<PAGE>

CROSS TIMBERS ROYALTY TRUST
--------------------------------------------------------------------------------

GLOSSARY OF TERMS
-----------------

The following are definitions of significant terms used in this Annual Report:

Bbl               Barrel (of oil)

Bcf               Billion cubic feet (of natural gas)

Mcf               Thousand cubic feet (of natural gas)

MMBtu             One million British Thermal Units, a common energy measurement

net proceeds      Gross proceeds from sale of production from the underlying
                  properties, less applicable costs

net profits       An interest in an oil and gas property measured by net profits
interest          from the sale of production, rather than a specific portion of
                  production. The following are defined net profits interests
                  that were conveyed from the underlying properties to the
                  trust:

                  90% net profits interests - interests that entitle the trust
                  to receive 90% of the net proceeds from the underlying
                  properties that are royalty or overriding royalty interests in
                  Texas, Oklahoma and New Mexico

                  75% net profits interests - interests that entitle the trust
                  to receive 75% of the net proceeds from the underlying
                  properties that are working interests in Texas and Oklahoma

royalty income    Net proceeds multiplied by the applicable net profits
                  percentage of 75% or 90% and paid to the trust

royalty interest  A nonoperating interest in an oil and gas property that
(and overriding   provides the owner a specified share of  production without
royalty interest) any production or development costs


underlying        Cross Timbers Oil's interest in certain oil and gas
properties        properties from which the net profits interests were conveyed.
                  The underlying properties include royalty and overriding
                  royalty interests in producing and nonproducing properties in
                  Texas, Oklahoma and New Mexico, and working interests in
                  producing properties located in Texas and Oklahoma.

working interest  An operating interest in an oil and gas property that provides
                  the owner a specified share of production that is subject to
                  all production and development costs



Forward Looking Statements

This Annual Report, including the accompanying Form 10-K, includes "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended.  All statements other than statements of historical fact included in
this Annual Report and Form 10-K, including, without limitation, statements
regarding estimates of proved reserves, future development plans and costs, and
industry and market conditions, are forward looking statements.  Although Cross
Timbers Oil believes that the expectations reflected in such forward looking
statements are reasonable, neither Cross Timbers Oil nor the trustee can give
any assurance that such expectations will prove to be correct.

                                                                               i
<PAGE>

THE TRUST
--------------------------------------------------------------------------------

Cross Timbers Royalty Trust was created on February 12, 1991 by conveyance of
90% net profits interests in certain royalty and overriding royalty interest
properties in Texas, Oklahoma and New Mexico, and 75% net profits interests in
certain working interest properties in Texas and Oklahoma. Cross Timbers Oil
Company owns the underlying properties from which these net profits interests
were conveyed.  The net profits interests are the only assets of the trust,
other than cash held for trust expenses and for distribution to unitholders.

Royalty income received by the trust on the last business day of each month is
calculated and paid by Cross Timbers Oil based on net proceeds received from the
underlying properties in the prior month.  Distributions, as calculated by the
trustee, are paid to month-end unitholders of record within ten business days.


UNITS OF BENEFICIAL INTEREST
--------------------------------------------------------------------------------

The units of beneficial interest in the trust are listed and traded on the New
York Stock Exchange under the symbol "CRT."  The following are the high and low
unit sales prices and total cash distributions per unit paid by the trust during
each quarter of 2000 and 1999:


                            Sales Price
                       --------------------   Distributions
    Quarter               High        Low       per Unit
---------------------  -----------  -------     --------

 2000
---------------------
First...............       $14.750  $ 9.500    $0.383466
Second..............        14.188   10.438     0.404105
Third...............        17.000   13.000     0.557722
Fourth..............        16.938   13.375     0.571726
                                               ---------
                                               $1.917019
                                               =========

 1999
---------------------
First...............       $10.125  $ 8.438  $0.240065
Second..............        10.750    9.000   0.195230
Third...............        13.875   10.125   0.276342
Fourth..............        12.750    9.250   0.379998
                                             ---------
                                             $1.091635
                                             =========

At December 31, 2000, there were 6,000,000 units outstanding and approximately
156 unitholders of record; 5,642,982 of these units were held by a depository
institution.  As of March 1, 2001, Cross Timbers Oil owned 1,360,000 units.

                                                                               1
<PAGE>

SUMMARY
--------------------------------------------------------------------------------

The trust was created to collect and distribute monthly royalty income to
unitholders.  Trust royalty income is received from two major components, the
90% net profits interests and the 75% net profits interests.

  -  The 90% net profits interests were conveyed from underlying royalty and
     overriding royalty interests in producing properties in Texas, Oklahoma and
     New Mexico.  Most royalty income is from long-lived gas properties in the
     San Juan Basin of northwestern New Mexico.  Because the 90% net profits
     interests are not subject to production or development costs, royalty
     income from these interests generally only varies because of changes in
     sales volumes or prices.

  -  The 75% net profits interests were conveyed from underlying working
     interests in seven large, predominantly oil-producing properties in Texas
     and Oklahoma.  Royalty income from these properties is reduced by
     production and development costs.  If costs exceed revenues from the
     underlying working interest properties in either Texas or Oklahoma, the 75%
     net profits interests for that state will not contribute to trust royalty
     income until all excess costs and accrued interest have been recovered from
     future net proceeds of that state. However, such excess costs will not
     reduce royalty income from the other 75% net profits interests or from the
     90% net profits interests.  Because of excess costs, the Texas 75% net
     profits interests did not contribute to trust royalty income in 1999 and
     through April 2000, and the Oklahoma 75% net profits interests did not
     contribute to trust royalty income from February through June 1999 and for
     September 1999.  Such excess costs generally occur during periods of higher
     development activity and lower oil prices.  For further information, see
     "Trustee's Discussion and Analysis - Costs."

