Document:

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                                                                    EXHIBIT 10.3
                             AMENDED AND RESTATED
                             EMPLOYMENT AGREEMENT

     This Amended and Restated Employment Agreement ("Agreement") is entered
into this 16/th/ day of May, 2000 (the "Effective Date"), between Cross Timbers
Oil Company, a Delaware corporation ("Cross Timbers") (Cross Timbers and, to the
extent applicable, one or more of its subsidiaries, being collectively referred
to herein as "Employer"), and Steffen E. Palko, who resides in Fort Worth, Texas
("Employee").

                                   RECITALS
                                   --------

     WHEREAS, Employee and Cross Timbers entered into that certain Employment
Agreement dated February 21, 1995 and effective March 31, 1995 (the "Original
Agreement"); and

     WHEREAS, Employee and Cross Timbers desire to amend and restate the
Original Agreement; and

     WHEREAS, Employer desires to employ Employee as Vice Chairman and President
of Cross Timbers and as an officer and/or director of one or more of Cross
Timbers' subsidiaries upon the terms and conditions provided herein; and

     WHEREAS, Employee desires to be so employed.

                            STATEMENT OF AGREEMENT
                            ----------------------

     NOW, THEREFORE, in consideration of the above recitals, and for and in
consideration of the mutual promises set forth below, the parties agree as
follows:

     1.   Employment.  Employer hereby employs Employee as Chairman and Chief
          ----------
Executive Officer of Cross Timbers, and Employee hereby accepts employment with
Employer upon the terms and conditions herein stated.

     2.   Term.  Subject to the provisions for termination set forth herein,
          ----
this Agreement shall be for the period commencing on the Effective Date and
ending on December 31, 2000 (referred to herein as the "Expiration Date).  In
the event Employee shall continue to be employed on the Expiration Date and no
previous Notice of Termination (as defined in Section 10.4) is effective on that
date, this Agreement and Employee's employment hereunder shall be automatically
continued from year to year thereafter until terminated by either party upon not
less than thirty (30) days written notice to the other party prior to any
anniversary of the Expiration Date.

     3.   Position and Duties.  Employee shall serve Employer in an executive
          -------------------
capacity as Chairman and Chief Executive Officer of Cross Timbers and as an
officer and/or director of one or more of Cross Timbers' subsidiaries.
Employee's duties shall include, in addition to those

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enumerated in the Bylaws of Employer, those duties as may be directed by the
Board of Directors of Cross Timbers (the "Board"), including service as an
officer and/or director of one or more of Cross Timbers' subsidiaries.

     4.   Extent of Services.  Employee shall devote his best efforts and full
          ------------------
business time (with allowances for vacations and sick leave) and attention to
furthering the business of Employer, and shall not during the term of this
Agreement be engaged in other activities which require such substantial services
on the part of Employee that Employee is unable to perform the duties assigned
to him by Employer.  The foregoing shall not be construed as preventing Employee
from maintaining or making investments, or engaging in other business,
enterprises or civic, charitable or public service functions, provided such
investments, business or enterprises do not require services on the part of
Employee that would materially impair the performance of his duties under this
Agreement.

     5.   Compensation.  As his regular compensation for all services rendered
          ------------
by Employee under this Agreement to Cross Timbers and its subsidiaries and
affiliates, Employer shall pay Employee a salary (the "Regular Salary") of not
less than $450,000 per annum, payable in substantially equal semimonthly
installments during the term hereof. It is understood that Employer will review
annually and may, in the discretion of the Board (or any committee thereof),
increase Employee's Regular Salary, in which case the amount of such increased
salary shall thereafter be deemed to be the amount of Regular Salary contracted
for in this Agreement for all purposes and, if so increased, the Regular Salary
shall not thereafter during the term of this Agreement be decreased to less than
$450,000 per annum.  All salary and any other current compensation (if any) paid
to Employee shall be subject to such payroll and withholding deductions as are
required by the laws of any jurisdiction, federal, state or local, with taxing
authority with respect to such salary and other compensation, if any.  Regular
Salary payments (including any increased Regular Salary payments) hereunder
shall not in any way limit or reduce any other obligation of Employer hereunder,
and no other compensation, benefit or payment hereunder shall in any way limit
or reduce the obligation of Employer to pay Employee's Regular Salary hereunder.
It is acknowledged by the parties that Employee's Regular Salary, as well as any
cash incentive compensation and other employee benefits payable pursuant hereto,
may be paid or provided by one or more of Cross Timbers' subsidiaries, but shall
be the ultimate responsibility of Cross Timbers.

     6.   Incentive Compensation and Other Benefits.
          -----------------------------------------

     6.1  Employer shall pay to Employee cash incentive compensation as shall be
determined by the Board (or any committee thereof) from time to time.  Employee
shall be entitled to participate in any such plan established at a level to
provide Employee compensation commensurate with Employee's position and
responsibilities.  Upon the establishment of such plans, this Agreement shall be
deemed to be automatically amended to include all applicable terms of such
plans.

