<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 1998      Commission file number 1-10982
 
 
                          Cross Timbers Royalty Trust
   (Exact name of registrant as specified in the Cross Timbers Royalty Trust
                                  Indenture)
 
                Texas                                    75-6415930
                                                      (I.R.S. Employer
   (State or other jurisdiction of                   Identification No.)
   incorporation or organization)
 
          NationsBank, N.A.                              75283-0650
                                                         (Zip Code)
               Trustee
           P.O. Box 830650
            Dallas, Texas
   (Address of principal executive
              offices)
 
       Registrant's telephone number including area code: (877) 228-5084
 
          Securities registered pursuant to Section 12(b) of the Act:
 
         Title of each class                   Name of each exchange on which
                                                         registered
 
    Units of Beneficial Interest                   New York Stock Exchange
 
       Securities registered pursuant to Section 12(g) of the Act: None
 
  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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
  At March 1, 1999, there were 6,000,000 Units of beneficial interest of the
Trust outstanding with an aggregate market value on that date of $54 million.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Listed below is the only document parts of which are incorporated herein by
reference and the parts of this report into which the document is
incorporated:
 
                  1998 Annual Report to Unit Holders--Part II
 
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<PAGE>
 
                                    PART I
 
Item 1. Business
 
  Cross Timbers Royalty Trust ("Trust") is an express trust created under the
laws of Texas pursuant to the Cross Timbers Royalty Trust Indenture
("Indenture") entered into on February 12, 1991 between the predecessors to
Cross Timbers Oil Company ("Cross Timbers Oil"), as grantors, and NCNB Texas
National Bank, as Trustee. NationsBank, N.A., successor of NCNB Texas National
Bank, is now the Trustee of the Trust. The principal office of the Trust is
located at 901 Main Street, Dallas, Texas 75202 (telephone number 877-228-
5084).
 
  On February 12, 1991, the predecessors conveyed net overriding royalty
interests (equivalent to net profits interests) to the Trust under five
separate conveyances:
 
  -- one in each of the states of Texas, Oklahoma and New Mexico, to convey a
     90% net overriding royalty interest carved out of substantially all
     royalty and overriding royalty interests owned by the predecessors in
     those states ("90% Royalty Trust Interests"), and
 
  -- one in each of the states of Texas and Oklahoma, to convey a 75% net
     overriding royalty interest carved out of specific working interests
     owned by the predecessors in those states ("75% Royalty Trust
     Interests").
 
  The conveyance of these interests (collectively referred to as "Royalty
Trust Interests") was effective as to production from and after October 1,
1990 at 7:00 a.m. The Royalty Trust Interests and the interests in the
properties from which they were carved ("Underlying Properties") are further
described under Item 2.
 
  In exchange for the conveyance of the Royalty Trust Interests to the Trust,
the predecessors received 12,000,000 units of beneficial interest of the Trust
("Units"), which were converted into 6,000,000 Units following a 1-for-2
reverse split in January 1992. Approximately 40% of the Units were distributed
to the owners of the predecessors in February 1991. The remaining 60% of the
Units were retained by Cross Timbers Oil Company, L.P., the successor
partnership to the predecessors that was effectively merged into Cross Timbers
Oil in May 1993. Cross Timbers Oil Company, L.P. sold Units in the Trust's
initial public offering in March 1992 and distributed its remaining Units to
its partners in November 1992. Units are listed and traded on the New York
Stock Exchange under the symbol "CRT."
 
  During 1996 and 1997, Cross Timbers Oil's Board of Directors authorized the
purchase of two million Units. As of March 1, 1999, Cross Timbers Oil owned
1,360,000 Units or 22.7% of the outstanding Units.
 
  On June 16, 1998, the Trust and Cross Timbers Oil filed a registration
statement with the Securities and Exchange Commission to sell the 1,360,000
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.
 
  Under the terms of each of the five conveyances, the Trust receives royalty
income from the Royalty Trust Interests on the last business day of each
month. Royalty income is determined by Cross Timbers Oil by multiplying the
net profit percentage (90% or 75%) times net proceeds from the Underlying
Properties for each of the five conveyances during the previous month. "Net
proceeds" is defined as the excess of gross proceeds over production costs.
"Gross proceeds" generally means amounts received from the sale of production
(net of production taxes), subject to certain adjustments. For the 90% Royalty
Trust Interests and the 75% Royalty Trust Interests, "production costs"
generally means property taxes accrued, transportation, marketing and other
charges. For the 75% Royalty Trust Interests only, "production costs" also
includes capital and operating costs paid (e.g., drilling, production and
other direct costs of owning and operating the property) and a monthly
overhead charge of $21,440 (total for both 75% conveyances). If production
costs exceed gross proceeds for any
 
                                       1
<PAGE>
 
conveyance, such excess is carried forward to the computation of net proceeds
for future months until the excess costs (plus interest accrued as specified
in the conveyances) are completely recovered. Such excess production costs and
related accrued interest from one conveyance cannot be used to reduce net
proceeds from any other conveyance.
 
  The Trust is not liable for any production costs or liabilities attributable
to the Royalty Trust Interests. If at any time the Trust receives royalty
income in excess of the amount due, the Trust is not obligated to return such
overpayment, but royalty income payable to the Trust for the next month shall
be reduced by the overpayment, plus interest at the rate specified in the
conveyance.
 
