underlying the net overriding royalty interests ("Royalty Trust
      Interests") conveyed to the Trust. Net proceeds are multiplied by net
      profit percentages of 90% in the case of Royalty Trust Interests carved
      from certain royalty interests in New Mexico, Oklahoma and Texas ("90%
      Royalty Trust Interests") and 75% in the case of Royalty Trust Interests
      carved from seven working interest properties in Oklahoma and Texas ("75%
      Royalty Trust Interests").

      Applicable costs deducted in the calculation of net proceeds for the 90%
      Royalty Trust Interests generally include applicable taxes,
      transportation, marketing and legal costs, and do not include other
      production and development costs. For the 75% Royalty Trust Interests,
      such costs include production expenses, development costs, applicable
      taxes, operating charges and other costs.

    - Royalty income is computed separately for each of five conveyances under
      which the Royalty Trust Interests were conveyed to the Trust. If monthly
      costs exceed revenues for any conveyance ("excess costs"), such excess
      cannot reduce royalty income from other conveyances, but is carried
      forward with accrued interest to be recovered from future net proceeds of
      that conveyance.

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

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

    - Distributions to Unit holders are recorded when declared by the Trustee.

    The financial statements of the Trust differ from financial statements
    prepared in accordance with generally accepted accounting principles
    ("GAAP") because revenues are not 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. The initial carrying value of the Royalty Trust
    Interests ($61,100,449) represents the net book value from the historical
    accounting records (successful efforts method) of predecessors to Cross
    Timbers Oil on February 12, 1991. Amortization of the Royalty Trust
    Interests is calculated on a unit-of-production basis and is charged
    directly to trust corpus. Accumulated amortization as of September 30, 1996
    and December 31, 1995 is $18,503,479 and $15,982,240 respectively.

                                                                               7
<PAGE>
 
2.  FEDERAL INCOME TAXES

    Tax counsel has advised the Trust that, under current tax laws, the Trust
    will be classified as a grantor trust for Federal income tax purposes and
    therefore is not subject to taxation at the trust level. However, the
    opinion of tax counsel is not binding on the Internal Revenue Service.

    The Unit holders are considered, for Federal income tax purposes, to own the
    Trust's income and principal as though no trust were in existence. The
    income of the Trust is deemed to have been received or accrued by the Unit
    holders at the time such income is received or accrued by the Trust, rather
    than when distributed by the Trust.

    Cross Timbers Oil has advised the Trustee that the Trust receives royalty
    income from coal seam gas wells. Production from coal seam gas wells drilled
    after December 31, 1979, and prior to January 1, 1993, qualifies for the
    Federal income tax credit for producing nonconventional fuels under Section
    29 of the Internal Revenue Code. This tax credit, which was approximately
    $1.01 per MMBtu for 1995, is recalculated annually based on each year's
    qualified production through the year 2002. Such credit, based on the Unit
    holder's pro rata share of qualifying production, may not reduce his regular
    tax liability (after the foreign tax credit and certain other non-refundable
    credits) below his tentative minimum tax. Any part of the Section 29 credit
    not allowed for the tax year solely because of this limitation is subject to
    certain carryover provisions. Each Unit holder should consult his tax
    advisor regarding Trust tax compliance matters.

    Based on 1996 qualifying sales volumes and the factors used in the
    calculation of the 1995 coal seam tax credit, the credit for the quarter and
    nine months ended September 30, 1996 is estimated to be $.045 and $.146 per
    Unit, respectively. Final 1996 coal seam tax credit data will be provided to
    Unit holders with year-end tax information.


3.  CONTINGENCIES

    Cross Timbers Oil has been pursuing claims in two lawsuits against working
    interest owners that have suspended Trust revenues from a portion of the 90%
    Royalty Trust Interests. The Trust joined one of these lawsuits as a
    plaintiff and, as of July 1996, a settlement in principle has been reached
    in this lawsuit. The Trust's portion of the settlement would be $675,000. If
    received by Cross Timbers Oil in November, these proceeds will be included
    in the Trust's December distribution to be paid on January 15, 1997 to Unit
    holders of record on December 31, 1996. The accompanying financial
    statements do not include a receivable related to such suspended revenues or
    expected settlement due the Trust. See Item 1 of Part II.

    The Trust is not a party in the remaining lawsuit. Cross Timbers Oil has
    advised the Trustee that suspended revenues related to this lawsuit total
    approximately $600,000, net to the Trust, as of December 31, 1995. There is
    no receivable related to these suspended revenues recorded in the Trust's
    financial statements. Additionally, if the plaintiffs are not successful in
    this lawsuit, the Trust's discounted future net cash flows from proved
    reserves as of December 31, 1995 would potentially be reduced by $600,000.
    Although the plaintiffs are vigorously pursuing this case, neither Cross
    Timbers Oil nor the Trustee can currently predict the ultimate outcome of
    this lawsuit. For further information regarding legal proceedings of the
    Trust, see Item 3 of the Trust's 1995 annual report on Form 10-K.