     6.2  Employee shall be qualified to participate in grants of options to
purchase units in a royalty trust pursuant to the 1998 and 1999 Royalty Trust
Option Plans or any other similar subsequently adopted royalty trust option
plans.  Employee shall also be qualified to participate in

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grants of Stock Options, Incentive Stock Options or Performance Shares (as
defined in the 1994, 1997 or 1998 Stock Incentive Plans of Cross Timbers) to
purchase or receive common stock of Cross Timbers pursuant to the 1994, 1997 or
1998 Stock Incentive Plans or any other similar subsequently adopted stock
plans.

     6.3  Employer shall also provide the following employee benefits to
Employee during the term of this Agreement:

     (a)  Life Insurance.  Employer will provide Employee with life insurance
          --------------
having a death benefit equal to $2,000,000.  Employee shall have the right to
designate on such policies the primary and contingent beneficiaries thereunder.

     (b)  Medical Insurance.  Employer shall maintain in full force and effect,
          -----------------
and Employee shall be entitled to participate in, any medical or health benefit
plan provided by Cross Timbers or any of its subsidiaries.

     (c)  Disability.  Employer shall maintain in full force and effect, and
          ----------
Employee shall be entitled to receive, such disability insurance protection as
is provided to other full-time executives of Cross Timbers or any of its
subsidiaries.

     (d)  Vacations.  Employee shall be entitled to four weeks paid vacation in
          ---------
each calendar year and to compensation in respect of earned but unused vacation
days, determined in accordance with Employer's vacation plan if such plan so
provides. Employee shall also be entitled to all paid holidays given by Employer
to the executives of Cross Timbers or any of its subsidiaries.

     (e)  Automobile and Related Expenses.  Employee shall be paid a monthly
          -------------------------------
automobile allowance of $1,600 and shall be reimbursed for all fees, tags,
insurance premiums and fuel and maintenance expenses regarding such automobile.

     (f)  Other Benefits.  Employee shall be entitled to all other benefits and
          --------------
to participate in and be covered by all such other employee benefit plans,
including deferred compensation programs, if any, as are provided to other full-
time executive employees of Cross Timbers or any of its subsidiaries from time
to time.

     6.4  Nothing paid to Employee under any plan or arrangement presently in
effect or made available in the future shall be deemed to be in lieu of the
Regular Salary payable to Employee pursuant to Section 5.  Employer shall not
make any changes in any plans or arrangements provided pursuant to this Section
6 that would adversely affect Employee's rights or benefits thereunder unless
such change occurs pursuant to a program applicable to all executives of Cross
Timbers or any of its subsidiaries and does not result in a proportionately
greater reduction in the rights or benefits to Employee as compared with any
other executive of Cross Timbers or any of its subsidiaries.

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     7.   Representation of Employee.  As a material inducement to Employer to
          --------------------------
enter into this Agreement, Employee represents and warrants to Employer that, to
the best of Employee's knowledge, he is not now, nor has he been in the past,
the subject of any regulatory agency's investigation for violation of state or
federal securities law, nor has he had any judgment against him for violation of
these laws in any civil action in any court.

     8.   Working Facilities and Staff.  Employer shall furnish Employee with
          ----------------------------
such facilities, staff and services as are suitable to his position and adequate
for the performance of his duties.

     9.   Expenses.  Employer shall pay or reimburse Employee for all reasonable
          --------
expenses for entertainment, travel, meals, hotel accommodations and fees and the
like incurred by him in the interest of the business of Employer, such payment
or reimbursement to be made upon submission of an itemized accounting statement
by Employee documenting such expenses as may be required by the Internal Revenue
Code of 1986, as amended (the "Code"); provided, however, that Employee shall be
reimbursed for such expenses, whether or not such expenses are deductible by
Employer under the Code.

     10.  Termination of Agreement.
          ------------------------

     10.1 Notwithstanding any other provision hereof, Employee's employment
hereunder shall terminate:

     (a)  upon the death of Employee;

     (b)  upon the disability of Employee, which for the purpose of this
          Agreement shall be the physical or mental inability of Employee to
          carry out the normal and usual duties of his employment on a full-time
          basis for the entire period of six (6) continuous months with the
          reasonable likelihood as determined by the Board that Employee, upon
          the advice of a qualified physician, will be unable to carry out the
          normal and usual duties of his employment on a full-time basis for the
          following continuous period of six (6) months, and within 30 days
          after Notice of Termination (as defined in Section 10.4) is given
          Employee shall not have returned to the performance of his duties on a
          full-time basis (subject to the terms of Sections 6.3(c) and 11);

     (c)  "for cause" (as defined in Section 10.2 below), upon written notice of
          termination for cause given by Employer to Employee; or

     (d)  on the Expiration Date (subject to the terms of Section 2).