Unitholders may be eligible to receive the following tax benefits but should
consult their tax advisors:

  -  The Nonconventional Fuel Source Tax Credit is related to coal seam gas
     production through the year 2002 from wells drilled after December 31, 1979
     and prior to January 1, 1993 underlying the 90% net profits interests.
     Unitholders are entitled to this tax credit (also referred to as "coal seam
     tax credit") which may be used to reduce the unitholder's regular income
     tax liability.

  -  Cost Depletion is generally available to unitholders as a deduction from
     royalty income.  Available depletion is dependent upon the unitholder's
     cost of units, purchase date and prior allowable depletion.

      As an example, a unitholder that acquired units in January 2000 and held
      them throughout 2000 would be entitled to a cost depletion deduction of
      approximately 8% of his cost. Assuming a cost of $11.00 per unit, cost
      depletion would offset 44% of 2000 taxable trust income. After considering
      the coal seam tax credit and assuming a 30% tax rate, the 2000 taxable
      equivalent return as a percentage of unit cost would be 22%. (NOTE-Because
      the units are a depleting asset, a portion of this return is effectively a
      return of capital.)

The following summarizes the effect of the above components on distributions per
unit for the last three years:

<TABLE>
<CAPTION>
                                          2000              1999               1998
                                   -----------------  -----------------  ----------------
                                   Monthly    Annual  Monthly   Annual   Monthly   Annual
                                   Average     Total  Average    Total   Average    Total
                                   -------    ------  -------   -------  -------   ------
<S>                                <C>        <C>     <C>       <C>      <C>       <C>
Royalty Income

- 90% net profits interests..       $ .129    $1.550   $ .088    $1.055   $ .094   $1.128

- 75% net profits interests..         .033      .393     .005      .060     .004     .052

Administration expense
 (net of interest income)....        (.002)    (.026)   (.002)    (.023)   (.002)   (.025)
                                    ------    ------   ------    ------   ------   ------

Total Distribution...........       $ .160    $1.917   $ .091    $1.092   $ .096   $1.155
                                    ======    ======   ======    ======   ======   ======

Nonconventional Fuel
  Source Tax Credit..........            *    $ .120        *    $ .158        *   $ .162
                                              ======            =======            ======
</TABLE>
* - Not applicable

                                                                               2
<PAGE>

TO UNITHOLDERS
--------------

We are pleased to present the 2000 Annual Report of Cross Timbers Royalty Trust
and the trust's 2000 Form 10-K.  Both of these reports contain important
information about the trust's net profits interests, including information
provided to the trustee by Cross Timbers Oil, and should be read in conjunction
with each other.

For the year ended December 31, 2000, royalty income totaled $11,660,510.  After
deducting trust administration expense and adding interest income, distributable
income was $11,502,114 or $1.917019 per unit.  Distributions for the year were
the highest since the trust's inception and were 76% higher than 1999 comparable
amounts because of higher product prices.

Natural gas prices for 2000 averaged $3.32 per Mcf for sales from the underlying
properties, a 67% increase from the 1999 average price of $1.99 per Mcf.  Gas
sales volumes from the underlying properties for the year ended December 31,
2000 totaled 3,080,601 Mcf, a 15% decrease from 1999 production of 3,643,023
Mcf. Gas volumes were lower primarily because of the timing of cash receipts and
coal seam gas production decline.

Oil sales volumes from the underlying properties during 2000 were 344,123 Bbls,
a 1% decline from 1999 levels.  The average oil price increased to $27.49 per
Bbl, up 85% from the 1999 average price of $14.88.

During 1998 and early 1999, costs exceeded revenues from the Texas 75% net
profits interests because of low oil prices and costs associated with a carbon
dioxide injection project.  With increased oil prices and completion of this
development project, the properties underlying the Texas 75% net profits
interests recovered $911,223 ($683,417 net to the trust) of excess costs and
accrued interest during the last half of 1999 and first half of 2000.  The Texas
75% net profits interests contributed $0.15 per unit to 2000 royalty income, or
8% of total distributions, as compared to 1999 when it did not contribute and
1998 when it contributed $0.02 per unit, or 1% of total 1998 distributions.

Coal seam gas sales volumes from the underlying properties were 874,819 Mcf in
2000, or a 25% decline from 1999 coal seam gas production of 1,173,950 Mcf.  The
resulting 2000 coal seam tax credit was $0.120389 per unit.  This credit (or a
portion thereof, if units were held less than the full year) is available to be
applied against a unitholder's regular federal income tax liability, subject to
certain limitations. Unitholders should consult their tax advisors regarding use
of this credit.

As of December 31, 2000, proved reserves of the net profits interests were
estimated by independent engineers to be 2,104,000 Bbls of oil and 34.8 Bcf of
natural gas.  Estimated oil reserves and gas reserves decreased 4% and 2%,
respectively, from year-end 1999 to 2000 primarily because of production.  All
reserve information prepared by independent engineers has been provided to the
trustee by Cross Timbers Oil.

Estimated future net revenues from proved reserves of the net profits interests
at December 31, 2000 are $357.2 million, or $59.53 per unit.  Using an annual
discount factor of 10%, the present value of estimated future net revenues at
December 31, 2000 is $169.4 million, or $28.24 per unit.  Proved reserve
estimates and related future net revenues have been determined based on a year-
end West Texas Intermediate posted oil price of $23.75 per barrel and a year-end
average realized gas price of $9.48 per Mcf.  Other guidelines used in
estimating proved reserves, as prescribed by the Financial Accounting Standards
Board, are described under Item 2 of the accompanying Form 10-K.   The present
value of estimated future net revenues is not necessarily indicative  of the
market value of trust units.

