<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, 1998


                          Commission File No. 1-10982



                          CROSS TIMBERS ROYALTY TRUST



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


                               NationsBank, N.A.
                                 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 October 30, 1998:
6,000,000
<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, 1998 and the
distributable income and changes in trust corpus for the three and nine-month
periods ended September 30, 1998 and 1997, have been included.  Distributable
income for such interim periods is not necessarily indicative of the
distributable income for the full year.

                                                                               2
<PAGE>
 
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



NationsBank, 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, 1998, and
the related condensed statements of distributable income and changes in trust
corpus for the three and nine-month periods ended September 30, 1998 and 1997,
in accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.  All
information included in these financial statements is the representation of the
Trustee.

A review consists principally of inquiries and analytical procedures applied to
financial data.  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 the condensed financial statements referred to above in order 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, 1997 included in the Trust's 1997
annual report on Form 10-K, and in our report dated March 18, 1998, 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, 1997 is fairly stated in all material respects in
relation to the statement of assets, liabilities and trust corpus included in
the Trust's 1997 annual report on Form 10-K from which it has been derived.



ARTHUR ANDERSEN LLP

Fort Worth, Texas
October 8, 1998

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


CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
 
 
                                                   SEPTEMBER 30,   DECEMBER 31,
                                                        1998           1997
                                                   --------------  ------------
                                                    (Unaudited)
 
ASSETS
 
Cash and short-term investments..................    $   481,109    $   662,486
 
Interest to be received..........................            784          1,065
 
Net overriding royalty interests in oil and gas
  properties - net (Note 1)......................     36,435,122     38,104,367
                                                     -----------   ------------
 
                                                     $36,917,015    $38,767,918
                                                     ===========   ============
 
 
LIABILITIES AND TRUST CORPUS
 
Distribution payable to Unit holders.............    $   481,893    $   663,551
 
Trust corpus (6,000,000 Units of beneficial
  interest authorized and outstanding)...........     36,435,122     38,104,367
                                                     -----------   ------------
 
                                                     $36,917,015    $38,767,918
                                                     ===========   ============
 



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)


                                    THREE MONTHS ENDED       NINE MONTHS ENDED  
                                       SEPTEMBER 30,           SEPTEMBER 30,  
                                  ----------------------  ----------------------
                                     1998        1997        1998        1997
                                  ----------  ----------  ----------  ----------
 
Royalty income................    $1,672,455  $2,158,987  $5,662,228  $8,526,022
                              
Interest income...............         2,596       3,550       8,908      13,065
                                  ----------  ----------  ----------  ----------
                              
Total income..................     1,675,051   2,162,537   5,671,136   8,539,087
                              
Administration expense........        37,763      44,404     131,480     134,780
                                  ----------  ----------  ----------  ----------
                              
Distributable income..........    $1,637,288  $2,118,133  $5,539,656  $8,404,307
                                  ==========  ==========  ==========  ==========
                              
Distributable income per Unit 
   (6,000,000 Units)..........    $ 0.272882   $0.353022   $0.923276   $1.400717
                                  ==========  ==========  ==========  ==========
 



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,
                                      -------------------------   --------------------------
                                         1998           1997          1998           1997
                                      -----------   -----------   -----------    -----------
<S>                                   <C>           <C>           <C>            <C>  
Trust Corpus, beginning of period..   $36,921,936   $39,507,766   $38,104,367    $41,337,673
                                                                                
Amortization of net overriding                                                  
  royalty interests................      (486,814)     (739,758)   (1,669,245)    (2,569,665)
                                                                                
Distributable income...............     1,637,288     2,118,133     5,539,656      8,404,307
                                                                                
Distributions declared.............    (1,637,288)   (2,118,133)   (5,539,656)    (8,404,307)
                                      -----------   -----------   -----------    -----------
                                                                                
Trust Corpus, end of period........   $36,435,122   $38,768,008   $36,435,122    $38,768,008
                                      ===========   ===========   ===========    ===========
</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 the 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 , 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. See Note 3.

    -  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, the creation date of the Trust.
    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, 1998 and December 31, 1997 is $24,665,327
    and $22,996,082, 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
    $1.05 per MMBtu for 1997, 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. Unit holders should consult their tax advisors
    regarding use of this credit and other Trust tax compliance matters.

    Based on 1998 qualifying sales volumes and the factors used in the
    calculation of the 1997 coal seam tax credit, the credit for the quarter and
    nine months ended September 30, 1998 is estimated to be $.045 and $.130 per
    Unit, respectively. The actual coal seam tax credit for the quarter and nine
    months ended September 30, 1997 was $0.065 and $0.164 respectively. Final
    1998 coal seam tax credit data will be provided to Unit holders with year-
    end tax information.