  Cross Timbers Oil does not operate or control any of the Underlying
Properties, with the exception of approximately 20 overriding royalty
interests in the San Juan Basin in which the Company acquired the underlying
working interest in December 1997 and became operator. As a working interest
owner, Cross Timbers Oil may decline participation in any operation and allow
consenting parties to conduct such operations, as provided under the operating
agreements. Cross Timbers Oil also can assign, sell, or otherwise transfer its
interest in the Underlying Properties, subject to the Royalty Trust Interests,
or can abandon an Underlying Property that is a working interest if it is
incapable of producing in paying quantities, as determined by Cross Timbers
Oil.
 
  To the extent it has the right to do so, Cross Timbers Oil is responsible
for marketing its production from the Underlying Properties under existing
sales contracts or new arrangements on the best terms reasonably obtainable in
the circumstances.
 
  Royalty income received by the Trust on or before the last business day of
the month generally represents receipts attributable to oil production two
months prior and gas production three months prior. The amount to be
distributed to Unit holders each month by the Trustee ("monthly distribution
amount") is determined by adding (a) royalty income received, (b) cash
available as a result of reduction of cash reserves and (c) any other cash
receipts (other than interest on the monthly distribution amount), and
subtracting the sum of (1) liabilities paid and (2) reduction in cash
available due to establishment of or increase in any cash reserve. The monthly
distribution amount and estimated interest received on such amount through the
distribution date is distributed to Unit holders of record within ten business
days after the monthly record date. The monthly record date is generally the
last business day of the month. The Trustee calculates the monthly
distribution amount (together with estimated interest to be received) and
announces the distribution per Unit at least ten days prior to the monthly
record date.
 
  At its discretion, the Trustee can establish cash reserves for
contingencies. Also at the Trustee's discretion, cash held for such reserves,
as well as for pending payment of the monthly distribution amount, are
invested in obligations issued or unconditionally guaranteed by the United
States or any agency or instrumentality thereof, repurchase agreements secured
by such obligations, or certificates of deposit of any bank having capital,
surplus and undivided profits in excess of $100,000,000.
 
  The function of the Trustee is to collect the income attributable to the
Royalty Trust Interests, to pay all expenses of the Trust, and to remit the
monthly distribution amount to Unit holders. The Trustee's powers are
enumerated in and limited by the terms of the Indenture. The Trust is not
empowered to carry on any business activity and, other than investing cash on
hand in specific short-term cash investments, is prohibited from acquiring any
assets other than the Royalty Trust Interests. The Trust has no employees
since all administrative functions are performed by the Trustee.
 
  Approximately 80% of the royalty income received by the Trust during 1998,
as well as 87% of the estimated proved reserves of the Royalty Trust Interests
at December 31, 1998 (based on the discounted present value using year-end oil
and gas prices), is attributable to natural gas. There is generally a greater
demand for gas during the winter months than the rest of the year. Otherwise,
Trust income generally is not subject to seasonal factors, nor dependent upon
patents, licenses, franchises or concessions. The Trust conducts no research
activities.
 
                                       2
<PAGE>
 
Item 2. Properties
 
  The Royalty Trust Interests are the principal asset of the Trust. The
Trustee cannot acquire any other asset, with the exception of certain short-
term investments as specified under Item 1. The Trustee is prohibited from
selling any portion of the Royalty Trust Interests unless approved by at least
80% of the Unit holders or at such time as the Trust's gross revenue is less
than $1,000,000 for two successive years.
 
  The Royalty Trust Interests (as defined under Item 1) are composed of:
 
  --the 90% Royalty Trust Interests which are carved from:
 
    i) producing royalty and overriding royalty interest properties in
       Texas, Oklahoma and New Mexico ("underlying royalties"), and
 
    ii) 11.11% non-participating royalty interests in nonproducing
        properties located primarily in Texas and Oklahoma ("underlying
        nonproducing royalties")
 
  --the 75% Royalty Trust Interests which are carved from non-operated
    working interests in four properties in Texas and three properties in
    Oklahoma ("underlying working interest properties").
 
  All underlying royalties, underlying nonproducing royalties and underlying
working interest properties are currently owned by Cross Timbers Oil. Cross
Timbers Oil may sell all or any portion of the Underlying Properties at any
time, subject to and burdened by the Royalty Trust Interests.
 
  The following information included in this Item 2 is based upon information
provided to the Trustee by Cross Timbers Oil.
 
Producing Acreage, Wells and Drilling
 
  Underlying Royalties. The underlying royalties are royalty and overriding
royalty interests primarily located in mature producing oil and gas fields.
The most significant producing region in which the underlying royalties are
located is the San Juan Basin in northwestern New Mexico. The Trust's
estimated proved reserves from this region totaled 30.9 Bcf at December 31,
1998, or approximately 85% of the Trust's total gas reserves at that date.
Cross Timbers Oil estimates that underlying royalties in the San Juan Basin
include more than 2,000 gross (approximately 30 net) wells, covering over
60,000 gross acres. Most of these wells are operated by Amoco Production
Company and Burlington Resources Oil & Gas Company. Production from
conventional gas wells is primarily from the Dakota, Mesaverde and Pictured
Cliffs formations.
 