As discussed in the tax instructions provided to unitholders in February 2001,
trust distributions are considered portfolio income, rather than passive income.
Unitholders should consult their tax advisors for further information.

Cross Timbers Royalty Trust
By: Bank of America, N.A., Trustee

    /s/ RON E. HOOPER
By: Ron E. Hooper
    Senior Vice President

                                                                               3
<PAGE>

THE UNDERLYING PROPERTIES
-------------------------

The underlying properties include over 2,900 producing properties with
established production histories in Texas, Oklahoma and New Mexico.  The average
reserve-to-production index for the underlying properties as of December 31,
2000 is approximately 13 years for oil and gas.  The reserve-to-production index
is calculated using total proved reserves and estimated 2001 production for the
underlying properties.  Based on estimated future net revenues at year-end oil
and gas prices, the proved reserves of the underlying properties are
approximately 14% oil and 86% natural gas.  The underlying properties also
include certain nonproducing properties in Texas, Oklahoma and New Mexico that
are primarily mineral interests.  Cross Timbers Oil cannot significantly
influence or control the operations of the underlying properties.

90% Net Profits Interests

Royalty and overriding royalty properties underlying the 90% net profits
interests represent 89% of the discounted future net cash flows from the trust's
proved reserves at December 31, 2000.  Approximately 95% of the discounted
future net cash flows from the 90% net profits interests is from gas reserves,
totaling 34.2 Bcf.  Oil reserves underlying the 90% net profits interests are
primarily located in West Texas and are estimated to be 678,000 Bbls at December
31, 2000.

Because the properties underlying the 90% net profits interests are royalty
interests and overriding royalty interests, royalty income from these properties
is not reduced by production and development costs. Additionally, royalty income
from these interests cannot be reduced by any excess costs of the 75% net
profits interests.  The trust, therefore, should generally receive monthly
royalty income from these interests, as determined by oil and gas sales volumes
and prices.

Most of the trust's gas reserves are located in the San Juan Basin of
northwestern New Mexico, one of the United States' largest natural gas fields.
The San Juan Basin royalties produced approximately 76% of gas sales volumes and
51% of royalty income for 2000.  As of December 31, 2000, the trust's proved
reserves in this region are estimated to be 28.3 Bcf, or 81% of total trust gas
reserves.

Approximately 28% of the trust's 2000 gas sales volumes were from coal seam
production in the San Juan Basin.  Through the year 2002, sales of production
from coal seam wells drilled after December 31, 1979 and prior to January 1,
1993 qualify for a federal income tax credit under Section 29 of the Internal
Revenue Code for nonconventional fuel sources.  This credit for 2000 coal seam
gas sales was approximately $1.06 per MMBtu or $0.120389 per unit, while the
coal seam credit for 1999 was $1.02 per MMBtu or $0.157564 per unit.  As of
December 31, 2000, the trust's proved coal seam gas reserves are estimated to be
4.4 Bcf, as compared with 5.4 Bcf at December 31, 1999.

Most of the trust's San Juan Basin conventional, or non-coal seam, production is
from the Mesa Verde formation, which has been approved for increased density
drilling.  Cross Timbers Oil believes that operators will further develop the
Mesa Verde formation underlying the net profits interests, and such future
development could significantly impact underlying gas sales volumes.  However,
minimal drilling is expected in 2001 because of  environmental concerns delaying
approval of drilling permits.

75% Net Profits Interests

Underlying the 75% net profits interests are working interests in seven large
properties in Texas and Oklahoma operated primarily by established oil
companies.  These properties are located in mature fields undergoing secondary
or tertiary recovery operations.  With its relatively minor working interest,
Cross Timbers Oil generally has little influence or control over operations on
any of these properties.

Proved reserves from the 75% net profits interests are almost entirely oil,
estimated to be approximately 1,426,000 Bbls at year-end 2000.  Based on year-
end oil and gas prices, proved reserves from these interests represent 11% of
the discounted future net cash flows of the trust's proved reserves at December
31, 2000.

Because these underlying properties are working interests,  production and
development costs are deducted in calculating royalty income from the 75% net
profits interests.  As a result, royalty income from these interests is affected
by the level of maintenance and development activity on these underlying
properties. Royalty income is also dependent upon oil sales volumes and prices
and is subject to reduction for any prior period excess costs.

Total 2000 development costs were $738,605, remaining relatively unchanged from
1999 development costs of $736,060.  First quarter 2001 development costs
totaled approximately $163,000; these costs are primarily related to fourth
quarter 2000 expenditures.

As reported to Cross Timbers Oil by unit operators in February of each year,
budgeted development costs were $356,000 for 2000 and $161,000 for 1999.  Actual
development costs often differ from amounts budgeted because of changes in
product prices that may affect the timing of projects.  Also, costs are deducted
in the calculation of trust royalty income several months after they are
incurred by the operator. Unit operators have reported to Cross Timbers Oil that
total budgeted costs are approximately $896,000 for 2001 and $717,000 for 2002,
net to Cross Timbers Oil's interests.

Higher development costs and lower oil prices during 1998 and early 1999 caused
costs to exceed revenues from the properties underlying the Texas 75% net
profits interests.  During 1999 and 2000, $911,223 ($683,417 net to the trust)
of such excess costs and accrued interest were recovered.  For information
regarding the effect of excess costs on trust royalty income, see "Trustee's
Discussion and Analysis - Years Ended December 31, 2000, 1999 and 1998 - Costs."