     10.2 Employer shall have "cause" to terminate Employee if Employee (a)
willfully and continually fails to substantially perform his duties with
Employer (other than a failure resulting from Employee's incapacity due to
physical or mental illness) which failure continues for a period of at least
thirty (30) days after a written notice of demand for substantial performance
has been

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delivered to Employee specifying the manner in which Employee has failed to
substantially perform, or (b) willfully engages in conduct which is demonstrably
and materially injurious to Employer, monetarily or otherwise; provided,
                                                               --------
however, that no termination of Employee's employment shall be for cause until
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(x) there shall have been delivered to Employee a written notice authorized by
two-thirds (2/3) of the full Board of Directors, specifying in detail the
particulars of Employee's conduct which violates either (a) or (b) above, (y)
Employee shall have been provided an opportunity to be heard by the Board (with
the assistance of Employee's counsel if Employee so desires), and (z) a
resolution is adopted in good faith by two-thirds (2/3) of the full Board of
Directors confirming such violation. No act, nor failure to act, on Employee's
part, shall be considered "willful" unless he has acted or failed to act with an
absence of good faith and without a reasonable belief that his action or failure
to act was in the best interest of Employer. Notwithstanding anything contained
in this Agreement to the contrary, no failure to perform by Employee after
Notice of Termination is given by or to Employee shall constitute cause.

     10.3 Employee may terminate his employment hereunder for "Good Reason" upon
the occurrence of any of the following events or conditions:

     (a)  a change in Employee's status, title, position or responsibilities
          (including reporting responsibilities) which, in Employee's reasonable
          judgment, represents a substantial reduction of the status, title,
          position or responsibilities as in effect immediately prior thereto;
          the assignment to Employee of any duties or responsibilities which, in
          Employee's reasonable judgment, are inconsistent with such status,
          title, position or responsibilities; or any removal of Employee from,
          or failure to reappoint or reelect him to, any of such positions,
          except in connection with the termination of his employment for cause,
          disability, or as a result of his death, or by Employee other than for
          Good Reason;

     (b)  a reduction in Employee's Regular Salary as the same may be increased
          from time to time thereafter;

     (c)  Employer's requiring Employee (without the consent of Employee) to be
          based at any place outside a twenty-five (25) mile radius of his place
          of employment immediately prior to such proposed relocation, except
          for reasonably required travel on Employer's business which is not
          materially greater than such travel requirements prior thereto, or, in
          the event Employee consents to any relocation beyond such 25-mile
          radius, the failure by Employer to pay (or reimburse Employee) for all
          reasonable moving expenses incurred by him relating to a change of his
          principal residence in connection with such relocation and to
          indemnify Employee against any loss (defined as the difference between
          the actual sale price of such residence and the higher of (a) his
          aggregate investment in such residence or (b) the fair market value of
          such residence as determined by a real estate appraiser designated by
          Employee and reasonably satisfactory to Employer) realized on the sale
          of Employee's principal residence in connection with any such change
          of residence;

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     (d)   the failure by Employer to provide Employee with compensation and
           benefits at least equal (in terms of benefit levels and/or reward
           opportunities) to those provided to Employee under each employee
           benefit plan, program and practice as in effect immediately prior to
           the Effective Date (or as in effect following the Effective Date, if
           greater), including, but not limited to, Cross Timbers' 1999 Royalty
           Trust Option Plan, the 1998 Stock Incentive Plan, the 1998 Royalty
           Trust Option Plan, the 1997 Stock Incentive Plan, the 1994 Stock
           Incentive Plan, Key Management Incentive Bonus Plan, the Cross
           Timbers Oil Company Employees' 401(k) Plan, and any other stock or
           royalty trust unit option plan, pension plan, life insurance plan,
           health and accident plan or disability plan;

     (e)   any material breach by Employer of any provision of this Agreement;
           or

     (f)    any purported termination of Employee's employment for cause by
            Employer which does not otherwise comply with the terms of this
            Agreement.

     10.4   Any termination of Employee's employment by Employer or by Employee
(other than termination as a result of Employee's death) shall be communicated
by written Notice of Termination to the other party hereto.  For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Employee's employment under the provision so
indicated.

     10.5   "Date of Termination" shall mean (i) if Employee's employment is
terminated by his death, the date of his death, (ii) if Employee's employment is
terminated upon the disability of Employee, thirty (30) days after Notice of
Termination is given (provided that Employee shall not have returned to the
performance of his duties on a full-time basis during such thirty (30) day
period), (iii) if Employee's employment is terminated for cause, the date
specified in the Notice of Termination, and (iv) if Employee's employment is
terminated for any other reason, the date on which a Notice of Termination is
given; provided that if within thirty (30) days after any Notice of Termination
is given the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected).