                                                                               8
<PAGE>
 
Item 2.  Trustee's Discussion and Analysis.

Three Months Ended September 30, 1996 and 1995
----------------------------------------------

For the quarter ended September 30, 1996, royalty income was $1,873,196 compared
with $1,238,586 for the third quarter of 1995.  This 51% increase in royalty
income is primarily the result of higher oil and gas prices and increased gas
production.

Administration expense increased from $51,067 to $80,507 from third quarter 1995
to 1996 as a result of payment of the annual stock exchange listing fee and
litigation-related legal and consulting fees. After considering interest income
and administration expense, distributable income for the quarter ended September
30, 1996 was $1,795,199, or $.299200 per Unit of beneficial interest.
Distributions of $.092159, $.106646 and $.100395 per Unit were made to Unit
holders of record on July 31, August 30 and September 30, 1996, respectively.
For the quarter ended September 30, 1995, distributable income was $1,189,225,
or $.198205 per Unit.

Royalty income is recorded when received by the Trust, which is the month
following receipt by Cross Timbers Oil, and generally two months after oil
production and three months after gas production.  Royalty income is generally
affected by three major factors:  1) oil and gas sales volumes, 2) oil and gas
sales prices and 3) costs deducted in the calculation of royalty income.
Because properties underlying the 90% Royalty Trust 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% Royalty Trust Interests are
subject to production and development costs, since the properties underlying the
75% Royalty Trust Interests are working interests.

Volumes

Third quarter oil sales volumes decreased 2% from 1995 to 1996 primarily because
of natural decline, partially offset by the effects of infill drilling on some
of the underlying working interest properties.

Gas sales volumes increased 14% from third quarter 1995 to 1996, primarily
because of higher production levels in the San Juan Basin.  Third quarter 1995
production from this region was partially curtailed because of low gas prices.

Prices

The average oil price for third quarter 1996 was $18.61 per barrel, an increase
of 20% from the third quarter 1995 average price of $15.55.

The average gas sales price for the third quarter of 1996 was $1.51 per thousand
cubic feet ("Mcf"), or 32% above the comparable 1995 price of $1.14.

After an extended period of depressed prices, San Juan Basin Gas prices rose to
two-year highs during the third quarter.  Because of the three-month interval
between gas production and receipt of royalty income by the Trust, higher San
Juan Basin gas prices began to positively impact Trust distributions with the
October 1996 distribution (paid to Unit holders on November 15).  Increased San
Juan Basin gas prices have been attributed to increased California demand and
reduced California gas supplies caused by pipeline maintenance and new eastward
bound San Juan Basin pipeline capacity.

                                                                               9
<PAGE>
 
Costs

Costs deducted in the calculation of third quarter 1996 royalty income (see
"Calculation of Royalty Income") increased 2% or $28,272 from total costs for
third quarter 1995.  This was a result of a 34% or $80,052 increase in
development costs partially offset by a 20% or $58,154 decrease in production
and property taxes.  Production expense remained relatively unchanged,
increasing only $6,374.  The increase in development costs was a result of
infill drilling projects on some of the underlying working interest properties
that began in second quarter 1995.  Lower production and property taxes are the
result of a decrease in estimated property taxes, partially offset by increased
production taxes from higher oil and gas revenues.


Nine Months Ended September 30, 1996 and 1995
---------------------------------------------

For the nine months ended September 30, 1996, royalty income was $5,341,840
compared with $4,527,600 for the same 1995 period.  The 18% increase in royalty
income is the result of higher oil and gas prices and gas sales volumes during
the first nine months of 1996, partially offset by higher costs.

Administration expense increased from $147,575 for the first nine months of 1995
to $169,603 for the comparable 1996 period primarily because of litigation-
related legal and consulting fees.  After considering interest income and
administration expense, distributable income for the nine months ended September
30, 1996 was $5,179,617, or $.863271 per Unit of beneficial interest.  For the
nine months ended September 30, 1995, distributable income was $4,386,308, or
$.731052 per Unit.

Volumes

Oil sales volumes for the first nine months of 1996 were only 1% below the
comparable 1995 period.  Decreases related to natural production decline were
offset primarily by the effects of infill drilling on some of the underlying
working interest properties.

Gas sales volumes increased 7% from the first nine months of 1995 to 1996.  This
increase is primarily the result of increased production from the San Juan Basin
which was partially curtailed in 1995 because of low gas prices.

Prices

The average oil price for the first nine months of 1996 was $17.72 per barrel,
an increase of 15% from the comparable 1995 price of $15.45.