                                                                               4
<PAGE>

--------------------------------------------------------------------------------
Estimated Proved Reserves and Future Net Revenues

The following are proved reserves of the underlying properties and proved
reserves and future net revenues from proved reserves of the net profits
interests at December 31, 2000, as estimated by independent engineers:

<TABLE>
<CAPTION>
                                              Underlying Properties                          Net Profits Interests
                                              ---------------------        -------------------------------------------------------
                                               Proved Reserves (a)         Proved Reserves (a) (b)        Future Net Revenues
                                              ---------------------        -----------------------    from Proved Reserves (a) (c)
                                               Oil             Gas          Oil               Gas     ----------------------------
                                              (Bbls)          (Mcf)        (Bbls)            (Mcf)    Undiscounted      Discounted
(in thousands)                                ------         ------        ------           ------    ------------      ----------
<S>                                           <C>             <C>          <C>              <C>       <C>               <C>
90% Net Profits Interests
 San Juan Basin
  Conventional.............                       71          26,555           64           23,899       $217,457        $ 92,007
  Coal Seam................                      -0-           4,898          -0-            4,408         36,779          24,190
                                              ------          ------       ------           ------    -----------      ----------
     Total.................                       71          31,453           64           28,307        254,236         116,197
 Other New Mexico..........                      116             297          104              276          4,606           2,666
 Texas.....................                      491           4,296          443            3,867         44,180          22,926
 Oklahoma..................                       75           1,951           67            1,757         16,810           8,970
                                              ------          ------       ------           ------    -----------      ----------
     Total.................                      753          37,997          678           34,207        319,832         150,759
                                              ------          ------       ------           ------    -----------      ----------
75% Net Profits Interests
 Texas.....................                    1,802             867          811              390         21,630           9,927
 Oklahoma..................                    1,688             513          615              183         15,730           8,741
                                              ------          ------       ------           ------    -----------      ----------
     Total.................                    3,490           1,380        1,426              573         37,360          18,668
                                              ------          ------       ------           ------    -----------      ----------

     TOTAL.................                    4,243          39,377        2,104           34,780       $357,192        $169,427
                                              ======          ======       ======           ======    ===========      ==========
</TABLE>

-----------------------------------

(a) Based on year-end oil and gas prices.  Discounted estimated future net
    revenues from proved reserves increased 179% from year-end 1999 to 2000,
    primarily because of a 333% increase in year-end gas prices over these
    periods.  For further information regarding trust proved reserves, see Item
    2 of the accompanying Form 10-K.

(b) Since the trust has defined net profits interests, the trust does not own a
    specific percentage of the oil and gas reserves.  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 net profits interests.

(c) Before income taxes (and the tax benefit of the estimated coal seam tax
    credit) since future net revenues are not subject to taxation at the trust
    level.

                                                                               5
<PAGE>

TRUSTEE'S DISCUSSION AND ANALYSIS
---------------------------------

Years Ended December 31, 2000, 1999 and 1998

Royalty income for 2000 was $11,660,510, as compared with $6,691,336 for 1999
and $7,079,632 for 1998. The 74% increase in royalty income from 1999 to 2000
was because of higher product prices.  The 5% decrease in royalty income from
1998 to 1999 was primarily because of recovery of prior year excess costs.
During 2000, 1999 and 1998, 64%, 79% and 80%, respectively, of royalty income
was derived from gas sales.

Trust administration expense was $185,624 in 2000 as compared to $152,631 in
1999 and $163,151 in 1998. Interest income was $27,228 in 2000, $11,098 in 1999
and  $10,857 in 1998.

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:

   .  oil and gas sales volumes,
   .  oil and gas sales prices, and
   .  costs deducted in the calculation of royalty income.

Volumes

Underlying oil sales volumes decreased 1% from 1999 to 2000, as compared to a
11% decrease from 1998 to 1999.  Sales volume decreases in 2000 were related to
natural production decline and timing of cash receipts and were offset by
increased production from properties underlying the Texas 75% and 90% net
profits interests.  Approximately half the 1999 decline was attributable to a
temporary disruption of production resulting from mechanical complications on
one of the underlying Oklahoma working interest properties.  Production on this
property gradually increased over the last half of 1999.  The remainder of the
1999 decline in oil volumes was primarily because of natural production decline.

Underlying gas sales volumes decreased 15% from 1999 to 2000 as compared to a 4%
increase from 1998 to 1999.  Lower 2000 gas sales volumes were primarily because
of timing of cash receipts and coal seam gas production decline. Higher 1999
volumes were primarily attributable to significant receipts related to prior
periods.

Prices

The average oil price for 2000 was $27.49 per Bbl, 85% higher than the 1999
average oil price of $14.88, which was 11% higher than the 1998 average price of
$13.40.  Because of the two-month interval between oil production and receipt by
the trust of related royalty income, the 1998 average price includes the effect
of oil prices that began to weaken in December 1997 and continued to decline
through 1998.  West Texas Intermediate posted crude oil prices dropped to $8.00
per barrel in December 1998, the lowest level since 1978.  After OPEC members
and other oil producers agreed to production cuts in March 1999, oil prices
climbed through the remainder of 1999 and first quarter 2000.  Despite OPEC
production increases in 2000, increased demand sustained higher prices.  The
West Texas Intermediate ("WTI") posted price reached $34.25 per Bbl in September
2000, its highest level in 10 years.  Lagging demand, caused by a world economic
slowdown, has caused oil prices to decline in 2001.  OPEC members have responded
with production cuts which to date have not significantly affected prices.  The
average WTI posted price for January and February 2001 was $26.55, compared with
$27.39 for the year 2000 and $28.93 for fourth quarter 2000.  Recent trust oil
prices have averaged approximately $0.90 higher than the WTI posted price.