     10.6   In the event of a Change in Control or a termination of Employee's
employment under this Agreement for any reason, Employee shall have no right to
receive any compensation, remuneration, bonus or benefit for any period
subsequent to the Date of Termination or the Change in Control, as the case may
be, except as may be provided in Sections 11, 12 and 13 or pursuant to Cross
Timbers' Management Group Employee Severance Protection Plan.  In the event that
Employee is entitled to receive Severance Benefits pursuant to Section 11 upon a
Change in Control,

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Employee shall not be entitled to receive Severance Benefits upon the occurrence
of any other event that would otherwise have entitled Employee to receive
Severance Benefits, including without limitation a subsequent Change in Control
or a Termination of Employee's employment as contemplated by Section 10.1.

     11.    Compensation Upon Termination or Change in Control.
            --------------------------------------------------

     11.1   If (i) Employee's employment is terminated for any reason other than
termination by Employer for Cause or termination by Employee for other than Good
Reason, or (ii) there shall occur a Change in Control (as defined in Section
11.4), Employee shall be entitled to the following severance benefits
(collectively, "Severance Benefits"):

     (a)    Employer shall pay to Employee an amount in cash equal to three (3)
times the sum of (i) Employee's Regular Salary and (ii) an amount equal to the
greater of Employee's two most recent bonuses awarded under the Key Management
Incentive Bonus Plan adopted by Cross Timbers (or any other bonus plan or
program then in effect) multiplied by two, to be paid on or before ten (10) days
                        -------------
after the Date of Termination or forty-five (45) days after the Change in
Control, as the case may be.

     (b)    For a period of eighteen (18) months after Employee's termination of
employment or a Change in Control, Employer shall at its expense continue on
behalf of Employee and his dependents and beneficiaries, all medical, dental,
vision, and health benefits and insurance coverage which were being provided to
Employee at the time of termination of employment. The benefits provided in this
Section 11.1(b) shall be no less favorable to Employee, in terms of amounts and
deductibles and costs to him, than the coverage provided Employee under the
plans providing such benefits at the time of termination. Employer's obligation
hereunder to provide a benefit shall terminate if Employee obtains comparable
coverage under a subsequent employer's benefit plan. For purposes of the
preceding sentence, benefits will not be comparable during any waiting period
for eligibility for such benefits or during any period during which there is a
preexisting condition limitation on such benefits. Employer also shall pay a
lump sum equal to the amount of any additional income tax payable by Employee
and attributable to the benefits provided under this Section 11.1(b) at the time
such tax is imposed upon Employee. In the event that Employee's participation in
any such coverage is barred under the general terms and provisions of the plans
and programs under which such coverage is provided, or any such coverage is
discontinued or the benefits thereunder are materially reduced, Employer shall
provide or arrange to provide Employee with benefits substantially similar to
those which Employee was entitled to receive under such coverage immediately
prior to the Termination Notice. At the end of the period of coverage set forth
above, Employee shall have the option to have assigned to him at no cost to
Employee and with no apportionment of prepaid premiums, any assignable insurance
owned by Employer and relating specifically to Employee, and Employee shall be
entitled to all health and similar benefits that are or would have been made
available to Employee under law.

     (c)    Employer shall transfer to Employee all right, title or other
ownership interest it may

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have in any automobile then being provided by Employer for use by Employee.

     (d)    Employer shall transfer to Employee any right, title or ownership in
any club memberships provided by Employer for use by Employee.

     (e)    Employer shall transfer to Employee any right, title or ownership in
any life insurance owned by Employer on Employee's life.

     (f)    (i)  Notwithstanding any provision to the contrary in any option
     agreement, restricted stock agreement, or other agreement relating to
     equity-type compensation that may be outstanding between Employee and
     Employer, all units, stock options, incentive stock options, performance
     shares, stock appreciation rights and royalty trust options (under the 1991
     Stock Incentive Plan, the 1994 Stock Incentive Plan, the 1997 Stock
     Incentive Plan, the 1998 Stock Incentive Plan, the 1998 Royalty Trust
     Option Plan, the 1999 Royalty Trust Option Plan or any other plan or
     arrangement) held by Employee immediately prior to the Date of Termination
     or the Change in Control, as the case may be, and any such units, options,
     shares or rights received by Employee after the Date of Termination or the
     Change in Control, as the case may be (whether or not received in exchange
     for or in substitution for existing units, options, shares or rights) shall
     immediately become 100% vested and exercisable, and Employee shall become
     100% vested in all shares of restricted stock held by or for the benefit of
     Employee; provided, however, that to the extent Employer is unable to
     provide for such acceleration of vesting, Employer shall provide in lieu
     thereof a lump-sum cash payment equal to the difference between the total
     value of such units, stock options, incentive stock options, performance
     shares, stock appreciation rights, royalty trust options and shares of
     restricted stock (the "stock rights") as of the date of Employee's
     termination of employment or a Change in Control and the total value of the
     stock rights in which Employee is vested as of the date of his termination
     of employment. The value of such accelerated vesting in Employee's stock
     rights shall be determined by the Board in good faith based on a valuation
     performed by an independent consultant selected by the Board; any such
     stock rights which are not in existence at the time of Employee's
     termination of employment or a Change in Control shall be valued as of the
     date of the Date of Termination or the Change in Control, as the case may
     be.