  Exploitation of coal seam gas reserves in the Fruitland formation was the
most significant recent development activity in the San Juan Basin until the
drilling period for the federal income tax credit expired on January 1, 1993
(see "Regulation-Coal Seam Tax Credit"). Since that date, operators in the San
Juan Basin have continued to report development of coal seam gas reserves
without the incentive of the federal income tax credit. It is not known
whether any of this development activity has directly affected Trust reserves
or production. The most significant recent activity in the San Juan Basin was
the completion of additional eastward pipeline capacity during 1996, reducing
the dependence of San Juan Basin gas on California markets. During 1998, gas-
powered electricity generation increased in the southwest U.S., thereby
increasing demand for San Juan Basin gas.
 
  The underlying royalties also include royalties in the Sand Hills field of
Crane County, Texas. Most of these properties are operated by Exxon Company,
U.S.A. and Chevron, U.S.A. The Sand Hills field was discovered in 1931 and
includes production from three main intervals, the Tubb, McKnight and Judkins.
Development potential for the field includes recompletions and additional
infill drilling.
 
  The underlying royalties contain approximately 462,000 gross (approximately
26,000 net) producing acres. Information regarding the number of wells on
royalty properties is generally not made available to royalty interest owners.
Accordingly, an accurate well count for all underlying royalties cannot be
provided.
 
 
                                       3
<PAGE>
 
  Underlying Working Interest Properties. The underlying working interest
properties, detailed below, are developed properties undergoing secondary or
tertiary recovery operations:
 
<TABLE>
<CAPTION>
                                                                        Ownership of
                                                                      Cross Timbers Oil
                                                                      -----------------
                                                                      Working  Revenue
  Unit      County/ State                   Operator                  Interest Interest
  ----     ---------------                  --------                  -------- --------
<S>        <C>             <C>                                        <C>      <C>
North
 Cowden    Ector/Texas     Altura Production Company                     1.7%    1.4%
North
 Central
 Levelland Hockley/Texas   Mobil Producing Texas and New Mexico, Inc.    3.2%    2.1%
Penwell    Ector/Texas     Texaco Exploration and Production, Inc.       5.2%    4.6%
Sharon
 Ridge
 Canyon    Borden/Texas    Exxon Company, U.S.A.                         4.3%    2.8%
Hewitt     Carter/Oklahoma Exxon Company, U.S.A.                        11.3%    9.9%
Wildcat
 Jim Penn  Carter/Oklahoma Texaco Exploration and Production, Inc.       8.6%    7.5%
South
 Graham
 Deese     Carter/Oklahoma Maynard Oil Company                           8.2%    7.0%
</TABLE>
 
  The underlying working interest properties consist of 60,154 gross (2,290
net) producing acres. As of December 31, 1998, there were 1,513 gross (66.8
net) productive oil wells, 1,134 gross (43.2 net) injection wells and no wells
in process of drilling on these properties. No wells were drilled during 1998.
During 1997, 15 gross (1.5 net) producing wells were drilled. During 1996, 36
gross (2.9 net) producing wells were drilled.
 
Oil and Gas Production
 
  Trust production is recognized in the period royalty income is received. Oil
and gas production and average sales prices attributable to the Underlying
Properties and the Royalty Trust Interests for the three years ended December
31, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                   90% Royalty                75% Royalty
                                 Trust Interests            Trust Interests                 Total
                          ----------------------------- ----------------------- -----------------------------
                            1998      1997      1996     1998    1997    1996     1998      1997      1996
                          --------- --------- --------- ------- ------- ------- --------- --------- ---------
<S>                       <C>       <C>       <C>       <C>     <C>     <C>     <C>       <C>       <C>
Production
Underlying Properties
 Oil--Sales (Bbls)......    100,592    95,453    89,632 291,777 328,528 347,168   392,369   423,981   436,800
 Average per day
  (Bbls)................        276       262       245     799     900     948     1,075     1,162     1,193
 Gas--Sales (Mcf).......  3,398,203 4,301,707 4,275,047 103,890 117,164 110,313 3,502,093 4,418,871 4,385,360
 Average per day (Mcf)..      9,310    11,785    11,681     285     321     301     9,595    12,106    11,982
Royalty Trust Interests
 Oil--Sales (Bbls)......     83,856    82,723    77,686  20,918  94,491  90,729   104,774   177,214   168,415
 Average per day
  (Bbls)................        230       227       212      57     259     248       287       486       460
 Gas--Sales (Mcf).......  3,010,809 3,844,158 3,797,722   7,857  33,342  31,225 3,018,666 3,877,500 3,828,947
 Average per day (Mcf)..      8,249    10,532    10,376      21      91      86     8,270    10,623    10,462
Average Price
Underlying Properties
 Oil (per Bbl)..........     $14.04    $19.41    $18.56  $13.18  $19.14  $18.61    $13.40    $19.20    $18.60
 Gas (per Mcf)..........      $2.05     $2.05     $1.50   $1.34   $1.93   $1.92     $2.03     $2.04     $1.51
</TABLE>
 
Nonproducing Acreage
 
  The underlying nonproducing royalties contain approximately 200,000 gross
(approximately 3,000 net) acres in Texas, Oklahoma and New Mexico which were
nonproducing at the date of the Trust's creation. Cross Timbers Oil is the
owner of underlying mineral interests in the majority of this acreage. The
Trust is entitled to 10% of oil and gas production attributable to the
underlying mineral properties, but is not entitled to delay rental payments or
lease bonuses. There has been no significant development of such nonproducing
acreage since the Trust's creation.
 