The 2000 average gas price was $3.32 per Mcf, a 67% increase from the 1999
average gas price of $1.99, which was 2% lower than the 1998 average price of
$2.03.  Prior to 1999, purchaser deductions were netted in the gas price.  As of
second quarter 1999, these purchaser deductions are included in taxes,
transportation and other costs (see "Costs" below).  Considering the effect of
this change in classification, gas prices increased 62% from 1999 to 2000 and
decreased 16% from 1998 to 1999.  Gas prices were lower in 1999 primarily
because of the abnormally warm winter of 1998-1999 across the United States that
resulted in higher levels of gas in storage.  Gas prices began to increase in
May 1999 and, after declining briefly at year end, continued to strengthen in
2000.  Higher gas prices have been supported by both lower gas storage levels
and increased demand for power generation.  NYMEX gas prices rose to a record
high of $10.10 per MMBtu in December 2000 as winter demand strained gas
supplies.  The average NYMEX price for January and February 2001 was $6.78 per
MMBtu.  The trust's recent gas prices have averaged approximately $0.30 per
MMBtu higher than the NYMEX price, primarily because of the effect of higher
natural gas liquids prices. San Juan Basin gas prices have continued to
strengthen relative to NYMEX prices because of demand from an improved
California economy and increased summer use of gas to generate electricity.

Costs

Because properties underlying the 90% net profits interests are royalty and
overriding royalty interests, the calculation of royalty income from these
interests only includes deductions for production and property taxes, legal
costs, and marketing and transportation charges.  In addition to these costs,
the calculation of royalty income from the 75% net profits interests includes
deductions for production and development costs since the related underlying
properties are working interests.  Royalty income is calculated monthly for each
of the five conveyances under which the net profits interests were conveyed to
the trust.  If monthly costs exceed revenues for any conveyance, such excess
costs cannot reduce royalty income from other conveyances, but must be
recovered, with accrued interest, from future net proceeds of that conveyance.

Before adjustment for excess costs (see "Excess Costs" below), total costs
deducted in the calculation of royalty income were $5,826,375 in 2000,
$4,732,936 in 1999 and $4,919,005 in 1998.  The 23% increase in costs from 1999
to 2000 is primarily attributable to increased production and property tax and
other purchaser deductions associated with higher revenues.  The 4% decrease in
costs from 1998 to 1999 is primarily the result of decreased development costs
and production expense, offset by increased purchaser deductions for gathering
and compression charges (included in taxes, transportation and other) which had
been netted in the gas sales price prior to second quarter 1999.  Higher 1998
development costs were primarily associated with a carbon dioxide injection
project on one of the properties underlying the Texas 75% net profits interests.

Excess Costs

During 1999, costs exceeded revenues for properties underlying the Texas 75% net
profits interests by $327,318 and for the properties underlying the

                                                             Continued on page 8

                                                                               6
<PAGE>

--------------------------------------------------------------------------------
Calculation of Royalty Income

The following is a summary of the calculation of royalty income received by the
trust:
<TABLE>
<CAPTION>
                                                                                      Three Months
                                              Year Ended December 31 (a)          Ended December 31 (a)
                                        --------------------------------------   ----------------------
                                            2000         1999          1998         2000        1999
                                        -----------  -----------   -----------   ----------  ----------
<S>                                    <C>           <C>           <C>           <C>         <C>
Sales Volumes
 Oil (Bbls) (b)
  Underlying properties.....                344,123      348,609       392,369       81,865      94,307
      Average per day.......                    940          955         1,075          890       1,025
  Net profits interests.....                163,219       97,677       104,774       41,264      34,379

 Gas (Mcf) (b)
  Underlying properties.....              3,080,601    3,643,023     3,502,093      683,897     973,070
      Average per day.......                  8,417        9,981         9,595        7,434      10,577
  Net profits interests.....              2,689,259    3,162,942     3,018,666      598,457     838,047

Average Sales Price
 Oil (per Bbl)..............                 $27.49       $14.88        $13.40       $31.18      $20.21
 Gas (per Mcf)..............                  $3.32        $1.99         $2.03        $4.33       $2.39

Revenues
 Oil sales..................            $ 9,459,575  $ 5,189,030   $ 5,256,626   $2,552,251  $1,905,541
 Gas sales..................             10,231,063    7,260,100     7,093,431    2,959,679   2,324,001
                                        -----------  -----------   -----------   ----------  ----------
  Total Revenues............             19,690,638   12,449,130    12,350,057    5,511,930   4,229,542
                                        -----------  -----------   -----------   ----------  ----------

Costs
 Taxes, transportation
   and other................              2,566,816    1,606,058     1,192,864      640,856     498,362
 Production expense (c).....              2,520,954    2,390,818     2,583,000      658,350     595,221
 Development costs..........                738,605      736,060     1,143,141      230,765     119,903
 Excess costs...............                      -     (432,789)     (515,078)           -           -
 Recovery of excess costs
  and accrued interest......                383,836      634,277        10,184            -     396,230
                                        -----------  -----------   -----------   ----------  ----------
  Total Costs...............              6,210,211    4,934,424     4,414,111    1,529,971   1,609,716
                                        -----------  -----------   -----------   ----------  ----------

Net Proceeds................            $13,480,427  $ 7,514,706   $ 7,935,946   $3,981,959  $2,619,826
                                        ===========  ===========   ===========   ==========  ==========
Royalty Income..............            $11,660,510  $ 6,691,336   $ 7,079,632   $3,436,186  $2,301,221
                                        ===========  ===========   ===========   ==========  ==========
</TABLE>

(a) Because of the interval between time of production and receipt of royalty
    income by the trust, oil and gas sales for the year ended December 31
    generally relate to oil production from November through October and gas
    production from October through September, while oil and gas sales for the
    three months ended December 31 generally relate to oil production from
    August through October and gas production from July through September.