The average gas price for the first nine months of 1996 increased to $1.44 per
Mcf, or 7% above the comparable 1995 price of $1.34.  San Juan Basin gas prices
have remained low during 1996 because of gas oversupplies in California, the
primary market for San Juan Basin gas.  See "Prices" under the three-month
discussion and analysis above regarding higher third quarter 1996 San Juan Basin
gas prices.

Costs

Costs deducted in the calculation of royalty income for the first nine months of
1996 increased 9% or $320,230 from total costs for the first nine months of
1995.  This is a result of a 45% or $269,540 increase in development costs, a 5%
or $90,229 increase in production expenses, net of excess costs (see Note 1 to
Condensed Financial Statements), partially offset by a 4% or $39,539 decrease in
production and property taxes.

Increased development costs are related to infill drilling projects that began
in second quarter 1995 on some of the underlying working interest properties,
while production expenses generally fluctuate based

                                                                              10
<PAGE>
 
on the timing of maintenance projects.  Production and property taxes decreased
primarily because of reduced property tax estimates, partially offset by
increased production taxes from higher oil and gas revenues.


COMPARATIVE OIL AND GAS SALES

Oil and gas sales attributable to the Underlying Properties and the Royalty
Trust Interests are as follows:

<TABLE>
<CAPTION>
                                     Three Months Ended     Nine Months Ended
                                     September 30, (a)      September 30, (a)
                                     ------------------   ---------------------
                                       1996      1995       1996         1995
                                     --------  --------   ---------  ----------
<S>                                  <C>       <C>        <C>        <C>
    OIL SALES (Bbls)                                                
                                                                    
       Underlying Properties (b)....  108,949   110,683     328,642     330,481
         Average per day............    1,184     1,203       1,199       1,211
         Average price..............   $18.61    $15.55      $17.72      $15.45
                                                                    
       Royalty Trust Interests (b)..   43,855    36,027     120,298     114,391
                                                                    
    GAS SALES (Mcf)                                                 
                                                                    
       Underlying Properties (b)....  909,771   796,704   2,898,179   2,705,591
         Average per day............    9,997     8,755      10,577       9,911
         Average price..............    $1.51     $1.14       $1.44       $1.34
                                                                    
       Royalty Trust Interests (b)..  796,495   681,073   2,513,267   2,302,330
</TABLE>

(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 Royalty Trust 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
    Royalty Trust Interests.  Therefore, comparative discussion of oil and gas
    sales is based on the Underlying Properties.


                                                                              11
<PAGE>
 
CALCULATION OF ROYALTY INCOME

Royalty income is computed by multiplying net proceeds from the properties
underlying the Royalty Trust Interests by specified net profit percentages of
(a) 90% in the case of Royalty Trust Interests carved from royalty interests in
New Mexico, Oklahoma and Texas ("90% Royalty Trust Interests") and (b) 75% in
the case of Royalty Trust Interests carved from seven working interest
properties in Oklahoma and Texas ("75% Royalty Trust Interests").  See Note 1 to
Condensed Financial Statements.  Royalty income received by the Trust for the
quarters ended September 30, 1996 and 1995 was computed as follows:
<TABLE>
<CAPTION>


                                               Three Months Ended September 30,
                                    -------------------------------------------------
                                               1996                      1995
                                    -----------------------   -----------------------
                                       90%          75%          90%         75%
                                     Royalty      Royalty      Royalty     Royalty
                                      Trust        Trust        Trust       Trust
                                    Interests     Interests    Interests   Interests
                                    ----------   ----------   ----------   ----------
<S>                                 <C>          <C>          <C>          <C>
REVENUES
   Oil sales......................  $  394,020   $1,632,990   $  344,813   $1,376,467
   Gas sales......................   1,317,897       56,756      877,867       29,491
                                    ----------   ----------   ----------   ----------

     Total........................   1,711,917    1,689,746    1,222,680    1,405,958
                                    ----------   ----------   ----------   ----------

COSTS
   Taxes on production
    and property..................     127,601      110,972      144,931      151,796
   Production expenses(a).........       6,684      661,803        7,082      655,031
   Developmwent costs.............          -       312,535           -       232,483
                                    ----------   ----------   ----------   ----------

    Total.........................     134,285    1,085,310      152,013    1,039,310
                                    ----------   ----------   ----------   ----------

NET PROCEEDS......................   1,577,632      604,436    1,070,667      366,648

Net Profit Percentage.............         90%          75%          90%          75%
                                    ----------   ----------   ----------   ----------

ROYALTY INCOME....................  $1,419,869   $  453,327   $  963,600   $  274,986
                                    ==========   ==========   ==========   ==========

</TABLE>

(a) Production expenses for the 75% Royalty Trust Interests include an overhead
    fee which is deducted and retained by Cross Timbers Oil.  This fee is
    currently $19,057 per month, or $57,171 per quarter.  This overhead fee is
    subject to adjustment each May based on an oil and gas industry index.