                                       4
<PAGE>
 
Pricing and Sales Information
 
  Oil and gas are generally sold from the Underlying Properties at market-
sensitive prices. The majority of sales from the underlying working interest
properties are to major oil and gas companies. Information about purchasers of
oil and gas from royalty properties is generally not provided by operators to
Cross Timbers Oil as a royalty owner, or to the Trust.
 
Oil and Gas Reserves
 
  General
 
  The following are definitions adopted by the Securities and Exchange
Commission and the Financial Accounting Standards Board which are applicable
to terms used in the following discussion of oil and gas reserves:
 
    Proved reserves--Estimated quantities of crude oil, natural gas and
  natural gas liquids which, upon analysis of geologic and engineering data,
  appear with reasonable certainty to be recoverable in the future from known
  oil and gas reservoirs under existing economic and operating conditions.
 
    Proved developed reserves--Proved reserves which can be expected to be
  recovered through existing wells with existing equipment and operating
  methods.
 
    Proved undeveloped reserves--Proved reserves which are expected to be
  recovered from new wells on undrilled acreage, or from existing wells where
  a relatively major expenditure is required.
 
    Estimated future net revenues--Also referred to herein as "estimated
  future net cash flows." Computational result of applying current prices of
  oil and gas (with consideration of price changes only to the extent
  provided by existing contractual arrangements) to estimated future
  production from proved oil and gas reserves as of the date of the latest
  balance sheet presented, less estimated future expenditures (based on
  current costs) to be incurred in developing and producing the proved
  reserves. Estimated future net revenues do not include the effects of the
  coal seam tax credit, since the Trust is not a taxable entity and the
  credit inures directly to the benefit of the Unit holder (see "Discounted
  Present Value of the Coal Seam Tax Credit" below).
 
    Present value of estimated future net revenues--Also referred to herein
  as "standardized measure of discounted future net cash flows" or
  "standardized measure." Computational result of discounting estimated
  future net revenues at a rate of 10% annually.
 
  Miller and Lents, Ltd., independent petroleum engineers, have estimated oil
and gas reserves attributable to the Royalty Trust Interests as of December
31, 1998, 1997, 1996 and 1995. Numerous uncertainties are inherent in
estimating reserve volumes and values and such estimates are subject to change
as additional information becomes available. The reserves actually recovered
and the timing of production of these reserves may be substantially different
from the original estimates.
 
  Reserve quantities and revenues for the Royalty Trust Interests were
estimated from projections of reserves and revenues attributable to the
combined interests of the Trust and Cross Timbers Oil in the subject
properties. Since the Trust has defined net profits interests, the Trust does
not own a specific ownership percentage of the oil and gas reserve quantities.
Accordingly, reserves allocated to the Trust pertaining to its 75% net profits
interest in the working interest properties have effectively been reduced to
reflect recovery of the Trust's 75% portion of applicable production and
development costs. Because Trust reserve quantities are determined using an
allocation formula, any fluctuations in actual or assumed prices or costs will
result in revisions to the estimated reserve quantities allocated to the
Royalty Trust Interests.
 
  The standardized measure of discounted future net cash flows and changes in
such discounted cash flows as presented below are prepared using assumptions
required by the Financial Accounting Standards Board. Such assumptions include
the use of year-end prices for oil and gas and year-end costs for estimated
future development and production expenditures to produce the proved reserves.
Because natural gas prices are
 
                                       5
<PAGE>
 
influenced by seasonal demand, use of year-end prices, as required by the
Financial Accounting Standards Board, may not be the most representative in
estimating future revenues or reserve data. Future net cash flows are
discounted at an annual rate of 10%. No provision is included for federal
income taxes since future net revenues are not subject to taxation at the
trust level.
 
  Year-end oil prices used to determine the standardized measure were based on
a West Texas Intermediate crude oil posted price of $9.50 per Bbl in 1998,
$15.50 per Bbl in 1997, $24.25 per Bbl in 1996, and $18.00 per Bbl in 1995.
The year-end weighted average gas prices used to determine the standardized
measure were $1.88 per Mcf in 1998, $1.76 per Mcf in 1997, $2.64 per Mcf in
1996 and $1.37 per Mcf in 1995.
 
  Proved Reserves
 
  The following table reconciles the change in proved reserves attributable to
the Royalty Trust Interests from December 31, 1995 through December 31, 1998
(in thousands):
 