3.  EXCESS COSTS

    Cross Timbers Oil has advised the Trustee that, in the calculation of
    royalty income for the three months ending September 30, 1998, costs
    exceeded revenues for the 75% Royalty Trust Interests by $220,943, or
    $165,707 net to the Trust. Cumulative excess costs through September 30,
    1998 were $364,343, or $273,257 net to the Trust. Such excess costs plus
    accrued interest of approximately $8,700 must be recovered from future net
    proceeds of the 75% Royalty Trust Interests before these conveyances can
    again contribute to Trust royalty income. See Item 2, "Trustee's Discussion
    and Analysis - Excess Costs."


4.  CROSS TIMBERS OIL COMPANY

    On June 16, 1998, the Trust and Cross Timbers Oil filed a registration
    statement with the Securities and Exchange Commission to sell 1,360,000
    Units (22.7% of outstanding Units) held by Cross Timbers Oil. As Cross
    Timbers Oil stated in a related news release, the filing was made in
    anticipation of better commodity prices and any sale is dependent on an
    improved market for oil and gas equities. The Trust did not participate in
    Cross Timbers Oil's decisions to acquire or sell Units and will not receive
    any of the proceeds in the event of such sale.

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

Year 2000

"Year 2000," or the ability of computer systems to process dates with years
beyond 1999, affects almost all companies and organizations.  Computer systems
that are not Year 2000 compliant by January 1, 2000 may have a material adverse
effect on companies and organizations that rely upon those systems.

The Trust's timely receipt of royalty income and disbursement of distributable
income to Unit holders is largely dependent upon performance by Cross Timbers
Oil, ChaseMellon Shareholder Services, L.L.C. and other third parties.  The
Trustee has been advised by Cross Timbers Oil that Year 2000 modifications have
been made to most of its computer systems and such modifications are currently
being tested.  No costs of such modifications will be incurred by the Trust.
However, with the exception of approximately 20 overriding royalty interests in
the San Juan Basin, Cross Timbers Oil does not operate any of the Underlying
Properties, nor does Cross Timbers Oil or any of its affiliates generally
purchase significant production from the Underlying Properties.  Therefore, the
Trust's Year 2000 exposure is primarily dependent upon compliance of ChaseMellon
Shareholder Services, L.L.C. and operators and product purchasers of significant
Underlying Properties, as well as vendors who supply critical goods and services
to these third parties.

The Trustee and Cross Timbers Oil are identifying significant third parties to
formally inquire about their Year 2000 status.  However, despite their efforts
to assure that such third parties are Year 2000 compliant, the Trustee and Cross
Timbers Oil cannot provide assurance that all significant third parties will
achieve timely Year 2000 compliance.  Such failure to achieve Year 2000
compliance could have a material adverse impact on timely Trust distributions to
Unit holders.


Three Months Ended September 30, 1998 and 1997

For the quarter ended September 30, 1998, royalty income was $1,672,455 compared
with $2,158,987 for the third quarter of 1997.  This 23% decrease in royalty
income is primarily the result of lower oil prices and lawsuit settlement
proceeds of $268,000 received during the third quarter of 1997.

After considering interest income of $2,596 and administration expense of
$37,763, distributable income for the quarter ended September 30, 1998 was
$1,637,288, or $0.272882 per Unit of beneficial interest. Distributions of
$0.079742, $0.112824 and $0.080316 per Unit were made to Unit holders of record
on July 31, August 31 and September 30, 1998, respectively.  For the quarter
ended September 30, 1997, distributable income was $2,118,133, or $0.353022 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.

                                                                               9
<PAGE>
 
Volumes

Third quarter oil sales volumes decreased 10% from 1997 to 1998 primarily
because of natural production decline and timing of cash receipts.  Gas sales
volumes decreased 13% over these periods primarily because of 219,000 Mcf
related to suspended revenues received in a lawsuit settlement in third quarter
1997, partially offset by an increase related to the timing of cash receipts.
Excluding reduced volumes from the lawsuit settlement and cash receipt timing
differences, gas sales volumes declined approximately 5% because of natural
production decline.

Prices

The average oil price for third quarter 1998 declined 33% to $11.69 per barrel
from the third quarter 1997 price of $17.35.  The average gas sales price for
the third quarter of 1998 increased 8% to $1.85 per Mcf, from the third quarter
1997 price of $1.72.

Costs

Before the reduction for excess costs (see "Excess Costs" below), costs deducted
in the calculation of third quarter 1998 royalty income (see "Calculation of
Royalty Income") decreased 3% or $41,067 from total costs for third quarter
1997.  This was primarily the result of a 20% or $71,990 net decrease in
production and property taxes related to lower oil and gas revenues.  This
decrease was partially offset by an 11% or $32,125 increase in development
costs.

Changes in production expense and development costs are usually related to the
timing of maintenance and development projects on the underlying working
interest properties.  Increased development costs are related to a 1998 carbon
dioxide injection project on one of the Texas underlying working interest
properties, partially offset by decreased Oklahoma drilling costs.