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

(c) Includes an overhead fee which is deducted and retained by Cross Timbers
    Oil. As of December 31, 2000, this fee was $22,570 per month and is subject
    to adjustment each May based on an oil and gas industry index.
--------------------------------------------------------------------------------

                                                                               7
<PAGE>

Oklahoma 75% net profits interests by $105,471.  Excess costs for the Texas 75%
net profits interests were primarily the result of low oil prices and increased
development costs related to the 1998 carbon dioxide injection project, while
excess costs for the Oklahoma 75% net profits interests were primarily related
to low oil prices and reduced oil sales volumes related to mechanical
complications on one of the underlying properties.

Excess costs from one conveyance cannot reduce royalty income computed under
another conveyance, but must be recovered from future net proceeds of the same
conveyance before the conveyance can again contribute to trust royalty income.
With improved oil prices, recoveries of excess costs and accrued interest
totaled $911,222 for the Texas 75% net profits interests and $106,890 for the
Oklahoma 75% net profits interests in the last half of 1999 and first half of
2000.  Excess costs and accrued interest were fully recovered for the Texas 75%
net profits interests in April 2000 and for the Oklahoma 75% net profits
interests in October 1999.

Fourth Quarter 2000 and 1999

During the quarter ended December 31, 2000, the trust received royalty income
totaling $3,436,186, compared with fourth quarter 1999 royalty income of
$2,301,221.  The 49% increase in royalty income from fourth quarter 1999 to 2000
was primarily because of higher oil and gas prices.

Administration expense was $14,749 and interest income was $8,919, resulting in
fourth quarter 2000 distributable income of $3,430,356, or $0.571726 per unit.
Distributable income for fourth quarter 1999 was $2,279,988 or $0.379998 per
unit.  Distributions to unitholders for the quarter ended December 31, 2000
were:

                   Record Date         Payment Date     Per Unit
                ------------------  -----------------  ----------
                October 31, 2000    November 14, 2000   $0.196948
                November 30, 2000   December 14, 2000    0.199555
                December 29, 2000   January 16, 2001     0.175223
                                                       ----------
                                                        $0.571726
                                                       ==========

Volumes

Fourth quarter 2000 underlying oil sales volumes were 81,865 Bbls, or 13% below
1999 levels.  Lower oil volumes are primarily because of the timing of cash
receipts and prior period adjustments.  Underlying gas sales volumes were
683,897 Mcf, or 30% below 1999 levels, primarily because of significant receipts
in fourth quarter 1999 related to prior periods.

Prices

The average fourth quarter 2000 oil price was $31.18 per Bbl, 54% higher than
the fourth quarter 1999 average price of $20.21.  The average fourth quarter gas
price was $4.33 per Mcf in 2000, 81% higher than the fourth quarter 1999 average
price of $2.39.  For further information about oil and gas prices, see "Years
Ended December 31, 2000, 1999 and 1998 - Prices" above.

Costs

Costs deducted in the calculation of fourth quarter 2000 royalty income
increased $316,485, or 26%, from fourth quarter 1999 before adjustment for
excess costs.  This was primarily the result of increased production and
property tax associated with higher revenues and higher development costs
primarily related to a carbon dioxide project on one of the properties
underlying the Texas 75% net profits interests.

Excess costs of $396,230 ($297,173 net to the trust) were recovered during
fourth quarter 1999.  Recovery of excess costs were the result of higher oil
prices and decreased development costs related to the 1998 carbon dioxide
injection project on one of the properties underlying the Texas 75% net profits
interests.  See "Years Ended December 31, 2000, 1999 and 1998 - Costs" above.

See Item 7a of the accompanying Form 10-K for disclosures of market risks
affecting the trust.

                                                                               8
<PAGE>

Cross Timbers Royalty Trust
--------------------------------------------------------------------------------

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

<TABLE>
<CAPTION>

                                                      December 31
                                                ------------------------
                                                   2000         1999
                                                -----------  -----------
<S>                                             <C>          <C>
Assets

 Cash and short-term investments..............  $ 1,048,031  $   912,164

 Interest to be received......................        3,307        1,840

 Net profits interests in oil and gas
  properties - net (Notes 1 and 2)............   30,755,456   33,005,334
                                                -----------  -----------

                                                $31,806,794  $33,919,338
                                                ===========  ===========

Liabilities and Trust Corpus

 Distribution payable to unitholders..........  $ 1,051,338  $   914,004

 Trust corpus (6,000,000 units of beneficial
  interest authorized and outstanding)........   30,755,456   33,005,334
                                                -----------  -----------

                                                $31,806,794  $33,919,338
                                                ===========  ===========
</TABLE>

--------------------------------------------------------------------------------

STATEMENTS OF DISTRIBUTABLE INCOME

<TABLE>
<CAPTION>

                                                  Year Ended December 31
                                         -----------------------------------------
                                             2000          1999           1998
                                         ------------   -----------    -----------
<S>                                      <C>            <C>           <C>
Royalty income.........................  $ 11,660,510   $ 6,691,336    $ 7,079,632

Interest income........................        27,228        11,098         10,857
                                         ------------   -----------    -----------

 Total income..........................    11,687,738     6,702,434      7,090,489

Administration expense.................       185,624       152,631        163,151
                                         ------------   -----------    -----------

 Distributable income..................  $ 11,502,114   $ 6,549,803    $ 6,927,338
                                         ============   ===========    ===========

 Distributable income per unit
   (6,000,000 units)...................  $   1.917019   $  1.091635    $  1.154555
                                         ============   ===========    ===========
</TABLE>
--------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>

                                                  Year Ended December 31
                                         -----------------------------------------
                                              2000          1999           1998
                                         ------------   -----------    -----------
<S>                                      <C>            <C>            <C>
Trust corpus
  beginning of year....................  $ 33,005,334   $36,024,941    $38,104,367

Amortization of net
  profits interests....................    (2,249,878)   (3,019,607)    (2,079,426)

Distributable income...................    11,502,114     6,549,803      6,927,338

Distributions declared.................   (11,502,114)   (6,549,803)    (6,927,338)
                                         ------------   -----------    -----------

Trust corpus
  end of year..........................  $ 30,755,456   $33,005,334    $36,024,941
                                         ============   ===========    ===========
</TABLE>

--------------------------------------------------------------------------------

See Accompanying Notes to Financial Statements.