<TABLE>
<CAPTION>
                           90% Royalty       75% Royalty
                         Trust Interests   Trust Interests         Total
                         ----------------  -----------------  -----------------
                          Oil      Gas       Oil       Gas      Oil      Gas
                         (Bbls)   (Mcf)     (Bbls)    (Mcf)   (Bbls)    (Mcf)
                         ------  --------  --------  -------  -------  --------
<S>                      <C>     <C>       <C>       <C>      <C>      <C>
Balance, December 31,
 1995................... 669.5   40,885.5   1,280.1    440.2  1,949.6  41,325.7
  Extensions,
   discoveries and other
   additions............   7.7      174.6      17.1      -0-     24.8     174.6
  Revisions of prior
   estimates............  81.3    2,418.2     598.5    281.5    679.8   2,699.7
  Production............ (77.7)  (3,797.7)    (90.7)   (31.2)  (168.4) (3,828.9)
                         -----   --------  --------  -------  -------  --------
Balance, December 31,
 1996................... 680.8   39,680.6   1,805.0    690.5  2,485.8  40,371.1
  Extensions,
   discoveries and other
   additions............ 107.9      270.0       -0-      -0-    107.9     270.0
  Revisions of prior
   estimates............  25.5    1,779.7    (745.8)  (301.5)  (720.3)  1,478.2
  Production............ (82.7)  (3,844.1)    (94.5)   (33.4)  (177.2) (3,877.5)
                         -----   --------  --------  -------  -------  --------
Balance, December 31,
 1997................... 731.5   37,886.2     964.7    355.6  1,696.2  38,241.8
  Extensions,
   discoveries and other
   additions............   3.6       95.7       -0-      -0-      3.6      95.7
  Revisions of prior
   estimates............  25.3    1,482.1    (696.7)  (282.4)  (671.4)  1,199.7
  Production............ (83.9)  (3,010.8)    (20.9)    (7.9)  (104.8) (3,018.7)
                         -----   --------  --------  -------  -------  --------
Balance, December 31,
 1998................... 676.5   36,453.2     247.1     65.3    923.6  36,518.5
                         =====   ========  ========  =======  =======  ========
</TABLE>
 
  During 1998, 1997 and 1996, revisions of prior estimates of the 90% Royalty
Trust Interests' proved gas reserves were primarily because of lower than
anticipated production declines. During 1997, proved oil reserves of the 90%
Royalty Trust Interests increased primarily because of development drilling on
Trust royalty acreage in Lea County, New Mexico. Revisions of prior estimates
of the 75% Royalty Trust Interests' proved reserves in each of these years
were primarily the result of changes in the year-end oil prices used in
estimating proved reserves. See "General" above.
 
                                       6
<PAGE>
 
  Proved Developed Reserves
 
  The following are estimated quantities of proved developed oil and gas
reserves as of December 31, 1995 and each following year-end through December
31, 1998 (in thousands):
 
<TABLE>
<CAPTION>
                                  90% Royalty     75% Royalty
                                Trust Interests Trust Interests      Total
                                --------------- --------------------------------
                                 Oil     Gas      Oil     Gas     Oil     Gas
                                (Bbls)  (Mcf)    (Bbls)  (Mcf)  (Bbls)   (Mcf)
                                ------ -------- -------- -------------- --------
<S>                             <C>    <C>      <C>      <C>    <C>     <C>
December 31, 1995.............. 665.2  38,866.6  1,203.5  429.3 1,868.7 39,295.9
                                =====  ======== ======== ====== ======= ========
December 31, 1996.............. 676.6  37,705.7  1,701.2  675.7 2,377.8 38,381.4
                                =====  ======== ======== ====== ======= ========
December 31, 1997.............. 727.9  35,947.4    908.6  346.8 1,636.5 36,294.2
                                =====  ======== ======== ====== ======= ========
December 31, 1998.............. 672.8  34,514.0    206.4   60.7   879.2 34,574.7
                                =====  ======== ======== ====== ======= ========
</TABLE>
 
  Changes in proved developed reserves are explained under "Proved Reserves"
above.
 
  Standardized Measure of Discounted Future Net Cash Flows from Proved
Reserves
 
  The following are summary calculations of the standardized measure of
discounted future net cash flows as of December 31, 1998, 1997 and 1996 (in
thousands):
 
<TABLE>
<CAPTION>
                                90% Royalty                  75% Royalty
                              Trust Interests              Trust Interests                   Total
                                December 31,                 December 31,                 December 31,
                         ----------------------------  --------------------------  ----------------------------
                           1998      1997      1996     1998     1997      1996      1998      1997      1996
                         --------  --------  --------  -------  -------  --------  --------  --------  --------
<S>                      <C>       <C>       <C>       <C>      <C>      <C>       <C>       <C>       <C>
Future cash inflows..... $ 77,207  $ 77,217  $119,971  $ 2,582  $14,975  $ 45,237  $ 79,789  $ 92,192  $165,208
Future production
 taxes..................   (5,401)   (5,346)   (8,282)    (131)    (847)   (2,611)   (5,532)   (6,193)  (10,893)
                         --------  --------  --------  -------  -------  --------  --------  --------  --------
Future net cash flows...   71,806    71,871   111,689    2,451   14,128    42,626    74,257    85,999   154,315
10% discount factor.....  (37,222)  (36,221)  (56,805)  (1,259)  (6,282)  (20,663)  (38,481)  (42,503)  (77,468)
                         --------  --------  --------  -------  -------  --------  --------  --------  --------
Standardized measure.... $ 34,584  $ 35,650  $ 54,884  $ 1,192  $ 7,846  $ 21,963  $ 35,776  $ 43,496  $ 76,847
                         ========  ========  ========  =======  =======  ========  ========  ========  ========
</TABLE>
 
  Changes in Standardized Measure of Discounted Future Net Cash Flows from
Proved Reserves
 
  The following reconciles the changes during 1998, 1997 and 1996 in the
standardized measure (in thousands):
 