            (ii) Notwithstanding any provision to the contrary in any option
     agreement that may be outstanding between Employee and Employer, Employee's
     right to exercise any previously unexercised options under any such option
     agreement shall not terminate until the latest date on which the option
     granted under such agreement would expire under the terms of such agreement
     but for Employee's termination of employment; provided, however, that to
     the extent Employer is unable to provide for the extension of the
     expiration date of such options, Employer shall provide in lieu thereof a
     lump-sum cash payment equal to the value of such extension Employer is
     unable to provide. Such values of such accelerated vesting and
     exercisability shall be determined by the Board in good faith based on a
     valuation performed by an independent consultant selected by the Board.

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     11.2   If Employee's employment shall be terminated (i) by Employer for
cause, or (ii) by Employee without Good Reason, Employer shall pay Employee (i)
his Regular Salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given and (ii) the vested portion of any incentive
compensation plan to which Employee is entitled in accordance with the terms of
such plan.

     11.3   During any period that Employee fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), Employee shall continue to receive his Regular Salary at
the rate then in effect for such period until his employment is terminated
pursuant to Section 10.1(b) hereof, provided that payments so made to Employee
during the Disability Period shall be reduced by the sum of the amounts, if any,
payable to Employee prior to the time of any such payment under disability
benefit plans of Employer and which were not previously applied to reduce any
Regular Salary payment.

     11.4   Change in Control.
            -----------------

     (a) For purposes of this Agreement, a "Change in Control" shall mean any
one of the following:

            (i)    "Continuing Directors" no longer constitute a majority of the
     Board; the term "Continuing Director" means any individual who is a member
     of the Board on the date hereof or was nominated for election as a director
     by, or whose nomination as a director was approved by, the Board with the
     affirmative vote of a majority of the Continuing Directors;

            (ii)   any person or group of persons (as defined in Rule 13d-5
     under the Securities Exchange Act of 1934, as amended ("Exchange Act"))
     together with his or its affiliates, becomes the beneficial owner, directly
     or indirectly, of 25% or more of the voting power of Cross Timbers' then
     outstanding securities entitled generally to vote for the election of Cross
     Timbers' directors;

            (iii)  the merger or consolidation to which Cross Timbers is a party
     if the shareholders of Cross Timbers immediately prior to the effective
     date of such merger or consolidation have beneficial ownership (as defined
     in Rule 13d-3 under the Exchange Act) of less than 50% of the combined
     voting power to vote for the election of directors of the surviving
     corporation or other entity following the effective date of such merger or
     consolidation; or

            (iv)   the sale of all or substantially all of the assets of Cross
     Timbers or the liquidation or dissolution of Cross Timbers.

     (b) Notwithstanding anything herein to the contrary, under no circumstances
will a change in the constitution of the board of directors of any subsidiary, a
change in the beneficial

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ownership of any subsidiary, the merger or consolidation of a subsidiary with
any other entity, the sale of all or substantially all of the assets of any
subsidiary or the liquidation or dissolution of any subsidiary constitute a
"Change in Control" under this Agreement.

     11.5   Employee shall not be required to mitigate the amount of any payment
provided in this Section 11 by seeking or accepting other employment or
otherwise.

     12.    Cross Timbers' Guarantee of Severance Benefits.
            ----------------------------------------------

     12.1   In the event Employee becomes entitled to receive from Employer
Severance Benefits under Section 11.1 above and such Employer fails to pay or
                         ------------
provide such Severance Benefits, Cross Timbers shall assume the obligation of
such Employer to pay or provide such Severance Benefits.  In consideration of
Cross Timbers' assumption of the obligation to pay or provide such Severance
Benefits provided under this Agreement, Cross Timbers shall be subrogated to any
recovery (irrespective of whether there is recovery from the third party of the
full amount of all claims against the third party) or right to recovery of
either Employee or his legal representative against Employer or any person or
entity.  Employee or his legal representative shall cooperate in doing what is
reasonably necessary to assist Cross Timbers in exercising such rights,
including but not limited to notifying Cross Timbers of the institution of any
claim against a third party and notifying the third party and the third party's
insurer, if any, of Cross Timbers' subrogation rights.  Neither Employee nor his
legal representative shall do anything after a loss to prejudice such rights.