                                                                               9
<PAGE>

Cross Timbers Royalty Trust
--------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS


1.  Trust Organization and Provisions

    Cross Timbers Royalty Trust was created on February 12, 1991 by predecessors
of Cross Timbers Oil, when the following net profits interests were conveyed
under five separate conveyances to the trust effective October 1, 1990, in
exchange for 6,000,000 units of beneficial interest in the trust:

    -  90% defined net profits interests in certain producing and nonproducing
       royalty interest properties in Texas, Oklahoma and New Mexico, and
    -  75% defined net profits interests in certain nonoperated working interest
       properties in Texas and Oklahoma.

    The underlying properties from which the net profits interests were carved
are currently owned by Cross Timbers Oil.  Bank of America, N.A. is the trustee
of the trust.  The trust indenture provides, among other provisions, that:

    -  the trust may not engage in any business activity or acquire any assets
       other than the net profits interests and specific short-term cash
       investments;
    -  the trust may not dispose of all or part of the net profits interests
       unless approved by 80% of the unitholders, or upon trust termination, and
       any sale must be for cash with the proceeds promptly distributed to the
       unitholders;
    -  the trustee may establish a cash reserve for payment of any liability
       that is contingent or not currently payable;
    -  the trustee may borrow funds required to pay trust liabilities if fully
       repaid prior to further distributions to unitholders;
    -  the trustee will make monthly cash distributions to unitholders (Note 3);
       and
    -  the trust will terminate upon the first occurrence of:
         -  disposition of all net profits interests pursuant to terms of the
            trust indenture,
         -  gross revenue of the trust is less than $1 million per year for two
            successive years, or
         -  a vote of 80% of the unitholders to terminate the trust in
            accordance with provisions of the trust indenture.


2.  Basis of Accounting

    The financial statements of the trust are prepared on the following basis
and are not intended to present financial position and results of operations in
conformity with generally accepted accounting principles:

    -  Royalty income is recorded in the month received by the trustee (Note 3).
    -  Interest income, interest to be received and distribution payable to
       unitholders include interest to be earned on royalty income from the
       monthly record date (last business day of the month) through the date of
       the next distribution.
    -  Trust expenses are recorded based on liabilities paid and cash reserves
       established by the trustee for liabilities and contingencies.
    -  Distributions to unitholders are recorded when declared by the trustee
       (Note 3).

    The most significant differences between the trust's financial statements
and those prepared in accordance with generally accepted accounting principles
are:

    -  Royalty income is recognized in the month received rather than accrued in
       the month of production.
    -  Expenses are recognized when paid rather than when incurred.
    -  Cash reserves may be established by the trustee for certain contingencies
       that would not be recorded under generally accepted accounting
       principles.

    The initial carrying value of the net profits interests of $61,100,449 was
Cross Timbers Oil's historical net book value of the interests on February 12,
1991, the date of the transfer to the trust.  Amortization of the net profits
interests is calculated on a unit-of-production basis and charged directly to
trust corpus.  Accumulated amortization was $30,344,993 as of December 31, 2000
and was $28,095,115 as of December 31, 1999.

3.  Distributions to Unitholders

    The trustee determines the amount to be distributed to unitholders each
month by totaling royalty income and other cash receipts, and subtracting
liabilities paid and adjustments in cash reserves established by the trustee.
The resulting amount (with estimated interest to be received on such amount
through the distribution date) is distributed to unitholders of record within
ten business days after the monthly record date, the last business day of the
month.

    Royalty income received by the trustee consists of net proceeds received in
the prior month by Cross Timbers Oil from the underlying properties multiplied
by the net profits percentage of 90% or 75%.  Net proceeds are the gross
proceeds received from the sale of production, less applicable costs.  For the
90% net profits interests, such costs generally include applicable taxes,
transportation, legal and marketing charges, and do not include other production
and development costs.  For the 75% net profits interests, such costs include
production costs, development and drilling costs, applicable taxes, operating
charges and other costs.

    Cross Timbers Oil, as owner of the underlying properties, computes royalty
income separately for each of the five conveyances (Note 1).  If costs exceed
gross proceeds for any conveyance, such excess costs cannot be used to reduce
the amounts to be received under the other conveyances.  The trust is not liable
for excess costs; however, future royalty income from the net profits interests
created by that conveyance will be reduced by such excess costs plus accrued
interest.  See Note 5.


4.  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.

    For federal income tax purposes, unitholders of a grantor trust are
considered to own the trust's income and principal as though no trust were in
existence.  The income of the trust is deemed to be received or accrued by the
unitholders 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
between December 31, 1979 and 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 was approximately $1.06 per MMBtu ($0.120389 per
unit) in 2000, $1.02 per MMBtu ($0.157564 per unit) in 1999 and $1.05 per MMBtu
($0.162287 per unit) in 1998.  Such credit, based on the unitholder's pro rata
share of qualifying production, may not reduce the unitholder'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 may be carried over
indefinitely as a credit against the unitholder's regular tax liability, subject
to the tentative minimum tax limitation.