<TABLE>
<CAPTION>
                               90% Royalty                 75% Royalty
                             Trust Interests             Trust Interests                  Total
                         --------------------------  --------------------------  --------------------------
                          1998      1997     1996     1998      1997     1996     1998      1997     1996
                         -------  --------  -------  -------  --------  -------  -------  --------  -------
<S>                      <C>      <C>       <C>      <C>      <C>       <C>      <C>      <C>       <C>
Standardized measure,
 January 1.............. $35,650  $ 54,884  $31,068  $ 7,846  $ 21,963  $11,175  $43,496  $ 76,847  $42,243
 Extensions, discoveries
  and other additions...     155     1,311      460        0         0      178      155     1,311      638
 Accretion of discount..   3,176     4,861    2,767      698     1,980    1,012    3,874     6,841    3,779
 Revisions of prior
  estimates, changes in
  price and other.......   2,369   (16,689)  27,159   (7,038)  (14,264)  11,298   (4,669)  (30,953)  38,457
 Royalty income.........  (6,766)   (8,717)  (6,570)    (314)   (1,833)  (1,700)  (7,080)  (10,550)  (8,270)
                         -------  --------  -------  -------  --------  -------  -------  --------  -------
Standardized measure,
 December 31............ $34,584  $ 35,650  $54,884  $ 1,192  $  7,846  $21,963  $35,776  $ 43,496  $76,847
                         =======  ========  =======  =======  ========  =======  =======  ========  =======
</TABLE>
 
                                       7
<PAGE>
 
  Discounted Present Value of the Coal Seam Tax Credit
 
  The standardized measure above does not include the effects of the coal seam
tax credit since the Trust is not a taxable entity. The following table
summarizes the estimated coal seam tax credit attributable to the 90% Royalty
Trust Interests at December 31, 1998, 1997 and 1996. Such estimates are based
on projected coal seam gas production through the year 2002 as estimated by
independent engineers. The estimates are also based on the current year
estimated Btu content and the coal seam tax credit of $1.05 per MMBtu at
December 31, 1998 and 1997 and $1.03 per MMBtu at December 31, 1996. See
"Regulation--Coal Seam Tax Credit."
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                           --------------------
                                                            1998   1997   1996
                                                           ------ ------ ------
                                                              (in thousands)
   <S>                                                     <C>    <C>    <C>
   Undiscounted........................................... $2,780 $3,390 $3,946
                                                           ====== ====== ======
   Discounted present value at 10%........................ $2,359 $2,784 $3,150
                                                           ====== ====== ======
</TABLE>
 
Certain Provisions Affecting San Juan Basin Royalty Interests
 
  Certain instruments creating or governing some of the Underlying Properties
that are royalties and overriding royalties in the San Juan Basin contain
provisions that purportedly either reduce the overriding royalty interest or
convert the royalty or overriding royalty interest into a working interest
when gas production falls below specified levels. Cross Timbers Oil believes
these provisions were included in these instruments because of a federal
regulation, that has since been repealed, limiting the amount of royalties and
overriding royalties placed on federal leases in the San Juan Basin. No
assurances, however, can be made regarding the effect of these provisions on
the Trust. Cross Timbers Oil and other royalty interest owners filed a
lawsuit, later joined by the Trust in 1993, to recover revenues suspended by
working interest owners based on their interpretation of these reduction or
conversion provisions. The Trust, Cross Timbers Oil and the other royalty
owners settled this lawsuit in 1996, receiving past production due to the
Trust and receiving further compensation for an agreement to reduce the
Trust's interest in the involved properties.
 
Reversion Agreement
 
  Certain of the underlying royalties are subject to a reversion agreement
between Cross Timbers Oil and a third party. The agreement calls for Cross
Timbers Oil to transfer 25% of its interest in those properties to the third
party when amounts received by Cross Timbers Oil from the Underlying
Properties subject to the agreement equal the purchase price of the properties
plus a 1% per month return on the unrecouped purchase price ("Payout"). If
Payout were to occur and the 25% interest were to be transferred to the third
party, the amounts payable to the Trust would be proportionately reduced.
Based on 1998 prices and levels of production, Cross Timbers Oil has advised
the Trustee that Payout is not projected to occur for more than 20 years.
Unless prices and production increase substantially, this reversion agreement
is not expected to have a material impact on the Trust.
 
Regulation
 
  Natural Gas Regulation
 
  The interstate transportation and sale for resale of natural gas is subject
to federal regulation, including transportation rates charged and various
other matters, by the Federal Energy Regulatory Commission ("FERC"). Federal
price controls on wellhead sales of domestic natural gas terminated on January
1, 1993. While natural gas prices are currently unregulated, Congress
historically has been active in the area of natural gas regulation. It is
impossible to predict whether new legislation to regulate natural gas might be
proposed, what proposals, if any, might actually be enacted by Congress or the
various state legislatures, and what effect, if any, such proposals might have
on the operations of the Underlying Properties.
 
                                       8
<PAGE>
 
  State Regulation
 
  The various states regulate the production and sale of oil and natural gas,
including imposing requirements for obtaining drilling permits, the method of
developing new fields, the spacing and operation of wells and the prevention
of waste of oil and gas resources. The rates of production may be regulated
and the maximum daily production allowables from both oil and gas wells may be
established on a market demand or conservation basis, or both.
 