                                                                              12
<PAGE>
 
PART II - OTHER INFORMATION
---------------------------


Item 1.  Legal Proceedings.

In July 1996, the Trust, Cross Timbers Oil and two other overriding royalty
interest owners settled in principle a lawsuit filed in the Eleventh Judicial
District Court in San Juan County, New Mexico, against Hallador Petroleum
Company ("Hallador") and other owners of working interests in certain gas wells
located in San Juan County, New Mexico, in which the Trust owns a net profits
interest. The Trust and the other plaintiffs were seeking to recover revenues
suspended by the defendants and a judgment confirming the plaintiffs' interests.
The defendants alleged that certain provisions in earlier documents signed by
the plaintiffs' predecessors-in-title purport to convert the overriding royalty
interests owned by Cross Timbers Oil and the other plaintiffs into working
interests during any month in which average daily production of natural gas
falls below 500 Mcf per well.

The settlement in principle provides that Cross Timbers Oil would receive
$750,000 in exchange for reducing its 7.5% overriding royalty interest in these
properties to a 1.875% overriding royalty interest that does not convert to a
working interest when daily production falls below 500 Mcf per well. The Trust
owns a 90% net profits interest in Cross Timbers Oil's interest, and would
receive $675,000 as its portion of the settlement. If received by Cross Timbers
Oil in November, these proceeds will be included in the Trust's December
distribution to be paid on January 15, 1997 to Unit holders of record on
December 31, 1996.

Items 2 through 5.  Not applicable.

Item 6. (a)  Exhibits.
----------------------
                                                                            Page
                                                                            ----

        (4) (a)  Cross Timbers Royalty Trust Indenture Amended and Restated 
                 on January 13, 1992 by NationsBank of Texas, N.A., as 
                 Trustee, heretofore filed as Exhibit 3.1 to the Trust's 
                 Registration Statement No. 33-44385 filed with the 
                 Securities and Exchange Commission on February 19, 1992, 
                 is incorporated herein by reference.

            (b)  Net Overriding Royalty Conveyance (Cross Timbers Royalty 
                 Trust, 90% - Texas) from South Timbers Limited Partnership, 
                 West Timbers Limited Partnership, North Timbers Limited 
                 Partnership, East Timbers Limited Partnership, Hickory 
                 Timbers Limited Partnership, and Cross Timbers Partners, 
                 L.P. (predecessors of Cross Timbers Oil Company, L.P. which 
                 subsequently merged into Cross Timbers Oil Company) to NCNB 
                 Texas National Bank (now NationsBank of Texas, N.A.), as 
                 Trustee, dated February 12, 1991 (without Schedules A and 
                 B), heretofore filed as Exhibit 10.1 to the Trust's 
                 Registration Statement No. 33-44385 filed with the 
                 Securities and Exchange Commission on February 19, 1992,
                 is incorporated herein by reference.

            (c)  Net Overriding Royalty Conveyance (Cross Timbers Royalty 
                 Trust, 75% - Texas) from South Timbers Limited Partnership, 
                 West Timbers Limited Partnership, North Timbers Limited 
                 Partnership, East Timbers Limited Partnership, Hickory 
                 Timbers Limited Partnership, and Cross 

                                                                              13
<PAGE>
 
                 Timbers Partners, L.P. (predecessors of Cross Timbers Oil
                 Company, L.P. which subsequently merged into Cross Timbers 
                 Oil Company) to NCNB Texas National Bank (now NationsBank 
                 of Texas, N.A.), as Trustee, dated February 12, 1991 
                 (without Schedules A and B), heretofore filed as Exhibit 
                 10.5 to the Trust's Registration Statement No. 33-44385 
                 filed with the Securities and Exchange Commission on 
                 February 19, 1992, is incorporated herein by reference.

        (15) (a) Awareness letter of Arthur Andersen LLP                      16


         (b) Reports on Form 8-K.

             No reports on Form 8-K have been filed during the quarter for which
             this report is filed.


                                                                              14
<PAGE>
 
                                  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 NATIONSBANK OF TEXAS, N.A., TRUSTEE


                                       By         JOE B. GRISSOM
                                         ------------------------------------
                                                  Joe  B. Grissom
                                                   Vice President



                                       CROSS TIMBERS OIL COMPANY



Date:  November 13, 1996               By         LOUIS G. BALDWIN
                                         ------------------------------------
                                                  Louis G. Baldwin
                                               Senior Vice President and
                                                Chief Financial Officer

                                                                              15