     12.2   In its sole discretion, Cross Timbers reserves the right to
prosecute an action in the name of Employee or his legal representative against
any third parties potentially liable to Employee. Cross Timbers shall have the
absolute discretion to settle subrogation claims on any basis it deems
appropriate under the circumstances. If Employee or his legal representative
initiates a lawsuit against any third parties potentially liable to Employee,
Cross Timbers shall not be responsible for any attorneys' fees or court costs
that may be incurred in such liability claim.

     12.3   Cross Timbers shall be entitled, to the extent of any payments made
to or on behalf of Employee or a dependent of Employee, to be paid first from
the proceeds of any settlement or judgment that may result from the exercise of
any rights of recovery asserted by or on behalf of Employee or his legal
representative against any person or entity legally responsible for the injury
for which such payment was made. Cross Timbers shall be reimbursed by Employee
or his legal representative an amount of money equal to all sums paid by Cross
Timbers under this Agreement to or on behalf of Employee and all expenses, costs
and attorneys' fees incurred by Cross Timbers in connection with the prosecution
and collection of Cross Timbers' subrogation interest. The right is also hereby
given Cross Timbers to receive directly from Employer or any third party(ies),
attorney(s) or insurance company(ies) an amount equal to the amount paid to or
on behalf of Employee.

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     13.    Excise Taxes.
            ------------

     13.1   In the event it shall be determined that any payment or distribution
of any type by Employer to or for the benefit of Employee, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (the "Total Payments"), would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest and penalties, are
collectively referred to as the "Excise Tax"), then Employee shall be entitled
to receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by Employee of all taxes (including additional excise taxes under
said Section 4999 and any interest and penalties imposed with respect to any
taxes) imposed upon the Gross-Up Payment, Employee retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments.
Employer shall pay the Gross-Up Payment to Employee within twenty (20) business
days after the Payment Date.

     13.2   All determinations required to be made under this Section 13(c)(ii)
including whether a Gross-Up Payment is required and the amount of such Gross-Up
Payment, shall be made by the independent accounting firm retained by Employer
on the date of determination (the "Accounting Firm"), which shall provide
detailed supporting calculations both to Employer and Employee within fifteen
(15) business days of the Payment Date, if applicable, or such earlier time as
is requested by Employer.  If the Accounting Firm determines that no Excise Tax
is payable by Employee, it shall furnish Employee with an opinion that he has
substantial authority not to report any Excise Tax on his federal income tax
return.  Any determination by the Accounting Firm shall be binding upon Employer
and Employee.  As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by Employer should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder.  In the event that Employer exhausts
its remedies pursuant to Section 13.3 and Employee thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred, and any such Underpayment shall be
promptly paid by Employer to or for the benefit of Employee.

     13.3   Employee shall notify Employer in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
Employer of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after Employee is notified
in writing of such claim and shall apprise Employer of the nature of such claim
and the date on which such claim is requested to be paid. Employee shall not pay
such claim prior to the expiration of the thirty (30)-day period following the
date on which he gives such notice to Employer (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due). If
Employer notifies Employee in writing prior to the expiration of such period
that it desires to contest such claim, Employee shall (w) give Employer any
information reasonably requested by Employer relating to such claim, (x) take
such action in connection with contesting such claim as Employer shall
reasonably request in writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably

                                       11
<PAGE>

selected by Employer, (y) cooperate with Employer in good faith in order to
effectively contest such claim, and (z) permit Employer to participate in any
proceedings relating to such claim, provided, however, that Employer shall bear
and pay directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall indemnify and hold
Employee harmless, on an after-tax basis, for any Excise Tax or income tax,
including interest and penalties with respect thereto, imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 13.3, Employer shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Employee to pay the tax claimed and sue for a refund,
or contest the claim in any permissible manner, and Employee agrees to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as Employer shall
determine; provided, however, that if Employer directs Employee to pay such
claim and sue for a refund, Employer shall advance the amount of such payment to
Employee, on an interest-free basis and shall indemnify and hold Employee
harmless, on an after-tax basis, from any Excise Tax or income tax, including
interest or penalties with respect thereto, imposed with respect to such advance
or with respect to any imputed income with respect to such advance; and further
provided that any extension of the statute of limitations relating to payment of
taxes for the taxable year of Employee with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, Employer's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and Employee
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.

     13.4   If, after the receipt by Employee of an amount advanced by Employer
pursuant to Section 13.3, Employee becomes entitled to receive any refund with
respect to such claim, Employee shall (subject to Employer's complying with the
requirements of Section 13.3) promptly pay to Employer the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Employee of an amount advanced by Employer
pursuant to Section 13.3, a determination is made that Employee shall not be
entitled to any refund with respect to such claim and Employer does not notify
Employee in writing of its intent to contest such denial of refund prior to the
expiration of thirty days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.