  Coal Seam Tax Credit
 
  The Trust receives royalty income from coal seam wells. Under Section 29 of
the Internal Revenue Code, coal seam gas produced prior to January 1, 2003
from wells drilled after December 31, 1979 and before January 1, 1993,
qualifies for the federal income tax credit for producing nonconventional
fuels. This tax credit for 1998 was approximately $1.05 per MMBtu. Such
credit, calculated based on the Unit holder's pro rata share of qualifying
production, may not reduce the Unit holder's regular tax liability (after the
foreign tax credit and certain other nonrefundable 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.
 
  Other Regulation
 
  The petroleum industry is also subject to compliance with various other
federal, state and local regulations and laws, including, but not limited to,
regulations and laws relating to environmental protection, occupational
safety, resource conservation and equal employment opportunity. Cross Timbers
Oil has advised the Trustee that it does not believe that compliance with
these laws will have any material adverse effect upon the Unit holders.
 
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
 
  No matters were submitted to a vote of Unit holders during 1998.
 
                                       9
<PAGE>
 
                                    PART II
 
Item 5. Market for Units of the Trust and Related Security Holder Matters
 
  The section entitled "Units of Beneficial Interest" on page 1 of the Trust's
Annual Report to Unit holders for the year ended December 31, 1998 is
incorporated herein by reference.
 
Item 6. Selected Financial Data
 
<TABLE>
<CAPTION>
                                            Year Ended December 31,
                          -----------------------------------------------------------
                             1998        1997        1996        1995        1994
                          ----------- ----------- ----------- ----------- -----------
<S>                       <C>         <C>         <C>         <C>         <C>
Royalty Income..........  $ 7,079,632 $10,549,668 $ 8,269,875 $ 5,739,704 $ 6,934,038
Distributable Income....    6,927,338  10,407,250   8,076,964   5,578,227   6,748,876
Distributable Income per
 Unit...................     1.154555    1.734541    1.346162    0.929705    1.124811
Distributions per Unit..     1.154555    1.734541    1.346162    0.929705    1.124811
Total Assets at Year-
 End....................   36,554,480  38,767,918  42,716,284  45,547,459  49,587,753
</TABLE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
  The "Trustee's Discussion and Analysis" of financial condition and results
of operations for the three-year period ended December 31, 1998 on pages 5, 6
and 7 of the Trust's Annual Report to Unit holders for the year ended December
31, 1998 is incorporated herein by reference.
 
  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 material adverse
effects 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, including property operators, oil and natural gas purchasers and
significant service providers such as electric utility companies and natural
gas plant, pipeline and gathering systems. Since the Trust does not use the
Trustee's computer systems in any significant capacity, the Trustee's Year
2000 compliance will not affect the Trust.
 
  Cross Timbers Oil is in the process of reviewing its computer systems and
computer-controlled field equipment and making the necessary modifications for
Year 2000 compliance. Cross Timbers Oil has completed modifications and
testing of its primary accounting and land computer programs. The remaining
computer systems have been inventoried and assessed. Remediation and testing
of significant remaining systems are expected to be complete by August 1999.
Based on its review, remediation efforts and the results of testing to date,
Cross Timbers Oil does not believe that timely modification of its computer
systems and computer-controlled equipment for Year 2000 compliance represents
a material risk to the Trust. No costs of such modifications will be incurred
by the Trust.
 
  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., property 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 have identified significant third parties whose Year 2000
compliance could significantly affect them, and are in the process of formally
inquiring 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
 
                                      10
<PAGE>
 
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.
 
  Cross Timbers Oil is currently identifying appropriate contingency plans in
the event of potential problems resulting from failure of its computer systems
on January 1, 2000. Contingency plans may include installing backup computer
systems or equipment and temporarily replacing systems or equipment with
manual processes. No contingency plans have been completed to date; Cross
Timbers Oil expects contingency plans to be complete by October 1999.
 
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
 
  Under the terms of the Indenture, the Trustee cannot engage the Trust in any
business activity nor cause the Trust to enter into any investments other than
investing cash on hand in specific short-term cash investments. Therefore, the
Trust cannot hold any derivative financial instruments. Additionally, any
gains or losses from any hedging activities conducted by Cross Timbers Oil are
specifically excluded from the calculation of net proceeds due the Trust under
the forms of the Royalty Trust conveyances.
 
Item 8. Financial Statements and Supplementary Data
 
  The financial statements of the Trust and the notes thereto, together with
the report thereon of Arthur Andersen LLP dated March 16, 1999, appearing on
pages 9 through 12 of the Trust's Annual Report to Unit holders for the year
ended December 31, 1998 are incorporated herein by reference.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
  There have been no changes in accountants or disagreements with accountants
on any matter of accounting principles or practices or financial statement
disclosures during the two years ended December 31, 1998.
 
                                      11
<PAGE>
 
                                   PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
  The Trust has no directors or executive officers. The Trustee is a corporate
trustee which may be removed, with or without cause, by the affirmative vote
of the holders of a majority of all the Units then outstanding.
 