Excess Costs

During third quarter 1998, costs exceeded revenues for the 75% Royalty Trust
Interests by $220,943, or $165,707 net to the Trust.  Cumulative excess costs
through September 30, 1998 were $354,276 for the underlying Texas working
interest properties and $10,067 for the underlying Oklahoma working interest
properties, or a total of $364,343 ($273,257 net to the Trust).  Such excess
costs are the result of low oil prices and increased development costs related
to the 1998 carbon dioxide injection project.  Excess costs from one conveyance
cannot reduce royalty income computed under another conveyance; therefore,
cumulative excess costs plus accrued interest (approximately $8,700 at September
30, 1998) must be recovered from the respective future net proceeds of the
underlying Texas and Oklahoma working interest properties before these
properties can again contribute to Trust royalty income.

After recovery of cumulative excess costs and accrued interest of $10,184, the
underlying Oklahoma working interest properties again contributed to royalty
income in October 1998.  Cross Timbers Oil has informed the Trustee that it
cannot predict when the underlying Texas working interest properties will again
contribute to royalty income since recovery of excess costs is dependent upon
future oil prices and development costs.  The 75% Royalty Trust Interests
contributed approximately $0.05 per Unit ($0.03 from the underlying Texas
working interest properties and $0.02 from the underlying Oklahoma working
interest properties) to third quarter 1997 royalty income, or 14% of third
quarter 1997 distributions.

Amortization

Amortization of Royalty Trust Interests, which is directly charged to trust
corpus, decreased to $486,814 for third quarter 1998 from $739,758 for the prior
year quarter.  Decreased amortization is the result of lower gas 

                                                                              10
<PAGE>
 
sales volumes for the quarter, as well as reduced oil sales volumes allocated to
the Royalty Trust Interests because of lower oil prices.


Nine Months Ended September 30, 1998 and 1997

For the nine months ended September 30, 1998, royalty income was $5,662,228
compared with $8,526,022 for the same 1997 period.  The primary reasons for this
34% decrease in royalty income are lower oil prices and lower gas sales volumes
which were largely attributable to lawsuit settlement proceeds of $733,000
received in 1997.

After considering interest income of $8,908 and administration expense of
$131,480, distributable income for the nine months ended September 30, 1998 was
$5,539,656, or $0.923276 per Unit of beneficial interest. For the nine months
ended September 30, 1997, distributable income was $8,404,307, or $1.400717 per
Unit.

Volumes

Oil sales volumes for the first nine months of 1998 decreased 6% from the
comparable 1997 period primarily because of natural production decline.  Gas
sales volumes decreased 750,577 Mcf or 22% from the first nine months of 1997
primarily as a result of 636,000 Mcf related to suspended revenues received in a
1997 lawsuit settlement.  The remaining gas volume decrease is primarily related
to natural decline and prior period volume adjustments, partially offset by the
timing of cash receipts.  Excluding such adjustments, cash receipt timing
differences and the lawsuit settlement, gas sales volumes declined approximately
6% because of natural production decline and reduced demand during the warmer
1997-1998 winter.

Prices

The average oil price for the first nine months of 1998 declined 30% to $13.65
per barrel from the comparable 1997 price of $19.62.  The average gas price of
$2.09 for the first nine months of 1998 remained relatively unchanged in
relation to the comparable 1997 price of $2.10.

Costs

Before the reduction for excess costs (see "Excess Costs" below), costs deducted
in the calculation of royalty income for the first nine months of 1998 increased
2% or $65,773 over total costs for the first nine months of 1997.  This is a
result of a 33% or $197,630 increase in development costs and a 3% or $49,486
increase in production expenses, partially offset by a 16% or $181,343 net
decrease in production and property taxes.

The increase in development costs is related to a carbon dioxide injection
project on one of the Texas underlying working interest properties that began in
1998, partially offset by decreased Oklahoma drilling costs.  Increased
production expenses are related to the timing of maintenance projects.  The
decrease in production taxes is because of lower oil and gas revenues, partially
offset by increased estimated property taxes.

Excess Costs

During the first nine months of 1998, costs exceeded revenues for the 75%
Royalty Trust Interests by $364,343, or $273,257 net to the Trust.  See "Three
Months Ended September 30, 1998 and 1997 - Excess Costs" above.  The Texas 75%
Royalty Trust Interests contributed approximately $0.25 per Unit to royalty
income for the first nine months of 1997, or 18% of distributions for that
period.

                                                                              11
<PAGE>
 
Amortization

Amortization of Royalty Trust Interests, which is directly charged to trust
corpus, decreased to $1,669,245 for the first nine months of 1998 from
$2,569,665 for the comparable prior year period.  Decreased amortization is the
result of lower gas sales volumes, as well as reduced oil sales volumes
allocated to the Royalty Trust Interests because of lower oil prices.