     14.    Counsel Fees and Indemnification.
            --------------------------------

     14.1   In the event Employer or Employee is required to employ legal
counsel to enforce the performance of this Agreement or recover damages because
of any breach of this Agreement, the prevailing party shall be entitled to
recover from the other party reasonable attorneys' fees and the reimbursement of
all necessary expenses and court costs.

                                       12
<PAGE>

     14.2   Employer shall indemnify and hold Employee harmless to the maximum
extent permitted by law against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees and costs incurred by Employee,
in connection with the defense of, or as a result of any action or proceeding or
any appeal from any action or proceeding, in which Employee is made or is
threatened to be made a party by reason that Employee is or was an officer or
director of Cross Timbers or any of its subsidiaries or affiliates, regardless
of whether such action or proceeding is one brought by or in the right of Cross
Timbers or any of its subsidiaries or affiliates, to procure a judgment in their
favor (or other than by or in the right of Cross Timbers or any of its
subsidiaries or affiliates).

     14.3   The undertakings of Section 14.1 above are independent of, and shall
not be limited or prejudiced by, the undertakings of Section 14.2 above.

     14.4   The provisions of this Section 14 shall survive the termination of
this Agreement.

     15.    Notices.  All notices, requests, demands and other communications
            -------
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given on the date of service if served
personally on the party to whom notice is to be given and acknowledged by
written receipt, or on the seventh day after mailing if mailed (return receipt
requested), postage prepaid and properly addressed as follows:

     Cross Timbers/Employer:    Cross Timbers Oil Company
     ----------------------
                                810 Houston Street, Suite 2000
                                Fort Worth, Texas  76102
                                Attention:  Board of Directors

     Employee:                  Steffen E. Palko
     --------
                                5024 Ranch View Road
                                Fort Worth, Texas  76109

Any party may change its address for purposes of this Section 15 by giving the
other party written notice of the new address in the manner set forth above.

     16.    Assignment; Binding Effect.  Neither this Agreement nor any of the
            --------------------------
rights or obligations hereunder may be assigned by any party without the prior
written consent of the other party. This Agreement is binding upon and inures to
the benefit of Employee and Employer and their respective heirs, personal
representatives and permitted successors and assigns. As used in this Agreement,
"Employer" shall mean the Employer as hereinabove defined and any successors to
its business or assets as aforesaid which execute and deliver the agreement
provided for in this Section 16 or which otherwise become bound by the terms and
provisions of this Agreement by operation of law.

                                       13
<PAGE>

     17.    Governing Law. This Agreement shall be governed by, and construed
            -------------
and enforced in accordance with, the laws of the State of Texas.

     18.    Waiver. Any waiver by any party of a breach of any provision of this
            ------
Agreement shall not operate or be construed as a waiver of any subsequent breach
thereof or of any other provision of this Agreement.

     19.    Entire Agreement.  This Agreement constitutes the entire agreement
            ----------------
between the parties hereto with respect to the subject matter hereof and
supersedes any and all prior and contemporaneous promises, agreements and
representations not set forth in this Agreement including, but not limited to,
as of the Effective Date, the Original Agreement.  This Agreement may not be
amended except by a mutual written agreement signed by all parties; provided,
however, that the terms of any cash incentive compensation plan or stock option
plan established by Employer subsequent to the date hereof in accordance with
terms previously outlined by Employer shall automatically become part of this
Agreement when established.

     20.    Severability.  Should any one or more of the provisions hereof be
            ------------
determined to be illegal or unenforceable, all other provisions hereof shall be
given effect separately therefrom and shall not be affected thereby.

     IN WITNESS WHEREOF, Employer and Employee have executed and delivered this
Agreement as of the date written above.

                              CROSS TIMBERS OIL COMPANY

                              By:   /s/ VAUGHN O. VENNERBERG, II
                                    --------------------------------------------
                                        Vaughn O. Vennerberg, II
                                        Executive Vice President-Administration

                              EMPLOYEE:

                              /s/ STEFFEN E. PALKO
                              --------------------------------------------
                                  Steffen E. Palko

                                       14<PAGE>

                                                                     EXHIBIT 4.1

                   Burlington Northern Santa Fe Corporation

                      7.95% Debenture due August 15, 2030

CUSIP No. 12189T AR 5                                           $ 275,000,000.00

     This Security is a Global Security within the meaning of the Indenture
     hereinafter referred to and is registered in the name of a Depositary or a
     nominee thereof. This Security may not be exchanged in whole or in part for
     a Security registered, and no transfer of this Security in whole or in part
     may be registered, in the name of any Person other than such Depositary or
     a nominee thereof, except in the limited circumstances described in the
     Indenture.