Item 11. Executive Compensation
 
  The Trustee received the following annual compensation from 1996 through
1998 as specified in the Trust Indenture:
 
<TABLE>
<CAPTION>
                                             Other Annual
        Name and Principal Position   Year Compensation (1)
        ---------------------------   ---- ----------------
        <S>                           <C>  <C>
        NationsBank, N.A., Trustee    1998      $3,540
                                      1997       7,806
                                      1996      10,072
</TABLE>
 
(1) Under the Trust Indenture, the Trustee is entitled to an administrative
    fee of: (i) 1/20 of 1% of the first $100 million of the annual gross
    revenue of the Trust, and 1/30 of 1% of the annual gross revenue of the
    Trust in excess of $100 million, and (ii) Trustee's standard hourly rates
    for time in excess of 300 hours annually.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
  (a) Security Ownership of Certain Beneficial Owners. The following table
sets forth as of March 1, 1999 information with respect to each person known
to the Trustee to beneficially own more than 5% of the outstanding Units of
the Trust:
 
<TABLE>
<CAPTION>
                                        Amount and Nature of   Percent
        Name and Address                Beneficial Ownership   of Class
        ----------------                --------------------   --------
        <S>                             <C>                    <C>    
        Cross Timbers Oil Company        1,360,000 Units (1)     22.7%
        810 Houston Street, Suite 2000                                
        Fort Worth, TX 76102                                          
                                                                      
        Haven Capital Management, Inc.     327,990 Units (2)      5.5% 
        665 Third Avenue
        New York, NY 10017
</TABLE>
 
(1) Cross Timbers Oil has the sole power to vote and dispose of 1,360,000
    Units.
(2) As reported on Schedule 13G, at December 31, 1998, Haven Capital
    Management, Inc. has the sole power to dispose of 323,990 Units held in
    client accounts, and has sole power to vote and dispose of 4,000 shares
    held in its profit sharing plan trust.
 
  (b) Security Ownership of Management. The Trust has no directors or
executive officers. As of March 1, 1999, NationsBank owned, in various
fiduciary capacities, an aggregate of 115,646 Units with a shared right to
vote 11,287 of these Units and no right to vote 36,702 of these Units.
NationsBank disclaims any beneficial interests in these Units. The number of
Units reflected in this paragraph includes Units held by all branches of
NationsBank.
 
  (c) Changes in Control. The Trustee knows of no arrangements which may
subsequently result in a change in control of the Trust.
 
Item 13. Certain Relationships and Related Transactions
 
  In computing royalty income paid to the Trust for the 75% Royalty Trust
Interests, Cross Timbers Oil deducts an overhead charge as reimbursement for
costs associated with monitoring these interests. This charge at December 31,
1998 is $21,440 per month, or $257,280 annually (net to the Trust of $16,080
or $192,960 annually), and is subject to annual adjustment based on an oil and
gas industry index.
 
  During 1998, NationsBank, N.A. received $11,200 for oil and gas consulting
services performed on behalf of the Trust. See Item 11 for the remuneration
received by the Trustee from 1996 through 1998 and Item 12(b) for information
concerning Units owned by the Trustee, NationsBank, N.A., in various fiduciary
capacities.
 
                                      12
<PAGE>
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
(a) The following documents are filed as a part of this report:
 
  1.Financial Statements (incorporated by reference in Item 8 of this report)
 
    Report of Independent Public Accountants
    Statements of Assets, Liabilities and Trust Corpus at December 31, 1998
    and 1997
    Statements of Distributable Income for the years ended December 31,
    1998, 1997 and 1996
    Statements of Changes in Trust Corpus for the years ended December 31,
    1998, 1997 and 1996
    Notes to Financial Statements
 
  2.Financial Statement Schedules
 
      Financial statement schedules are omitted because of the absence of
    conditions under which they are required or because the required
    information is given in the financial statements or notes thereto.
 
  3.Exhibits
 
<TABLE>
 <C>            <S>
        (4) (a) Cross Timbers Royalty Trust Indenture amended and restated on
                January 13, 1992 by 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.) 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 Partnership,
                East Timbers Limited Partnership, Hickory Timbers Limited
                Partnership, and Cross Timbers Partners, L.P. (predecessors of
                Cross Timbers Oil Company, L.P.) 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.
 
        (13)    Cross Timbers Royalty Trust Annual Report to security holders
                for fiscal year ended December 31, 1998.
 
        (23.1)  Consent of Arthur Andersen LLP
 
        (23.2)  Consent of Miller and Lents, Ltd.
</TABLE>
 
      Copies of the above Exhibits are available to any Unit holder, at the
    actual cost of reproduction, upon written request to the Trustee,
    NationsBank, N.A., P.O. Box 830650, Dallas, Texas 75283-0650.
 
(b) Reports on Form 8-K
 
  During the last quarter of the Trust's fiscal year ended December 31, 1998,
there were no reports filed on Form 8-K by the Trust with the Securities and
Exchange Commission.
 
                                       13
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) 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
 
                                                      JOE B. GRISSOM
                                          By: _________________________________
                                                      Joe B. Grissom
                                                      Vice President
 
                                          CROSS TIMBERS OIL COMPANY
 
 
                                                     BENNIE G. KNIFFEN
Date: March 31, 1999                      By: _________________________________
                                                     Bennie G. Kniffen
                                                 Senior Vice President and
                                                        Controller
 
              (The Trust has no directors or executive officers.)
 
                                      14