COMPARATIVE OIL AND GAS SALES

Oil and gas sales attributable to the Underlying Properties and the Royalty
Trust Interests are as follows:
 
                                    Three Months Ended      Nine Months Ended
                                     September 30, (a)       September 30, (a)
                                  ----------------------  ----------------------
                                     1998        1997        1998        1997
                                  ----------  ----------  ----------  ----------
 
OIL SALES (Bbls)

   Underlying Properties (b)....      96,020     107,138     297,770     317,063
     Average per day............       1,044       1,165       1,091       1,161
     Average price..............  $    11.69  $    17.35  $    13.65  $    19.62
                                                                     
   Royalty Trust Interests (b)..      22,000      37,828      81,597     139,154
                                                                     
GAS SALES (Mcf)                                                      
                                                                     
   Underlying Properties (b)....     964,888   1,108,805   2,727,394   3,477,971
     Average per day............      10,603      12,185       9,990      12,740
     Average price..............  $     1.85  $     1.72  $     2.09  $     2.10
                                                                     
   Royalty Trust Interests (b)..     829,257     969,209   2,355,216   3,059,986


(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.

                                                                              12
<PAGE>
 
CALCULATION OF ROYALTY INCOME

The following is the calculation of royalty income received by the Trust for the
quarters ended September 30, 1998 and 1997.  See Note 1 to Condensed Financial
Statements.

 
                                         Three Months Ended September 30,
                                  ---------------------------------------------
                                           1998                   1997
                                  ---------------------  ----------------------
                                     90%         75%        90%         75%
                                   Royalty     Royalty    Royalty     Royalty
                                    Trust       Trust      Trust       Trust
                                  Interests   Interests  Interests   Interests
                                  ----------  ---------  ----------  ----------
REVENUES
 Oil sales......................  $  331,273  $ 791,106  $  442,405  $1,416,080
 Gas sales......................   1,751,715     33,471   1,868,225      43,197
                                  ----------  ---------  ----------  ----------
                                                                     
  Total.........................   2,082,988    824,577   2,310,630   1,459,277
                                  ----------  ---------  ----------  ----------
                                                                     
COSTS                                                                
 Production and property taxes..     233,337     58,953     218,980     145,300
 Production expenses (a)........         401    661,028         515     662,116
 Development costs..............           -    314,699           -     282,574
 Excess costs (b)...............           -   (220,943)          -           -
                                  ----------  ---------  ----------  ----------
                                                                     
  Total.........................     233,738    813,737     219,495   1,089,990
                                  ----------  ---------  ----------  ----------
                                                                     
NET PROCEEDS....................   1,849,250     10,840   2,091,135     369,287
                                                                     
Net Profit Percentage...........          90%        75%         90%         75%
                                  ----------  ---------  ----------  ----------
                                                                     
ROYALTY INCOME..................  $1,664,325  $   8,130  $1,882,022  $  276,965
                                  ==========  =========  ==========  ==========
 

(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 $21,440 per month, or $64,320 per quarter.  This overhead fee is
    subject to adjustment each May based on an oil and gas industry index.

(b) See Note 3 to Condensed Financial Statements.

                                                                              13
<PAGE>
 
PART II - OTHER INFORMATION


Item 1.  Legal Proceedings.

Cross Timbers Oil has advised the Trustee that a lawsuit relating to certain
Texas properties underlying the 75% Royalty Trust Interests has been settled.
Neither the Trust nor Cross Timbers Oil was named as a party in the suit, filed
by surface owners of certain lands in Ector County, Texas.  The surface owners
brought suit against various oil and gas operators and leasehold interest owners
that own oil and gas leases covering the lands involved, alleging that the oil
and gas operations of the named defendants polluted the surface and subsurface
of the land involved.  The Trust's interest in the property involved is a 75%
net overriding royalty in Cross Timbers Oil's 5.2% working interest.  The cost
of the settlement net to the Trust's interest was approximately $18,000.


Item 2 through 5.  Not Applicable.


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

(a)  Exhibits.

       Exhibit Number
       and Description                                                      Page

       (4)(a) Cross Timbers Royalty Trust Indenture Amended and 
              Restated on January 13, 1992 by NationsBank of Texas, 
              N.A. (now NationsBank, 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, 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

                                                                              14
<PAGE>
 
              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, 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)   Awareness letter of Arthur Andersen LLP                        17


(b)  Reports on Form 8-K.

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

                                                                              15
<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, N.A., TRUSTEE


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



                                       CROSS TIMBERS OIL COMPANY



Date: October 30, 1998                 By /s/   LOUIS G. BALDWIN
                                         ------------------------------
                                                Louis G. Baldwin
                                           Senior Vice President and
                                            Chief Financial Officer

                                                                              16