   BURLINGTON NORTHERN SANTA FE CORPORATION, a corporation duly organized and
existing under the laws of Delaware (herein called the "Company", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to CEDE & CO. or registered assigns, the
principal sum of Two Hundred Seventy-Five Million Dollars ($275,000,000.00) on
August 15, 2030, and to pay interest thereon from August 8, 2000 or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, semi-annually on February 15 and August 15 in each year,
commencing February 15, 2001, at the rate of 7.95% per annum, until the
principal hereof is paid or made available for payment. The interest so payable,
and punctually paid or duly provided for, on any Interest Payment Date will, as
provided in such Indenture, be paid to the Person in whose name this Security
(or one or more Predecessor Securities) is registered at the close of business
on the Regular Record Date for such interest, which shall be the February 1 or
August 1 (whether or not a Business Day), as the case may be, next preceding
such Interest Payment Date. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on such Regular
Record Date and may either be paid to the Person in whose name this Security (or
one or more Predecessor Securities) is registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest to be fixed by
the Trustee, notice whereof shall be given to Holders of Securities of this
series not less than 10 days prior to such Special Record Date, or be paid at
any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Securities of this series may be listed,
and upon such notice as may be required by such exchange, all as more fully
provided in said Indenture.

   Payment of the principal of (and premium, if any) and interest on this
Security will be made at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan, The City of New York, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts; provided, however, that at the
option of the Company payment of interest may be made by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Security Register.

   Reference is hereby made to the further provisions of this Security set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.

   Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.

   In Witness Whereof, the Company has caused this instrument to be duly
executed under its corporate seal.

Dated:  August 8, 2000                 BURLINGTON NORTHERN SANTA FE CORPORATION

                                       By
                                          --------------------------------------
                                                   Thomas N. Hund
                                          Senior Vice President, Chief Financial
                                          Officer and Treasurer

Attest:

------------------------
     Jeffrey T. Williams
     Assistant Secretary

   This is one of the Securities of the series designated therein referred to in
the within-mentioned Indenture.

                                       BANK ONE TRUST COMPANY,
                                       NATIONAL ASSOCIATION
                                                                      As Trustee

                                       By
                                          --------------------------------------
                                                              Authorized Officer
<PAGE>

   This Security is one of a duly authorized issue of securities of the Company
(herein called the "Securities"), issued and to be issued in one or more series
under an Indenture, dated as of December 1, 1995 (herein called the "Indenture",
which term shall have the meaning assigned to it in such instrument), between
the Company and Bank One Trust Company, National Association, as successor to
The First National Bank of Chicago, as Trustee (herein called the "Trustee",
which term includes any successor trustee under the Indenture), and reference is
hereby made to the Indenture for a statement of the respective rights,
limitations of rights, duties and immunities thereunder of the Company, the
Trustee and the Holders of the Securities and of the terms upon which the
Securities are, and are to be, authenticated and delivered. This Security is one
of the series designated on the face hereof, limited in aggregate principal
amount to $275,000,000.00

   The Securities of this series are subject to redemption upon not less than 30
and not more than 60 days' notice by mail, at any time, as a whole or in part,
at the election of the Company, at a redemption price equal to the greater of
(i) 100% of their principal amount or (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted to the
date of redemption on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the Treasury Rate (as defined in the Officers'
Certificate establishing the Securities of this series), plus 25 basis points,
plus in either case accrued interest to the date of redemption.

   In the event of redemption of this Security in part only, a new Security or
Securities of this series and of like tenor for the unredeemed portion hereof
will be issued in the name of the Holder, upon the cancellation hereof.

   The Indenture contains provisions for defeasance at any time of the entire
indebtedness of this Security or certain restrictive covenants and Events of
Default with respect to this Security, in each case upon compliance with certain
conditions set forth in the Indenture.

   If an Event of Default with respect to Securities of this series shall occur
and be continuing, the principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.

   The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in principal amount of the Securities at
the time Outstanding of each series to be affected. The Indenture also contains
provisions permitting the Holders of specified percentages in principal amount
of the Securities of each series at the time Outstanding, on behalf of the
Holders of all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Security.

   As provided in and subject to the provisions of the Indenture, the Holder of
this Security shall not have the right to institute any proceeding with respect
to the Indenture or for the appointment of a receiver or trustee or for any
other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and the Trustee shall have failed to institute any such
proceeding, for 60 days after receipt of such notice, request and offer of
indemnity. The foregoing shall not apply to any suit instituted by the Holder of
this Security for the enforcement of any payment of principal hereof or any
premium or interest hereon on or after the respective due dates expressed
herein.

   No reference herein to the Indenture and no provision of this Security or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and any premium and interest
on this Security at the times, place and rate, and in the coin or currency,
herein prescribed.

   As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Security Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Company in any place where the principal of and any premium and
interest on this Security are payable, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Securities of this series
and of like tenor, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.

   The Securities of this series are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.

   No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.

   Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security is overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.

   All terms used in this Security which are defined in the Indenture shall have
the meanings assigned to them in the Indenture.

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