                                                                              10
<PAGE>

5.  Excess Costs

    Cross Timbers Oil has advised the trustee that costs exceeded revenues from
the underlying properties of the 75% net profits interests during the years
ended December 31, 1999 and 1998, which were recovered during these years and
the year ended December 31, 2000.  Excess costs and accrued interest for each
conveyance must be fully recovered from the respective future net proceeds of
the 75% net profits interests before they can again contribute to trust royalty
income.  The following is a summary of changes in excess costs and recoveries by
conveyance during these periods.

<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                                       -------------------------------------------------------
                                          2000             1999                   1998
                                       ---------   ---------------------   ------------------
                                         Texas       Texas     Oklahoma     Texas    Oklahoma
                                       ---------   ---------   ---------   --------  --------
<S>                                    <C>         <C>         <C>         <C>       <C>
Excess costs and accrued interest -
  beginning of period................  $ 375,802   $ 519,817   $       -   $      -  $      -
Excess costs.........................          -     327,318     105,471    505,011    10,067
Accrued interest.....................      8,034      56,054       1,419     14,806       117
Recovery of excess costs
 and accrued interest................   (383,836)   (527,387)   (106,890)         -   (10,184)
                                       ---------   ---------   ---------   --------  --------

Excess costs and accrued interest -
 end of period.......................  $       -   $ 375,802   $       -   $519,817  $      -
                                       =========   =========   =========   ========  ========

Net to trust (75%)...................  $       -   $ 281,852   $       -   $389,863  $      -
                                       =========   =========   =========   ========  ========
</TABLE>

6.  Cross Timbers Oil Company

    In computing royalty income paid to the trust for the 75% net profits
interests (Note 3), Cross Timbers Oil deducts an overhead charge as
reimbursement for costs associated with monitoring these interests.  This charge
at December 31, 2000 was $22,570 per month, or $270,840 annually (net to the
trust of $16,928 per month or $203,130 annually), and is subject to annual
adjustment based on an oil and gas industry index.

    Cross Timbers Oil does not operate or control any of the underlying
properties.  However, Cross Timbers Oil operates working interests from which
approximately 20 overriding royalty interests were conveyed.  Cross Timbers Oil
acquired these working interests after the overriding royalty interests were
conveyed to the trust.  As of March 1, 2001, Cross Timbers Oil owned 22.7% of
the outstanding trust units.


7.  Supplemental Oil and Gas Reserve Information (Unaudited)

    Proved oil and gas reserve information is included in Item 2 of the trust's
Annual Report on Form 10-K which is included in this report.


8.  Quarterly Financial Data (Unaudited)

    The following is a summary of royalty income, distributable income and
distributable income per unit by quarter for 2000 and 1999:

<TABLE>
<CAPTION>

                                                                        Distributable
                                               Royalty     Distributable   Income
                                               Income         Income      per Unit
                                            -------------  -------------  ---------
<S>                                         <C>            <C>            <C>
2000
----
First Quarter.............................    $ 2,352,880    $ 2,300,796  $0.383466
Second Quarter............................      2,477,134      2,424,630   0.404105
Third Quarter.............................      3,394,310      3,346,332   0.557722
Fourth Quarter............................      3,436,186      3,430,356   0.571726
                                              -----------    -----------  ---------
                                              $11,660,510    $11,502,114  $1.917019
                                              ===========    ===========  =========
1999
----
First Quarter.............................    $ 1,479,855    $ 1,440,388  $0.240065
Second Quarter............................      1,213,539      1,171,375   0.195230
Third Quarter.............................      1,696,721      1,658,052   0.276342
Fourth Quarter............................      2,301,221      2,279,988   0.379998
                                              -----------    -----------  ---------
                                              $ 6,691,336    $ 6,549,803  $1.091635
                                              ===========    ===========  =========
</TABLE>

                                                                              11
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------------------

Bank of America, N.A., as Trustee for the Cross Timbers Royalty Trust:

    We have audited the accompanying statements of assets, liabilities and trust
corpus of the Cross Timbers Royalty Trust as of December 31, 2000 and 1999, and
the related statements of distributable income and changes in trust corpus for
each of the three years in the period ended December 31, 2000.  These financial
statements are the responsibility of the trustee.  Our responsibility is to
express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant estimates made by the trustee, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.

    As described in Note 2 to the financial statements, these financial
statements were prepared on the modified cash basis of accounting, which is a
comprehensive basis of accounting other than accounting principles generally
accepted in the United States.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and trust corpus of the trust
as of December 31, 2000 and 1999 and its distributable income and changes in
trust corpus for each of the three years in the period ended December 31, 2000,
in conformity with the modified cash basis of accounting described in Note 2.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

Fort Worth, Texas
March 19, 2001

                                                                              12
<PAGE>

CROSS TIMBERS ROYALTY TRUST
---------------------------

901 Main Street, 17th Floor
P.O. Box 830650
Dallas, Texas 75283-0650
(877) 228-5084
Bank of America, N.A., Trustee

A copy of the Cross Timbers Royalty Trust Form 10-K
has been provided with this Annual Report.  Additional copies
of this Annual Report and Form 10-K will be provided to
unitholders without charge upon request.

AUDITORS
--------

Arthur Andersen LLP
Fort Worth, Texas

LEGAL COUNSEL
-------------

Thompson & Knight L.L.P.
Dallas, Texas

TAX COUNSEL
-----------

Winstead Sechrest & Minick P.C.
Houston, Texas

TRANSFER AGENT AND REGISTRAR
----------------------------

Mellon Investor Services, L.L.C.
Dallas, Texas
www.melloninvestor.com